Blog: Adapt or die - why profitable companies go broke.

Petah Marian | 26 March 2012

The garment industry has one of the highest bankruptcy rates of any commercial sector. What makes the industry different to any other sector is the large number of long-established, previously profitable companies that go broke, argues garment industry consultant David Birnbaum. "We have a pattern: we create innovative companies that rise and prosper, only to decay and die," he says.

The reason, according to Birnbaum, that so many companies fail is their inability to adapt to the changing needs of consumers. He says it is likely that two former giants of the US clothing sector, Sears and Liz Claiborne, will disappear completely over the next five years. He argues that process is already under way with Sears selling off stores and Liz Claiborne selling its eponymous label. 

One company that is looking to avoid joining that list is Perry Ellis, which revealed plans to shutter a number of businesses that have averaged US$30-40m in revenue over the past two years but "have not contributed substantially in profitability" as part of a broader restructuring programme. It expects to close these businesses by the end of this year and will look to cut costs through infrastructure improvements and a reduced headcount. The comments came as the company recorded a decline in fourth-quarter net profit.

Meanwhile, Zara recorded another year of growth, driven largely by international expansion. Over the year, the world's largest clothing retailer put down stores across 49 markets, and entered five, posting a 12% increase in net profit to reach EUR1.9bn.

From the world's largest retailer, to the world's largest sourcing group - Li & Fung also recorded positive full-year results last week, posting a 24% hike in full-year profit. The company attributed the growth to the expansion of its sourcing network and the growth of its Asian business.

Asia remains an important prospect for companies looking internationally, with research released last week highlighting the potential of China as an attractive e-commerce prospect. According to Chinese e-commerce group VIPStore, the country is set to become the world's largest e-commerce market by 2015. It said that China has 485m internet users, more than the US and Japan combined, yet internet penetration is only at 37%.

Neiman Marcus is one retailer to take advantage of this potential, announcing plans to enter China through the launch of an e-commerce site next year. It said it will invest US$28m in Glamour Sales Holding to build the online business, as well as supporting the growth of Glamour Sales' existing flash sales business.

Finally, Leonie Barrie is attending the Prime Source Forum in Hong Kong this week. If you're attending, please drop by the stand to say hello.



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