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During a Jan. 8 Kellogg School visit, Hartmarx CEO Homi Patel introduced MBA students to some real-life challenges his company faces in the apparel industry. Patel's 90-minute discussion took place in Dean Emeritus Donald P. Jacobs' Strategic Dilemmas in Business course.

Naked truth: tough times in polarized apparel industry

During visit to ‘dilemmas’ class, Hartmarx CEO Homi Patel challenges Kellogg students to grapple with difficult market situations

By Matt Golosinski

1/10/2007 - For a man whose business is confronting numerous dilemmas brought on by industry consolidation, outsourcing, private label competition and other challenges, Homi Patel retains a crisp, refined manner — much like the suits he wears that are produced by his company.

Patel, the 57-year-old CEO of Hartmarx Corp., a diversified apparel concern more than twice his age and known for quality menswear brands such as Hart Schaffner Marx and Hickey-Freeman, addressed these hurdles with a sober-minded ease that did not seem to dispel an underlying optimism. During a Jan. 9 appearance in Dean Emeritus Donald P. Jacobs’ Strategic Dilemmas in Business class, Patel outlined several choices his company could use to counter crushing market pressures.

The question for Kellogg students enrolled in the course was: Which choice to pursue?

“About every five years there is some megatrend that changes the business,” said Patel, who produced some numbers to indicate the severity and swiftness with which these changes can strike. “Ten years ago, we had 25,000 employees working in 37 union factories in the U.S.; today, we have 4,000 people in six factories.”

Among the reasons for this transformation, Patel listed a familiar one — outsourcing — but even more formidable has been consolidation in the retail space as major department stores either go out of business or merge, resulting in fewer overall players who nevertheless wield more power over mid-sized manufacturers like Hartmarx.

“You can’t sell them all your brands, you can no longer sell exclusivity. There are not enough different enterprises,” said Patel, one reason Hartmarx must determine which of its licensed brands to retain.

Some of these retailers are also producing their own private label brands, after calculating that there is little value in having a Hartmarx supply a branded item when many customers are no longer willing to pay a premium for such goods. Complicating matters, economic dynamics have polarized the apparel industry, resulting in businesses being forced to migrate either toward the high or low ends of the continuum — anywhere but in the “muddled” middle segment.

“Consumers are either going to the luxury end or moving downstream,” said Patel, adding that other industries, including wine, are witnessing similar trends. In the retail clothing sector, customers are shopping at stores like Nordstrom (which carries Hartmarx products) or else places like Target or Walmart. Companies like Carson Pirie Scott have found themselves mired in a narrowing middle market, said Patel, a fate he acknowledged that his firm is taking steps to avoid.

One way Hartmarx is trying to increase its market value is through international licensing arrangements. Over the last year, the company hammered out an agreement in China with Youngor Group Ltd., the largest public menswear retailer in that nation. While Patel said his company can not realistically find sufficiently large customer segments in fashion-forward cities like Paris or Milan, Hartmarx sees opportunities in Asia.

“I would love to see a similar deal in India,” said Patel, noting that his company also already does strong business in Korea, Japan and South America.

Patel has also overseen the company’s decision to diversify away from its historical roots as a strictly menswear manufacturer. Today, Hartmarx is trying to capture value by augmenting its traditional lines both by producing informal wear for men as well as by entering the women’s fashion arena, a space that offers better margins compared to menswear, and three or four times as many specialty or boutique shops than exist for men, according to Patel.

But this choice poses one dilemma for the company: “Our heritage and core strength has been in men’s clothing,” said Patel. “What is the right mix? Fifty-fifty [between men’s and women fashions]? I wouldn’t be comfortable with that right now. Maybe in 10 years.”

Another dilemma involves whether to take the company private using private equity capital. Or perhaps, instead, to grow larger by remaining public but acquiring other companies of its own size or smaller. Recently, for example, Hartmarx purchased the upscale Zooey brand and business.

There are risks and benefits associated with any of these moves, said Patel.

Some things are clear though. Any strategy today will involve a mix of selling approaches, according to the Hartmarx CEO. “The multichannel strategy is the answer,” he said. “Combinations of freestanding and online stores will dominate.”

But it is unlikely that Hartmarx strategy will involve altering its quality, one of the things that has been a company hallmark for more than a century, and a value that is very important to Patel.

“You don’t ‘inspect’ quality into a product,” he said, observing the industry practice of looking for flaws only after an item is about to leave the factory. “You build quality into the product.”