Courtaulds sale highlights private label risks

This week's giveaway of Courtaulds Textiles to Hong Kong investor group PD Enterprises has been an expensive exercise for Sara Lee

. But if dumping the former pride of Britain's textile industry costs over US$500m, does this mean there's no future in supplying the world's clothing retailers? asks Mike Flanagan.

Brenda Barnes, CEO of Sara Lee, announced the giveaway of Courtaulds Textiles to Hong Kong investor group PD Enterprises just a few days before Britain's annual Baishakhi Mela on 14 May.

She was probably unaware of the symbolism: the world's largest Bengali festival outside Bangladesh is hardly news in Sara Lee's Chicago headquarters. But London's Brick Lane, site of the Mela, was developed, like Courtaulds, by Huguenot (French Protestant) silk workers, and is now almost entirely populated by Asians.

Londoners take a passing pride in the street's church - built by the Huguenots, turned into a synagogue once the Huguenots got rich and moved out, and now a mosque. But the area's peaceful morphing into an Asian community has never really been news; just a fact of life.

Courtaulds in 1978 was the world's largest textile company. In 2005 it still contributed US$560m to Sara Lee's sales, mostly Marks & Spencer private label.

With clothing or textiles dominating Britain's exports for most of the past thousand years, you might have expected some British concern about Courtaulds' latest woes. But although unions are understandably concerned about yet another change of owner, the British have reacted as phlegmatically to Courtaulds' apparent demise as to a soothing plate of Brick Lane chicken tikka masala.

But why is divesting Courtaulds costing Sara Lee so much? Apparently the group got nothing for the business, but retained "certain obligations of Courtaulds," with a US$483m pension contribution merely "the most significant."

And that's after it had pumped in US$33m working capital. If dumping the former pride of Britain's textile industry costs over US$500m, is there no future in supplying the world's clothing retailers?

Value in private label

PD Enterprises isn't shy of spending money: it started by buying a group of Pacific Dunlop brands in China and the Philippines for US$390m. And there's still value in private label apparel contractors.

Negotiators don't come sharper than Hong Kong's Li & Fung - which has just paid US$37m for Oxford

 Industries' women's wear division (plus, Oxford claims, a further US$30m in the small print). The division sells to Target and Wal-Mart

, and contributed a mere US$260m - half Courtaulds' sales - to Oxford's US$1.3bn turnover in 2005.

Most major Asian clothing businesses want to buy into the major retailers' local suppliers - the people who design private label clothes, then take all the risks associated with getting them made and shipped into the stores.

When things go right, for an intermediary like Li & Fung, they offer a huge opportunity for rationalising the supply chain, and using better access to Wal-Mart and Target to push its sales heavily.

But things can very easily go wrong for private label suppliers too. In 2000, M&S supplier Bairdwear practically disintegrated when M&S stopped dealing with it. And Li & Fung backed away from bidding for another then M&S clothing supplier, Coats Viyella, when the retailer was unable to give the assurances about long-term contracts.

Direct sourcing

For the past few years, the major retailers have all been musing about more direct sourcing from factories - and performance has been declining at the largest private label supplier, Jones Apparel.

Even if the retailers don't go direct, there's no law of nature saying all clothes must be designed in the country they're going to be worn in. True, Gap

 has recently decided it'll sell more clothes in Europe if it designs them there. But France's Groupe Mulliez has also just announced a pilot to design a significant proportion of its range in Bangalore

This is because Western private label suppliers carry a lot of overhead. Designers aren't that cheap. And firing them if a major contract walks out can itself be an expensive business.

So buying a private label business in a country like Britain with reasonably tight redundancy laws can be risky - especially if the company is heavily dependent on one client.

That risk is lower if, as at Oxford Industries, business is spread over a number of clients.

The cost of managing problems is also lower in a country where redundancy rules are laxer - as in the US. And the potential if things go well is obviously a lot greater if the business supplies Wal-Mart than if it's supplying M&S, whose clothes sales are about a quarter of Wal-Mart's US$27bn.

Now almost all those risks were there when Sara Lee paid US$239m for it six years ago - a pretty bad time to pay 20 times earnings for a clothing manufacturer. Legal and actuarial changes make this a bad time to sell a British business with Courtaulds' mix of workers and retirees.

So there's no big lesson in Sara Lee's quandary. Sara Lee has simply displayed truly dreadful timing. In its long history, so have a lot of Brick Lane's businesses. But the Lane's still there.