Fashion Industry Shakeup

Apparel Businesses Grapple With Recession And Find a Harder Time Getting Loans
by Anna Scott

DOWNTOWN LOS ANGELES - Downtown Los Angeles has long been a fashion industry hub. The area is home to thousands of businesses at every level of the apparel food chain, from fabric suppliers to designers to wholesalers. According to a Fashion District Business Improvement District study, the area in 2006 supported 66,000 jobs and did an estimated $5.76 billion in volume.

Despite these powerful figures, business models that have driven the industry for decades are being challenged by the recession, local business leaders say. The forces at hand, specifically a nationwide dip in consumer spending and troubles at the New York-based fashion industry-financing giant the CIT Group, Inc., extend well beyond Downtown. But the fallout is having a big impact at the local level.

“This has woken everybody up,” said Kent Smith, executive director of the Fashion District Business Improvement District, which operates in a 115-block area of Downtown. “The crystal ball has become a lot cloudier. In the fashion industry in particular, it is very murky out there in terms of trying to fathom what is going on inside the head of the consumer.”

The Los Angeles region’s apparel industry generated approximately $24 billion last year in sales and shipments and employed 122,240 workers, according to the Los Angeles Economic Development Corporation. About 70% of that industry is based in Downtown, said California Fashion Association President Ilse Metchek.

An unusual and intricate financing system underlies much of the industry.

Unlike most other goods-based businesses, clothing manufacturers and wholesalers often fill orders for retailers without seeing a dime upfront. Small- to medium-sized clothing companies without a lot of capital often rely on financing firms called “factors” for short-term loans to cover the upfront costs of creating shipments. Then, when the order is delivered, the retailer pays back the factor and the manufacturer or wholesaler gets paid as well.

With consumer spending down, that system has been unraveling, experts say. As retailers have faltered, factor financing is harder to come by.

“When we’re seeing some fairly large retailers going into Chapter 11, then factors get really nervous,” said Smith. “As credit has tightened up, it becomes more challenging for the wholesalers and manufacturers to get those loans in advance of delivering the goods to a retailer.”

The crunch has forced many Downtown fashion companies to find alternate ways of doing business.

Liza Stewart runs one of the more than 1,000 showrooms at the Fashion District’s California Market Center. She sells contemporary women’s sportswear and dresses from various fashion lines to retailers including Bloomingdale’s, Nordstrom and several small boutiques. In recent months, Stewart said, she and other showroom owners have gone from being neutral middlemen to active negotiators between clothing suppliers and stores.

“We’ve had to get involved a lot more to make sure we work out alternate forms of payment if they’re not factor-approved, or even contact stores directly for a payment,” said Stewart. “We’re relying on credit card payments, wire transfers and upfront deposits more and more.”

CIT Fallout


The situation has been exacerbated by troubles at one of the nation’s biggest factors for small and midsize apparel businesses, CIT. The company was on the brink of bankruptcy until it received a $3 billion rescue loan from bondholders last month, and still faces about $7 billion in debt over the next fiscal year, according to published reports. CIT’s problems have rippled throughout the fashion industry, because the lender not only functions as a factor but also has a research arm that vets retailers for many other, smaller factors.

“They affect the whole supply chain,” said Donald Nunnari, president of the Downtown-based factor Merchant Factors Corp., which represents many local apparel companies and relies mostly on CIT and Wells Fargo Trade Capital to run credit checks on retailers. While CIT seems to be back to business as usual following the infusion, Nunnari said, the uncertainty in the credit market has driven some businesses away from factor financing altogether.

“More and more specialty stores don’t seek credit and don’t have credit,” said Nunnari. “They have to pay for shipments by credit card or COD. That doesn’t help me as a factor.”

Some of the small clothing designers and manufacturers that deal with those specialty stores are in an even more precarious position.

Jünker Designs, a two-person, Downtown-based team that creates one-of-a-kind pieces for rock star clients and local boutiques, is too small to attract factors. The company has suffered consequences recently from dealing with small retailers in a down economy.

“We’ve had about $20,000 in returns” since last fall, said Jünker co-creator Giuliana Mayo. “It’s gotten really difficult for us. We take deposits now. Because so many people are canceling orders, that’s the only way we can do business.”

In the short-term, Metchek said, she is concerned that the upheaval in the industry could stop new, small operations like Jünker from starting up.

“Retailers will not buy from a newbie because they need to be guaranteed delivery,” she said. “These new, little companies are going to have a very tough time, and my concern is that creativity will be stymied.”

Despite those worries, Metchek and Smith also say there are signs that, in the long-term, the uncertainty could be a positive thing, shaking up the old way of doing things to make room for local entrepreneurs.

In that spirit, Metchek recently started an initiative that she hopes will usher in a new business model. The effort, dubbed Business Innovation Strategies, aims to bring together small, burgeoning fashion businesses that have generated interest from retailers but might not qualify for factor financing with potential investors. The effort will unfold as a series of roundtable presentations, said Metchek.

The first meeting, to include Downtown-based banks, fashion industry venture capitalists, accounting firms and other potential local investors, is scheduled for November, she said.

“The mission is access to capital, providing the platform for that access and helping potentially great companies take flight,” said Metchek. “The turnaround in terms of new capital, new growth, it just won’t happen until 2010, but you’ve got to get ahead of the curve.”