Los Angeles Denim Factories Are Struggling to Stay Alive

Manufacturing

As of Wednesday, November 22, 2017

Los Angeles has always been the epicenter for manufacturing blue jeans in the United States. Major labels such as True Religion, Lucky Brand, Hudson and 7 For All Mankind built their reputations on that “Made in the USA” cachet, which signaled quality and prestige in their premium-denim products.

It was a marketing tool that helped manufacturers sell their products to upscale department stores and boutiques around the world catering to a fashionable crowd that didn’t mind paying $200 to $400 for a pair of denim dungarees.

But the rise in California and Los Angeles’ minimum wage, a move by blue-jeans owners to beef up profit margins and consumers pulling back on their clothing expense accounts are crushing Los Angeles denim factories.

Earlier this month, United Denim Inc. informed state employment officials that it planned by the end of the year to lay off 164 of its approximately 200 employees, who work in its south Los Angeles factory. “We are in survival mode,” said Mateo Juarez, the owner of the factory, which has been making blue jeans since 2009. “We are letting a lot of people go. We are taking our last breath.”

Things looked a little brighter three months ago. Juarez was getting inquiries from Gap and Abercrombie & Fitch about moving some of their production from Mexico to the United States because President Trump was threatening to fine companies producing outside of the United States. But threats of a fine fizzled and blue-jeans makers are moving out of Los Angeles as the minimum wage, at $12 an hour, is set to rise to $13.50 an hour by next summer for larger businesses. By 2021, the minimum wage will be at $15 an hour.

“If you make blue jeans in China, including the fabric washes, it is $6. If you do the same jeans in Mexico, you can make it for $10, which includes dropping if off here in Los Angeles. And if you do it in the U.S.A., you are looking at $40 to $50. That’s a big difference,” Juarez explained.

He calculates that if you manufacture 100,000 jeans in Mexico, it will cost $1 million. Make those jeans in Los Angeles, the price skyrockets to $4 million. The difference is astronomical and only economically practical if blue jeans are selling for $100 to $200.

That simple math calculation is not lost on the big private-equity groups and multimillion-dollar companies that have bought many of the premium blue-jeans labels started by Los Angeles entrepreneurs who turned a glimmer of an idea into big brands.

Jeff Lubell cofounded True Religion in 2002 and 11 years later sold it to TowerBrook Capital for $835 million. (True Religion filed for Chapter 11 bankruptcy protection earlier this year and exited bankruptcy in October.)

Peter Koral, Michael Glasser and Jerome Dahan launched 7 For All Mankind in 2000. After a split with Glasser and Dahan, Koral turned around and sold the company in 2007 to VF Corp. for $775 million, which then sold the blue-jeans lifestyle brand last year to the Israeli company Delta Galil.

Jeff Rudes and Susie Crippen started J Brand in 2004. In 2010, they sold 52 percent of the company for $85 million to Star Avenue Capital, which two years later sold a majority share to the Japanese company Fast Retailing for about $290 million. Fast Retailing is the parent company of retailer Uniqlo.

These days, new leaders in the executive offices are less concerned about that “Made in the USA” label and more concerned about return on investments. They are shaving costs by heading to Mexico, Vietnam and India, where labor costs and regulations aren’t as stiff as they are in the United States.

“Almost all denim here is going out the door,” said Ilse Metchek, president of the California Fashion Association, whose members are manufacturers and apparel and fashion-related companies. “It’s because of minimum wage. Denim is very labor-intensive.”

Singing the blues

Until five years ago, Atomic Denim had 1,000 workers in two Los Angeles factories making blue jeans for mostly True Religion. Today, there is only one factory with 70 to 100 workers who fluctuate with the season in their production for Hudson, Tom Ford and Diesel.

Last year, to meet the demand for lower prices, Atomic Denim opened a Tijuana, Mexico, factory where the salaries for the 70 workers there are about half of what they are in Los Angeles. “There is no large volume in Los Angeles like it was before. The market is different,” said Claudia Bae Kye, vice president of E & C Fashion, the parent company of Atomic Denim and Pacific Concept Laundry. “We needed to go somewhere else to match the pricing companies wanted.”

Another big blue-jeans manufacturer taking a big hit from the decline in local blue-jeans orders is Jean Mart. Three months ago, Steve Rhee took over the 100,000-square-foot factory with 600 sewing machines from his parents, who retired. Now called Factory One Studio, Rhee has only 75 workers to fill a space that used to hold hundreds of workers.

The factory’s biggest clients used to be True Religion and Lucky Brand until they went elsewhere.

One year ago, the factory was rolling out nearly 3,000 pairs of blue jeans a day. Right now, the company is making about 1,500 pairs of blue jeans for Diesel, J Brand and Fear of God. Many companies are only interested in making 100 to 200 units at a time. “All the big guys are in Mexico now,” he said. “It is hard to find consistent work now in Los Angeles.”

The change in the Los Angeles denim-manufacturing industry sounded a death knell last year for American Garment Sewing in Vernon, Calif. “We used to have a lot of customers, but then it started to shift in 2015,” said Anton Pavel, the company’s owner.

In 2015, the factory—with 200 employees—had about 80 percent of its production in blue jeans—mostly for True Religion. Other production was dedicated to army uniforms. Annual revenues totaled about $10 million to $12 million.

Last year, the True Religion business dried up and blue jeans made up only 20 percent of production for labels such as Current/Elliott, Joie, Kate Spade and Theory. About 80 percent of production became army uniforms and the rest was denim. The employee workforce dropped to 100. “The big customers in denim moved out, and we tried to move in more military uniforms, which was a really slow process,” Pavel said.

A series of workers’ compensation claims saw the company’s insurance costs skyrocket from $10,000 a month to $50,000 a month and annual revenues plummeted to $6 million. “The [workers’ compensation] complaints were so high, we couldn’t cover our expenses,” Pavel said.

Also, military-uniform makers only wanted to pay the federal minimum wage of $7.25 an hour rather than the higher Los Angeles minimum wage. “So we were stuck between a rock and a hard place,” the blue-jeans-factory owner said. “Basically the expenses became huge, and we ran out of money.”

At the end of last year, Pavel paid his remaining employees and shut down his company.