Guest Commentary: Made in the USA?
By Dan Goldman, senior manager, Kurt Salmon
Unless you are a grandstanding politician, the notion of American apparel production may feel like it was declared dead years ago. Our share of domestically manufactured apparel has dropped from 50% in 1994 to 2.5% in 2012, and this trend shows little sign of reversing on a macro level.
But despite this gloomy diagnosis, some types of clothing manufacturers can build compelling business theses for bringing manufacturing back home—and breathing new life into smaller corners of the domestic apparel manufacturing space.
We estimate that domestic apparel manufacturing will grow at an annual rate of 4% to 6% through 2017, building on a small uptick in momentum that started post-recession and a growing demand for higher-quality, American-made products and faster fashion.
The vast majority of this manufacturing growth is projected to come from a few select categories that can benefit most from moving production closer to the consumer: small or mid-sized contemporary fashion and premium denim, accessories, and specialized or localized products.
There are already several American-made success stories in these categories. In 2013, Men’s Wearhouse acquired American clothing brand Joseph Abboud for $97.5 million in an effort to expand its “Made in the USA” collection. Also in 2013, premium menswear brand Samuelsohn bought high-end suit maker Hickey Freeman’s Rochester-based production facility and license based on the belief that the company can grow 50% in three to four years while remaining 100% American made.
The domestic premium denim market is experiencing similar growth. True Religion is seeing a significant sales bump, driving its 51% employee growth between 2009 and 2012. High-end brand rag & bone is also experiencing a surge in demand behind its continued store rollout.
In the accessories space, Walmart recently announced that it is expanding its “Made in the USA” program by investing $28 million in existing production facilities. Also in 2014, Renfro Corporation invested $14 million in U.S.-based production capacity for sock manufacturing. And preppy clothier Vineyard Vines produces its ties, tote bags and belts in the United States and will be increasing local production capabilities to meet growing demand.
There are two big reasons American-based production makes good sense for select categories: positive consumer reception and operational efficiencies.
Positive Consumer Reception
The “Made in the USA” stamp helps boost sales. In fact, 72% of Americans in a 2012 Harris poll said it was important or very important that their clothing be made in the United States. And they are often willing to pay more to buy American: 75% are willing to pay a premium for “Made in the USA” products.
While patriotic sentiment can be expected at the tail end of a recession because it translates into U.S. jobs, such sentimentality suggests it can make sense to produce select American-made product lines for the positive brand image (think Levi’s), even though a brand may not be a great fit operationally for re-shoring.
Operational Efficiencies: Speed, Accuracy and Quality
Moving production back to the States has the potential to dramatically improve the right company’s entire supply chain and production cycle.
Starting with product development, re-shoring lets brands review and turn samples around more quickly by moving the factory significantly closer to the designers, speeding up the design process.
From there, re-shoring enables a brand to place smaller orders, which large international factories might deprioritize or reject. School House, a high-end, university-licensed clothing company, recently moved production back to the United States due to its low priority with large Sri Lankan factories. Small or mid-sized companies should benefit the most here.
Re-shoring also facilitates improved quality control by allowing for greater oversight, perfect for higher-end products. And shorter lead times can help high-fashion brands capitalize on emerging trends. “It’s so convenient ... you can react so much faster to the market,” says a rag & bone designer. Plus, re-shoring helps specialized products companies efficiently meet short-term demand while carrying less inventory and reducing markdown risk. Domestic production can easily save six to 11 weeks on average out of a 39-week process for basic woven apparel.
Yes, labor is more expensive in the United States, but wage increases in China have made the country less competitive and driven brands to look elsewhere. And when factoring in reduced shipping, inventory holding and markdown costs, American production can make increasing sense. In fact, it can actually deliver increased profits, especially for higher-priced items, considering consumers are generally willing to pay a premium for American-made goods.
Given all this, it’s no surprise Brooks Brothers re-shored 70% of its suit production due to increasing costs. And PVH (owner of brands including Calvin Klein, Tommy Hilfiger and Van Heusen) is motivated by the same reasons. “For the first time in 50 years, PVH is now manufacturing shirts back in the U.S., in North Carolina today,” said chief supply chain officer Bill McRaith at an American Apparel & Footwear Association conference. “We are scaling up quickly because it’s financially viable, not because it’s a good thing to do, not because we can make a statement, but because it financially makes sense to go make those products in that location. We can respond to the consumer so fast. It is completely irrelevant how much extra I have to pay for the product. I always make more when I sell. I may have to pay $5 extra [to produce it in the United States], but I will make $20 at retail.”
Looking Ahead
We expect to see continued growth in American-made apparel in key categories like contemporary and high-end fashion, denim and suits, accessories, and localized or specialized products. This year, men’s shoe brand Allen Edmonds announced its intentions to expand into apparel with all American-manufactured products. And the SEAMS Association is working with multiple retailers and apparel brands to begin U.S. production. For investors and brands, the lesson may be surprising, but don’t assume American manufacturing is a thing of the past.
Dan Goldman is a senior manager in Kurt Salmon's private equity and strategy practice ([email protected]).