"There are still too many smaller, typically family-owned, manufacturers making little profit and surviving on past fat"

"There are still too many smaller, typically family-owned, manufacturers making little profit and surviving on past fat"

In Britain there are too many small clothing and footwear manufacturers making too little money. It is time for the sector to take a leaf from the German market and realise that for many it is merge or die.

There are still too many smaller, typically family-owned, manufacturers making little profit and surviving on past fat.

The shoe manufacturing industry is a particular example. Two decades ago, Britain's many independent shoe makers supplied a healthy range of independent family-owned shoe shops on Britain's high streets.

Nowadays, most are gone. But it's not just the internet to blame, which accounts for 20% of shoe sales – although the industry is certainly guilty of being slow to adapt and capitalise on the huge online sales market. 

Some of these many family shoe shops disappeared because they were not good businesses, some because no-one in the family wanted to take over when the parents retired, and often they have simply closed because the family owned the shop's freehold and found it could make more money leasing it to a coffee bar or bookies.

"A merger means greater control can be exerted on the supply chain, allowing businesses to have greater oversight, management of costs and risks, and increased responsiveness to customer demand"

We have also seen brands like Clarks, which once sourced from a range of UK suppliers, become vertically integrated and selling only its own brand shoes, sourced from China.

Fewer outlets for suppliers, means the remaining buyers become more important. And, of course, their buying power combined with the need to compete against online and China means suppliers' prices get forced down too.

Company consolidation

What can shoe manufacturers do in the face of such price pressures? This is where we can learn from Germany where there was a similar situation of many smaller businesses that had been family run for many generations.

Here there has been a strong consolidation process with companies merging. No matter how many or few shoes you sell, each company has overheads such as a warehouse, accounts and customer service teams, and a logistics operation. Mergers in Germany have allowed this duplication to be removed, costs saved and profitability to be restored.

The experience from the recent merger of Florida Group, whose brands include Van-Dal and Pikolinos, with Groococks, manufacturer of the long-established Padders shoe brand, in May this year bears this out. 

This merger has already delivered GBP1m (US$1.3m) in annual cost savings. To put that into context, it would have taken sales to increase annually by nearly 90,000 extra pairs of shoes, with no increase in overheads, to achieve an equivalent increase in profits

Tony Linford, Florida Group's managing director, comments: "Good mergers grow the top line as well as reducing the bottom line. In our case Florida Group has numerous department store concessions that lend themselves to adding extra products, such as the Padders shoes, while Groococks brought, amongst other benefits, a valuable relationship with Debenhams and lots of experience that are proving hugely valuable for Florida Group's Van Dal brand."

"2+2=5"

In other consolidations, synergies have yielded value in a variety of ways. Indeed, the concept is occasionally quoted as "2+2=5," where the combination of entities produces a result that they would struggle to achieve independently.

For instance, consolidation has been successful in the case of Monix and Shani, which created a much stronger coat company, and for Cityfax and Mellers, which created a much stronger accessories company.

With a vertically integrated model, a merger means greater control can be exerted on the supply chain, allowing businesses to have greater oversight, management of costs and risks, and increased responsiveness to customer demand.

In a market where differentiation is challenging, and price may be the main competitive weapon, consolidation is a proven model for improving profits. After all, Mike Ashley became a billionaire by acquiring regional retailers to achieve synergies while using their greater combined clout to acquire rights and wrangle better prices from sports brands.

What is stopping more of Britain's shoe and clothing manufacturing businesses creating fewer larger groups that have the clout to deal with the new world of online as well as huge retailers constantly trying to force down our margins? 

There are too many brands making little money while living off past glories. Cost increases through leaving the EU aren't going to help some, and while these may in part be passed onto consumers, many may have to be absorbed by manufacturers. 

In the longer term, consumers remain strongly interested in brands and are willing to pay a premium price for them. 

If the industry can achieve a more efficient way of creating and delivering brands through consolidation to remove the huge amount of costly duplication of overheads, there can be a bright and profitable future for Britain's remaining manufacturers.

About the author: William Senior is an Associate at corporate finance specialists Watersheds, which has particular experience advising shoe, clothing and accessories businesses looking to buy, merge and sell.