Hanesbrands Innovate-to-Elevate strategy is driving impressive growth

Hanesbrands' Innovate-to-Elevate strategy is driving impressive growth

An upbeat Hanesbrands has raised its guidance for the year ahead and expects sales to break through the $5bn barrier for the first time. At the heart of this momentum is its Innovate-to-Elevate strategy, combining brand power with product innovation - and a low-cost supply chain that the basic apparel maker sees as its "secret sauce."

Having spent the past few years positioning its supply chain operations into lower cost regions and factories, Hanesbrands is now ready to unleash its full potential as a key part of the company's Innovate-to-Elevate strategy.

"Our goal is to deliver big ideas that we can charge for, and ones that we can manufacture at large scale in our supply chain and expand margins by driving the cost per unit down," explains co-chief operating officer William Nictakis, speaking at the company's recent investor day.

Known within the company as "I2E", the three-pronged Innovate-to-Elevate strategy rests on the premise that innovation is a competitive advantage - and is boosting business through a combination of powerful brands, innovative products and a global supply chain designed to deliver them.

Together these three pillars have been acting as a springboard to increase shelf space, gain market share, lower costs, internalise production of higher-volume programmes, and introduce higher-margin products.

Indeed, not only did the company more than double its full-year profit to US$330.5m in 2013, but is clearly confident it can deliver even better results in the year ahead. Another record year is forecast for 2014, with net sales seen rising from $4.63bn to around $5.1bn, and earnings per share climbing to $4.60-4.80, up from $3.91 a year earlier.

"We think there is a lot more to come," confirms chief operating officer Gerald Evans.

"Secret sauce"
Making it all possible is Hanesbrands' supply chain - which Evans describes as "our secret sauce."

Unlike most apparel companies, Hanesbrands owns its supply chain, with more then 80% of products supplied through its network of large-scale facilities and dedicated contractors, most of which are offshore.

And it's this resource that has, over the past six years, reduced energy and water consumption by 20-30%, dramatically improved quality, and delivered $30-$40m of savings per year.

Michael Faircloth, president and chief global operations officer, explains the company now has fewer larger facilities - 59 less than in 2005 - yet there has been no loss of capacity, operating costs are down, there is less inventory, and the cost of many products has been cut by double-digit percentages.

"Producing nearly 1.9bn units a year gives us tremendous scale. We have established a global network that's positioned just where we want it, balanced between the Eastern and Western hemisphere manufacturing clusters to better mitigate risk and supply products to our global markets.

"And what sets us apart is that we own our global supply chain. Nearly 90% of our product for the US market comes through our owned and contractor network. And this gives us a tremendous advantage in terms of low cost, compliance and the ability to efficiently scale up innovations across multiple product categories."

Powerful combination
Nearly 40% of unit volume is produced in Asia, where Hanesbrands employs over 12,000 people -8,500 of whom are based in Vietnam, where the company is thought to be the largest US employer.

"With that scale, Vietnam has quickly become the central hub of our Eastern manufacturing cluster," he notes, adding: "The lower wages combined with large-scale efficient factories make a powerful combination."

But Faircloth emphasises: "We do not chase the cheapest labour into areas that could risk our reputation. Rather we make long-term investments in stable countries that have attractive wages, then operate large-scale, highly-efficient factories to achieve a sustainable low cost."

That said, fully loaded wages in its supply network indexed against El Salvador and the Dominican Republic at 100, show China comes in at 123 while Vietnam is just 58.

Looking ahead, the company plans to continue to build capacity in Vietnam, adding capabilities to produce an even a wider variety of products over the next few years. It also believes it will have "an incredible operating advantage" if the proposed Trans Pacific Partnership (TPP) being negotiated between 12 countries including the US and Vietnam, goes ahead.

Questioned on the financial impact of the potential free trade pact with Vietnam, CEO Richard Noll said any benefits "would probably be in the latter half of the decade," adding that by then, Hanesbrands would have had a decade of experience operating in Vietnam."

Bedrock of apparel brands
Hanesbrands credits its powerful performance to a bedrock of apparel brands that includes Hanes - the company's largest, with retail sales of $3.6bn - Champion, Playtex, Bali, and Maidenform across categories ranging from T-shirts, bras and panties to socks, hosiery and activewear.

"Consumers really demand brands. When you ask them to explain how they make purchase decisions, you'll see that brand is the number one criteria and price ranks a distant fifth," Evans elaborates.

Powerful brands in turn provide "pricing power to offset inflation and maintain margins in inflationary periods. And it allows brand leaders to price at a premium to weaker brands and private label," says Evans.

On top of this, when consumers trust brands, "they're more likely to try new innovations" - and pay more for the privilege.

Which leads to the second component of the I2E strategy: innovation. Hanesbrands' innovation platforms include Tagless Tees, Bottoms and Underwear; and Flexible Fit bras that offer a simplified size system and more comfort.

There's also the ComfortBlend fabric innovation inspired by materials used in performance activewear that combine cotton and synthetic yarns for products that are softer, shrink less, and dry faster.

"We introduced Hanes men's ComfortBlend underwear in 2012 with a 30% price premium to our core products, and the results have been fantastic," notes Innerwear president Howard Upchurch. He adds it's the kind of product "the consumer loves" so much "that they replace everything in their drawer."

ComfortBlend sales grew over 125% in 2013 and account for 5% of basics sales, so not surprisingly the concept is being extended into socks, kids' underwear and panties.

And the newest platform - X-Temp - helps keep wearers cooler and drier by increasing the rate of evaporation when their temperature rises, and reducing the rate of evaporation when they're cooler. Launched in men's underwear and socks last year at a 75% price premium to core products, it is now being rolled out in women's panties and socks.

"We're not interested in newness or fashion, but rather focus on identifying the long-term megatrends that will impact our categories over the next five to ten years," explains co-chief operating officer William Nictakis. "The key is long-term trends, not fleeting fashion."

Click on the following link to read more: Hanesbrands on track with Maidenform integration.