Lending Lull

Trendy But Cash-Strapped, Small Fashion Makers Fight for Financing

Sewing appears easier than  finding CEO successors. Source: DPA
Sewing appears easier than finding CEO successors.
  • Why it matters

    Why it matters

    Germany’s small- and mid-sized fashion houses are struggling, and most can’t get the loans or credit they need to grow or survive.

  • Facts

    Facts

    • The succession crisis at Bogner, a German clothing maker, is endemic of the generational succession issues facing small firms.
    • Most mid-sized fashion firms in Germany generate only half the cash they need to finance their own growth.
    • Small- and medium-enterprise bonds are one way to raise financing, but interest costs are usually high.
  • Audio

    Audio

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Willy Bogner Jr. wants to put things in order at Bogner, the German sports clothing company created by his father in 1932, to ensure the brand lives on when he leaves.

He’s been consulting with the U.S. investment banking giant Goldman Sachs.

Sources within the company have told Handelsblatt just about anything is possible from going public with a sale of stock to selling the company outright, though Mr. Bogner reportedly is insisting the buyer be another clothing company with expertise in the field.

Whatever path he chooses, the 72-year old ex-skiing star and filmmaker must ensure the fashion company can finance its long-term growth. The brand has potential, as underscored by the expansion of its fashion and licensing business and the opening of additional retail stores, sources said. But this growth also generates additional costs.

Mr. Bogner, who manages the company, has overcome the initial reluctance of other family members, who are the sole shareholders of the company.

“Many German clothing companies are unable to finance with their cash flow the necessary investments in expansion, for example, for their own stores, the increased marketing pressure or globalization. ”

Philip Beil, senior partner Roland Berger Strategy Consultants

Mr. Bogner believes he’s on the right path in the daunting quest of creating a clear line of succession in a family-owned business. Many companies, particularly in the fashion sector, have had a difficult time transferring power from one generation to another, especially from the second to the third.

Often, this problem occurs because long-term financing has not been put in place.

“Many German clothing companies are unable to finance, with their cash flow, the necessary investments in expansion, for example, for their own stores, the increased marketing pressure or globalization,” said Philip Beil, a senior partner Roland Berger Strategy Consultants in Munich.

The pressure on German fashion companies has increased because the market has changed drastically.

Discounters such as Dublin-based Primark are enjoying huge success while luxury lines such as France’s LVMH and Kering Group and Italy’s Prada and Armani continue to expand.

Companies caught in the mid-price range are finding it harder to effectively compete.

 

Textile executive Willy Bogner is looking for investors. Interested? Source: DPA
Textile executive Willy Bogner is looking for investors. German ice skating star Katarina Witt is looking for a sponsoring deal. Source: DPA

 

Whether they sell cheap or luxury products, fashion companies are investing heavily in their own retail shops. The Spanish clothing brand Mango just opened its largest store in Europe in Frankfurt and plans to open another 10 in Germany this year. Other fashion retailers are also looking at building their presence here.

Opportunity is driving this expansion. The retail landscape is shrinking with many single-line stores exiting the business and traditional department stores such as Karstadt continuing to struggle.

Additionally, building their own retail stores allows brands to eliminate the middleman and better present their own wares, even though it’s more expensive to operate a store than to let others sell for you.

High investment costs frequently are too much for mid-level companies.

“Nine out of 10 companies are not earning enough today to finance their growth,” said Franz Maximilian Schmid-Preissler of SchmidPreissler Strategic Consultants. According to his calculations, many have, at most, a pre-tax and a earnings before interest and taxes (EBIT) margin of 6 to 7 percent.

“They need an EBIT of 12 to 15 percent to finance their future,” said Mr. Schmid-Preissler.

Since banks often are unwilling to give them new loans, many family-owned companies see small- and medium-enterprise financing as the only solution, even though they must pay high interest rates. And that can lay a trap if the business hits a rough patch before the bonds mature, as the case of Strenesse, a maker of knitwear, illustrates.

The hunt for money led the family-owned fashion company to secure a one-year bond, which delivered a crushing blow when it matured this spring. Strenesse was forced to declare bankruptcy and has announced a restructuring.

The hunt for money led the family-owned fashion company to secure a one-year bond, which delivered a crushing blow when it matured this spring.

Strenesse was forced to declare bankruptcy and has announced a restructuring.

The company is now being run by Michael Pluta, a founder and partner of the law firm Pluta Rechtsanwalt GmbH who assumed the title of chairman of the board. The clothing company founded by Gerd and Gabriele Strehle is now seeking new investors as the family itself remains hopelessly divided on how to proceed.

Many other German clothing companies have issued similar SME bonds including Eterna, Seidensticker and René Lezard, but they have time to consider financing options before the bond’s due date.

For many owners, the journey has become too strenuous to continue. This was the case with the Bree family, which sacrificed its total control over the handbag producer in Isernhagen near Hanover. Although Axel Bree, the son of the founder, remains chief executive officer, new investors have stepped in and have a say in how the company operates.

Margaretha and Wolfgang Ley enjoyed many years of international success with their Escada brand after its 1978 launch, but they couldn’t hold their own in the market even after a late public offering.

Wolfgang Ley resigned in 2006 as chief executive officer and the company was forced to declare bankruptcy in August 2009. Luckily, the company found a deep-pocketed rescuer in Lakshmi Mittal, the Indian steel magnate and investor, who purchased Escada in November 2009.

He installed his daughter-in-law, Megha Mittal, as owner and chairwoman of the board.

The intervention of a strong investor saved Escada. Perhaps Ms. Mittal would also be interested in helping Bogner.

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