Guatemalan Denim Maker Sets Sights on the Premium Market

Setting Up Business for Premium Denim in Central America

Premium denim has been a financial boon to hundreds of local companies and put Los Angeles on the map as a top fashion innovator for high-end denim.

Now one of the biggest blue-jeans factories in the Western Hemisphere is about to go after a slice of that pie.

Koramsa, a Guatemalan blue-jeans manufacturer that produces up to 250,000 pairs of jeans a week for companies such as Abercrombie & Fitch and Gap Inc., is joining forces with a new Los Angeles laundry to grab a bit of the premium-denim business normally made in Los Angeles.

The goal is simple: survival.

Koramsa wants to improve its 10 percent profit margins and go after top-line business instead of doing massreplenishment programs that fluctuate wildly throughout the year.

“The only way Central American apparel manufacturers are going to survive is by doing products that have a high value added,” explained Koramsa President Carlos Arias, who was in Los Angeles recently.

Ever since Arias joined the company in 2000, he has been in charge of making the behemoth factory successful in an apparel world dominated by China. Under his guidance, the company has gone from a factory that made as many as 700,000 pairs of blue jeans every week in recent years (for mainly Levi Strauss & Co. and Gap) to shifting production into low gear but increasing profit margins with value-added service.

The company added a sophisticated design center a few years ago, bought 60 industrial laundry machines and started tracking European trends to be able to integrate its own designs into its full-package program.

Now Koramsa wants to ramp things up and corner some of that premium-denim business done almost exclusively in Los Angeles. Koramsa recently partnered with Blue River Denim Inc., a new Los Angeles laundry that caters to the high-end denim business, to share the latest and most innovative wash and finishing techniques. Tony Rodriguez, president of Blue River, will also help refer premium-denim business down to Koramsa, where garments can be cut and sewn and then sent to Blue River for treatment or completely finished at Koramsa. Koramsa is also developing a factory in Nicaragua to take advantage of certain privileges that country has to import as much as 100 million square meters of fabric every year from places such as China, India and Vietnam and still get clothing into the United States free of quota and duties.

Premium-denim sales, although a small percentage of total denim sales in the United States, are still strong but not as strong as they used to be. According to Cotton Inc., sales of premium denim during the first eight months of 2006 accounted for 4.3 percent of all denim jeans sold, up from 3.3 percent over the same period in 2005. However, sales growth was only up 33 percent, down from the triple-digit growth seen in 2005.

To remain profitable, many premium-denim companies are moving beyond blue jeans and offering a wide array of products. Their goal is to maintain those high profit margins that have made millionaires of many apparel company execs.

For example, True Religion Apparel Inc. in Los Angeles enjoyed a gross profit margin last year of about 53 percent on a total revenue of $139 million. Net profit margins were 17.57 percent. The company’s jeans sell for anywhere from $170 to $440 a pair.

True Religion is growing the business and boosting profits by launching its own retail chain, which should have 11 stores operating by the end of the year. Currently, retail sales are running at about $1,300 to $2,000 per square foot per year, said Michael Buckley, True Religion’s president, in a recent conference call with analysts.

As Arias sees it, as the premiumdenim business gets more competitive in Los Angeles, there will be a demand for businesses to come up with money-saving steps to improve profitability. Guatemala could be just the place for cost savings.

The country is close to the United States. Monthly wages are $228 to $305, and there are no quotas or tariffs on apparel made from U.S. fabrics under the relatively new Central American Free Trade Agreement, which went into effect last year. Blue-jeans makers can save as much as $10 to $15 per jean if their products are made in Guatemala, industry observers said. The average pair of premium jeans costs between $30 and $40 to make in Los Angeles.

But that doesn’t sway well-known Los Angeles premiumdenim company 7 For All Mankind. The company’s creative director, Tim Kaeding, said it is important for the blue-jeans venture to continue manufacturing in Los Angeles. “Manufacturing in Los Angeles allows us the creativity and quality that you don’t have manufacturing elsewhere,” he said.

Getting the wash right

Eight months ago, Koramsa began working with New York–based Paper Denim & Cloth to help that company produce a $100 premium-denim jean that vies with $150 to $175 jeans made in the United States, Arias said.

The idea of premium denim being produced outside of Los Angeles has always been a tantalizing idea. But one of the things that makes premium denim hot is the various washes that turn an ordinary jean into a “cool” jean worn by starlets and fashionistas with money to burn.

According to George Rudes of Not Your Daughter’s Jeans in Los Angeles, the biggest input into a premium jean is the wash, which is very labor intensive. “Forty percent of the cost is the wash, another 30 percent can be the fabric and 25 percent is labor,” Rudes said.

That’s where Rodriguez, who has more than 20 years of experience working in the apparel industry, comes in. He is a whiz at developing washes. For eight years, he was the senior vice president of Caitac Garment Processing Inc., a laundry in Gardena, Calif., known for its productdevelopment capabilities. Rodriguez worked with Jerome Dahan when the designer was first getting 7 For All Mankind off the ground in 2000.

“The wash is what makes all the difference,” Rodriguez said. He is currently developing 20 different washes of the same denim fabric for Banana Republic, a subsidiary of Gap, which could be sewn at the Koramsa facility in Guatemala and washed at Blue River.

Rodriguez said it is getting harder to produce jeans in Los Angeles without raising prices. “We are getting into tough times. Minimum wage is going up,” he said. “You have to create alliances with people overseas and be lean.”

Right now, Rodriguez has only about 35 workers at his laundry, which now has six industrial washing machines, four dryers and 70 brush mannequins. As he gears up for full production this summer, he will employ 250 people and have the capacity to treat 5,000 pairs of blue jeans a day, he said.

“Making it in Guatemala is like making it here,” said Bruce Berton, director of international business consulting at Los Angeles accounting firm Stonefield Josephson Inc. “Koramsa will be getting large margins and blue-jean companies will have an extra $10 to $15 per jean to play with. What remains to be seen is if they [Koramsa] have the attitude and infrastructure to work with these la-la-land designers.”