Eran Itzhak is making solid progress with Bagirs recovery plan

Eran Itzhak is making solid progress with Bagir's recovery plan

Exactly 12 months into his role as chief executive of Israel-based tailored clothing manufacturer Bagir Group, and Eran Itzhak is in a buoyant mood. The business is debt-free for the first time in nearly a decade, has refocused its manufacturing base on Ethiopia, Egypt and Vietnam, and is fighting back with new products and a return to innovation.

"What we are trying to do is find the right path for how Bagir fits in," Itzhak tells just-style. "A year ago we just didn't have the right set-up; we had all the other resources in the group in terms of design, marketing and sales, product development, operation management, but not the factories."

It has been a tumultuous few years for the company, which as recently as 2014 held a 12.5% share of the UK formalwear market by value of items sold. But the loss of a major customer, a series of profit warnings, and a wider trend that has seen consumers move away from suits to semi-tailored and more casual clothing have all taken their toll.

But so far the results of the restructuring seem promising. First half earnings before interest, tax, depreciation and amortisation swung to $0.8m from losses of $0.4m a year ago. And while revenue slipped 25.6% to $33.5m in the six months to 30 June, this was in line with management expectations.

Perhaps the most significant milestone came earlier this month, when the company cleared its $21m debt after paying lenders $6.3m in cash – money that was secured through a share placing earlier in the year that raised $8.5m.

Itzhak, a lawyer by training who was appointed Bagir Group CEO last November, has been with the company for the past five years, and his recovery plan leans on three main pillars: in addition to the refinancing, the focus has been on cost reduction as well as realigning the operation and marketing strategies.

The company's cost base has been cut by 30% – from $13.5m to $9.5m a year – through a reduction in manpower, rent and related costs, travel expenses and other overheads. Another $2m in savings has been earmarked for the first half of 2017, bringing fixed costs of the whole company down to around $7.5m.

Included in the savings so far, a not insignificant $0.5m has come from moving sampling from Israel to the company's production sites in the Far East and Egypt.

"We have reduced the cost of samples because we're now making them in more attractive geographies, and by manufacturing where the bulk orders are produced we have narrowed the gap between the samples and bulk production," Itzhak says. He adds that there are advantages in terms of quality too when the production site is also responsible for samples.

Factory focus

But some of the most exciting changes have taken place on the operational front. Bagir has closed its factories in China and Romania and is now "focusing our facilities and operations in three geographies only – Egypt, Vietnam and Ethiopia – because this is where we have duty-free rules, competitive labour costs, and full ownership or full control of the lines with our own people on site."

Each of the three countries, he says, "gives us a specific and unique added value that you cannot get in the other places," adding that they also open up new opportunities to expand the company's product lines. 

Exports from Egypt to the US for instance – where Bagir generates two-thirds of its revenues – are duty-free under the Qualifying Industrial Zone (QIZ) initiative, and the addition of new facilities here will allow the company to move into products like formal shirts and chinos.

"We have one factory in Egypt (METCO) that is 50% owned by Bagir where we are manufacturing 1,300 suits per day, and we are now expanding the operation to two more factories: one that is set up to produce 600 suits per day and an additional facility that is dedicated only to trousers in which we are going to make 1,800 trousers per day."

Shifting trouser production from METCO means this facility will become a jackets-only factory producing 1,700 jackets per day, with corresponding opportunities to increase efficiency.

Likewise, production in Vietnam got underway last year following a $1m investment in a compound of nine factories where a special three-storey building is dedicated to Bagir.

"This factory is located in Da Nang and we are producing 1,200 suits per day on two floors and we intend to expand it to 1,800 suits by using the third floor.

"In addition we have just created a new joint venture in Hanoi to support big volume orders of 3,000 per order and above."

Crucially, there is the ability to extend capacities further and, at the factory in Hanoi in particular, to manufacture ladies' wear and outerwear "at attractive prices."

Ethiopia the game-changer

However, it is on the possibilities offered by Ethiopia that Itzhak gets particularly animated. Indeed, the company has just shipped the first trouser exports from its new manufacturing site in the country, completing a test order for fast fashion giant H&M. The trousers were shipped to the US, and more orders for other destinations are now in production.

"Ethiopia is the game-changer. We are the first to manufacture and export tailored garments from Ethiopia," he explains.

Two years of "time and energy and resources" have so far seen Bagir invest $1.5m to buy a 50% stake in Nazareth Garments, whose factory used to produce uniforms for the Ethiopian police and Ethiopian airlines, relocate the general manager from China to Ethiopia, relocate the CTO from Israel to Ethiopia, and relocate the quality manager from China to Ethiopia.

"We have created a new reality in this factory, and at the moment we are manufacturing 600 trousers in export quality per day, with a clear plan to increase the quantity to 3,000 trousers in the next 18 months and jacket lines to follow. I'm excited."

With "all the key elements, the duty-free rules, preferential market access to the EU through the Everything But Arms (EBA) scheme, and duty-free access to the US through AGOA (the African Growth and Opportunity Act), the competitive labour costs, government support and huge potential to grow further," the goal is to develop Ethiopia as Bagir's main production base within three years.

Part of the money raised through the share placing "will be invested in this facility in Ethiopia. This is the first phase of this factory, and we intend to increase the capacity to 4,000 suits within three years."

The game of sourcing

Itzhak is not deterred by recent unrest in Ethiopia and the government's decision to declare a state of emergency in the country, pointing out: "It's part of the game of sourcing."

He continues: "We have been operating in the market since 1961 and our specialty is manufacturing, and as a manufacturer you need to adjust to the new reality all the time. In the 60s and 70s we had 7,000 employees in Israel; slowly we moved from Israel to Portugal, from Portugal to Jordan, from Jordan to Egypt, then we manufactured in China, Egypt and Romania, and then Vietnam and now Ethiopia. This is part of what we do. This is the type of flexibility the industry demands.

"We are managing business as usual at our factory and will continue our plans. We expect to get $3-4m from Ethiopia next year and are not changing our focus or expectations. I'm not preparing any back-up plan for Ethiopia for the simple reason that there is no country that can offer the same advantages and benefits."   

He also points out that the decision to move to a new geography is not one to be taken lightly. "It took us more than two years to find the right partner in Ethiopia and we didn't go to the most shiny factory or the one with the most magnificent machinery; we went based on the clear criteria that we had and we chose the right partner for us."

The resulting 10,000 square metre building on 50,000 square metres of land not only offers potential for expansion, but also meant there was enough space to open an on-site training school because "no-one in Ethiopia knew how to make suits at Bagir standards."

"Africa, to my understanding, is the next best thing, and you will see that more and more brands and manufacturers understand this, and you can already see huge investments coming from China to Ethiopia.

"Yes there are issues like the infrastructure, transportation, the lack of tradition, the need to bring people from Sri Lanka and Bangladesh to manage the lines – but this is part of the sourcing game. I don't see them as difficulties; I see them as challenges. And there is a big prize waiting for the ones who are willing to meet these challenges."

Global Innovative Tailoring

Also part of Bagir's plans for the future is reinstating its tradition for innovation, something that was abandoned in recent years as the business focused on survival. It has the potential to be lucrative, too, with four new product lines last year generating 5% of the company's annual turnover.

"In this competitive market price is always a 'race to the bottom,' so you need to offer more added value, which is where innovation comes in. We have eight concepts in the pipeline, of which six are ready to market."

These include, for example, a heated suit jacket that ensures the temperature close to the body remains warm – so the wearer will not need a coat to make a short trip outside.

Another development is a new canvas construction for ladies' wear that replaces traditional multi-layer pieces with a single graduated piece that "makes the manufacturing time shorter, which reduces cost, and gives a better result."

Mitigating risk

Headquartered in Kiryat Gat in Israel, Bagir had a somewhat unfortunate listing on the London Stock Exchange's AIM market back in 2014, when its flotation was almost immediately followed by a shock profit warning after its biggest customer at the time, Marks & Spencer, slashed orders.

Not surprisingly the company is now risk-averse, and is expanding its customer base in the US, UK, Europe, Australia and South Africa to reduce reliance on any single company or country. As well as customers including the UK's Arcadia Group, whose labels include Burton and Topman, Bagir licenses the Jay Godfrey and AR-RED brands sold in the US, as well as producing its own GIR Collection to showcase its most advanced innovative designs, which are often then picked up and re-created for customers.

Aligned with this is a shift towards more high volume orders – mainly in the UK, so that the mix can be balanced between small and big orders – "because it's already how we successfully operate in the US."

Another move to reduce risk is "to not lean only on tailored garments." Consumers are dressing more casually these days, so "we are now opening up new opportunities in terms of ladies' wear, outerwear, semi-tailored garments like jackets and chinos, and in addition expanding our operation in the field of uniforms and workwear."

Risk also comes into the conversation in the context of the potential impact of Brexit. While Bagir has a natural hedge to currency fluctuations by operating across a range of manufacturing countries and customer markets, Itzhak is also comforted by the reaction from investors who have committed to the business since the UK referendum in June.

"Another change in our company is we are encouraging customers to work with us on an FOB dollar basis because we want to reduce our exposure to inventories and to foreign currencies. More than 80% of our business is already FOB dollar based. So we kind of have natural protection to Brexit."

The changing relationship between retailers and their supply chains is also on Itzhak's radar.

"The industry is becoming more tough; the retailers don't want mediators any more, they want to work with factories and offshore operations directly."

"Our response to this rising demand is providing customers with the ability to enjoy both worlds. The name of the game is finding the right path between serving the customer in the most direct way, and providing any additional services that might be requested. We are restructuring the company and the regional offices as a one-stop-shop that allows retailers to communicate with them directly, and providing all the additional services such as design, sourcing and product development.

"So we are offering both, and this is our way to cope with industry trends."