California Apparel News

The apparel industry is a fluid business where nothing ever remains the same. The factoring business is in step with those adjustments, whether it is giving advice on how to finance imported goods or meeting retailers’ demands. In recent years, there has been a flurry of mergers among factors that has prompted more boutique firms to eye Los Angeles as a good place to do business.

Deborah Belgum, senior editor of California Apparel News, recently questioned several local factors about the changes they are seeing in the local apparel industry. They were Mitchell Cohen, executive vice president and Western regional manager of CIT Commercial Services in Los Angeles; Dave Reza, senior vice president, Western region, of Milberg Factors Inc. in Glendale, Calif.; Sunnie Kim, chief executive officer of Hana Financial Inc. in Los Angeles; Harry Friedman, senior vice president of Rosenthal & Rosenthal Inc. in Woodland Hills, Calif.; and Don Nunnari, vice president, regional manager, of Merchant Factors Corp. in Los Angeles.

What challenges are apparel companies going to face in 2006?

Mitchell Cohen: As the Federal Reserve continues to raise short-term borrowing costs, certainly the higher cost of funds will have an impact on apparel companies. Companies’ ability to pass these costs to their customers will be a challenge. My observation has been that local manufacturers are operating at full capacity for the first time in recent years. This may result in local manufacturers finding it a hardship to get their quick-turn production done locally.

Dave Reza: There is continued pressure from offshore competitors and continued consolidation in the retail industry. Those companies that were big suppliers of the May Co., who don’t have a relationship with Federated stores, are going to have more pressure on revenue erosion.

I think the whole question of global sourcing continues to be a challenge to those who have been more domestic producers.

They have to learn to have a presence offshore, learn where to go, who the quality producers are, whom to stay away from or to have confidence in.

Sunnie Kim: In 2006, continued rising fuel costs combined with increasing interest rates will become major challenges for most apparel companies. Higher fuel costs will put continued pressure on consumers’ disposable incomes, lessening their ability to purchase goods. Additionally, rising interest rates will impact the cost of capital by hampering expansion and causing companies to limit inventories.

Harry Friedman: A major challenge in 2006 remains keeping up with the external forces that affect the apparel business. For example, in just the last few months, a portion of the tax laws that applies to LLCs, or limited liability corporations, has actually been successfully challenged in the California Supreme Court. Also, the potential changes in the California labor and immigration laws continue to be front-page news.

It’s more important than ever that apparel companies surround themselves with knowledgeable professionals, certified public accountants, attorneys and factors to help keep them up to date and to help them adjust to these changes quickly and efficiently when they occur.

Don Nunnari: Some of the challenges are going to be that with interest rates and energy prices rising, it will affect consumers’ discretionary spending and apparel buying.

How has the factoring business changed in the past year, and what changes are we going to see?

MC: At CIT, we are getting more creative in terms of lending structure. It’s very exciting for us to be able to present flexible financing solutions to meet the business challenges of our clients. We are also continuing our global expansion, which will help us serve our clients better since so many of them source from abroad and do business overseas.

DR: In the last year or two, we’ve seen some new players come into L.A., such as Milberg Factors, Rosenthal & Rosenthal and Merchants Factors. There has been continued growth in the ethnic factoring business; Hana Financial and Finance One come to mind. At the same time, there are still some investment companies or hedge funds that have invested in factors; Capital and First Capital are examples of that. So the ownership of those companies is not traditional factoring institutions; they are investors. It affects their strategy, which may be more short-term growth and return rather than long term. For the future, there are questions about the larger factors and whether they will be sold by their current owners.

SK: As we are becoming a true worldwide economy, factoring clients have required an increasing reliance on letters of credit to finance the growing amount of imported products. Additionally, clients are making a greater number of sales to foreignbased accounts, requiring their factors to develop ways of qualifying international credits, either through the expansion of the factors’ internal international departments or using third-party sources.

HF: Over the past year, factors have continued to rely more and more on the hightech end of our business in order to quickly and accurately service our clients. Rosenthal & Rosenthal continued in 2005 to make significant enhancements and modifications to our computer systems. We also anticipate another major roll out of systems enhancements in 2006.

DN: There is still consolidation of the major factoring firms, which has presented opportunities for smaller factoring companies in Los Angeles. It has created opportunities for small factoring companies like Merchant to service the small- to mid-size manufacturers. In light of this, we have seen more small factors opening in Los Angeles.

How has your typical customer changed over the past few years?

MC: The biggest change we have observed over recent years is that our clients are developing deeper relationships and sourcing partnerships with their overseas suppliers. We have responded by building a multilingual staff, both here in Los Angeles and Asia, to help us serve the needs of these companies.

DR: The biggest change I’ve seen is that more of my clients are importing than before. As a factor, you need to help them with import financing such as letters of credit, inventory financing and even share from a consulting perspective some of the experiences other clients have had importing without naming names. Our typical client now is much more concentrated in its customer base as retailers consolidate. For private-label clients, they are much more committed to the merchandising process. They have to understand and talk to their customers a lot, help design the product rather than take a design and go with it. With our better-wear clients, we see more of a move to branding.

SK: More and more apparel companies source at least a portion of their merchandise via imports. Governmental implementations of policies such as the North American Free Trade Agreement, organizations such as the World Trade Organization, the emerging foreign labor pool, trade deficit and terrorism have affected how these companies do business internationally and will continue to do so in the ensuing years.

HF: In the last five years, apparel companies have made significant changes in their production cycles. For example, many apparel companies have converted from domestic manufacturing to offshore production and, in some cases, back to domestic production again. Factors need to be flexible and quick in meeting their clients, everchanging letters of credit and inventory financing needs.

DN: There is more importing going on by manufacturers and more exporting of U.S. product throughout the world to places like Europe, Japan and the Middle East. Also, manufacturers continue to operate more efficiently in order to service their customers. They have had to become more efficient because of retailers’ demands.

Do you think more small apparel companies in California will become mid-tier businesses?

MC: No, not necessarily. It seems to me that, in general, both small and mid-sized apparel companies are focusing more on building a brand. They seem to be embracing the concept of providing a differentiated product, sold via a very targeted distribution channel.

DR: With retailers consolidating, I think there is a mind set that they want to buy from established companies that can deliver a quality product at the right price and on time. That sort of suggests that companies that are already established or smaller companies have to invest in vendor compliance and have some scale to them. It is still a merchandising business. So if you are doing bottoms, the retailer may come to you and say, “I love your bottoms line. Is there a tops line to complement that?” It leads to a successful company pressured into having a broader type of product they can offer.

SK:We believe that more companies will be moving to mid-tier companies in an effort to compete with the growing phenomenon of the mega-mass retailers. As we have seen, these stores have squeezed out the “Mom and Pop” stores as they can offer prices and quantities that smaller companies cannot compete with. Mid-tier companies will have opportunities to purchase at lower prices and thereby improve margins. These companies also will become more specialized and be able to move quicker with respect to changing trends.

HF: Growth will always remain a major objective in the apparel business. However, as uncontrolled growth is still the leading cause of business failure in this country, it’s important to make sure that growth is well planned, with a continuous view on profitability.

DN: More California companies will be growing to the mid-tier level because of the demand for California lifestyle brands, both domestically and internationally, whether it is sportswear, surf/skate apparel or casual wear.