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https://www.wsj.com/articles/SB950573052395979151
Tyco Rules Plastic-Hangers Market Through Aggressive
Acquisitions
By Mark Maremont Staff Reporter of The Wall Street Journal
Feb. 15, 2000 12:01 am ET
When Tyco International Ltd. bought a company that makes the plastic hangers that
Kmart Corp. uses to display clothing, the retailer's executives weren't very concerned.
Then Tyco snapped up Kmart's other hanger supplier. Then two more hanger companies.
Fearful that Tyco could corner the market, Kmart started funneling much of its $40
million hanger account to one of the remaining independents, a small New York outfit
called WAF Group Inc.
Last fall, Tyco also gobbled up WAF.
Kmart now has little choice but to accept a recent Tyco price increase for most of its
supply, says Bill Adams, a Kmart divisional vice president. "Consolidation in this industry
is going just a little too far," he says.
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Acquisitions are the lifeblood of Tyco, a once-obscure conglomerate that in the past six
years has spent upward of $30 billion to acquire more than 120 companies, turning itself
into a titan with $22 billion in annual revenue. Tyco's playground is a long way from the
sexy dot-com world; it thrives in the gritty recesses of the old industrial economy. Among
its product lines are fire-sprinkler systems, electrical connectors and valves for water
systems.
Lots of Leverage
Executives of Tyco, which is registered in Bermuda but has its main offices in Exeter, N.H.,
have said the acquisitions frequently allow them to bring leadership to fragmented,
inefficient industries. Purchased firms are melded with Tyco units and the overlap
eliminated. Profit margins of acquisitions often double in just a year, the company says.
But a closer look suggests that in at least a few industries, Tyco also may be profiting by
grabbing unusually large market shares, then using its dominance to raise prices or wring
concessions from customers. Because these are obscure subsectors of the economy, not
many people seem to notice, or care.
In less than four years, Tyco has amassed a hanger business with annual revenue of more
than $400 million and 70% to 80% of the U.S. market for plastic garment hangers, by
industry executives' estimates. Only a handful of rivals remain in the U.S., none with the
global manufacturing reach that big retailers and garment makers prefer. Billions of the
plastic hangers -- retailers generally don't use wire -- are used in the U.S. each year to
display clothing.
'Over a Barrel'
Angered by rising prices and deteriorating service, some big retailers and clothing
makers say Tyco is abusing its dominant position. Tyco "has basically monopolized the
market," says Amy Bennett, a hanger buyer in the children's division of VF Corp. , the
maker of Lee, Wrangler and Healthtex garments. VF says Tyco has raised prices twice
since buying the No. 2 hanger company, Batts Inc., last spring. For many models, "they
have us over a barrel," she says, adding that she would switch to another supplier "in a
minute" if that were possible.
At J.C. Penney Co., hanger buyer John Davis says he was "stunned" when the federal
government allowed Tyco to buy Batts, then his company's main supplier, because it
"created a monopoly." Mr. Davis says he complained about the deal last year to a staffer at
the Federal Trade Commission but has heard nothing. An FTC spokeswoman declines to
comment.
After the deal, Mr. Davis says, service worsened. He says deliveries last fall were so late
that some stores had to buy hangers in smaller batches from local distributors at 50%
higher prices.
Andrew Zuckerman, president of Tyco's hanger unit, A&E Products Group, blames most
service glitches on a software switch-over that has now been completed. As for the price
increases, they stem from unexpectedly large cost rises on raw materials, he says,
particularly two kinds of plastic resin. Those resins have indeed gone up, about 40% over
the past year.
Market Share
Mr. Zuckerman agrees that his company is the U.S. and global leader in plastic hangers.
But, counting plastic hangers of nearly every sort -- including those used to display shoes,
socks, blankets, towels, automobile mats and carpet swatches, along with those sold
directly to consumers -- Mr. Zuckerman says A&E has only 30% of the U.S. market.
He acknowledges this figure doesn't count hangers made for the U.S. market by A&E's
overseas licensees, even though they bear A&E's logo. He declines to estimate A&E's share
in just the garment-hanger market.
Industry executives say the 30% overall figure is very misleading because garment
hangers are a distinct business, one A&E clearly dominates. A firm that recycles many
stores' hangers, Uniplast Industries Inc. in Hasbrouck Heights, N.J., says, "In most
everything we buy, it's all A&E product. Judging from those percentages, they have nearly
all of the business."
Of course, sometimes the reason one company has most of a retail chain's business is
simply that the chain chose that firm as its main supplier. But in the past, retailers could
pick a main supplier after playing one highly competitive vendor off against another for
the lowest price. That is what they say has changed.
Mr. Zuckerman says the business is still very competitive. "Do we have a better position
than our competitors in this particular market segment? Yes we do," he says. But he says
Tyco spent a lot of money to get there. And customers still have plenty of choices, he
argues. For instance, retailers could finance the expansion of rival hanger companies, or
they could "choose to manufacture hangers themselves."
There is a parallel in another field where Tyco operates. In fire-protection equipment,
many customers also grumble about a pattern of price increases following Tyco
acquisitions.
For years, Tyco vied with a company called Central Sprinkler Corp. to sell the sprinkler
heads embedded in buildings' ceilings. Customers say prices declined by as much as 25%
over five years because of technology and competition. But last summer, Tyco bought
Central, giving it three of the six major sprinkler brands and more than half of the U.S.
market, by industry executives' estimates.
A few months later, Tyco announced a price increase averaging about 8%, blaming rising
costs for manufacturing and handling. Customers say prices rose 40% on a popular type of
sprinkler that only Tyco and Central made.
"When Central was independent, they were very aggressive on their pricing," says Marty
Giles of Virginia Sprinkler Co., an installer. "But since Tyco owns them all now, they can
push their prices up."
Mr. Giles and other big customers say Tyco also has been raising prices on two kinds of
sprinkler-system pipe, plastic and thin-wall steel. Industry executives say Tyco has had
about a 70% U.S. market share in thin-wall steel pipe since buying its chief rival abut three
years ago, and gained more than 60% of the plastic-pipe market with the Central takeover.
In a written statement, a Tyco spokeswoman, Judith Czelusniak, says the company won't
comment on its market share in fire-protection segments for competitive reasons. She
says Tyco has raised its prices on steel pipe because steel is more expensive. If Tyco's
prices rise "to a degree that cannot be supported," customers will switch to thickerwalled pipes from abroad, Ms. Czelusniak says.
She confirms that Tyco has raised the price of one type of sprinkler head 40%, but says the
item is a small part Tyco's sprinkler business, and prices of other models have declined or
stayed the same.
Garment hangers, though essential to the retail clothing industry, are items most people
don't notice. At wholesale, most hangers cost between six cents and 25 cents each. The
lower price buys the flimsy, all-plastic white hangers found at mass merchandisers;
toward the upper end are the sturdy, clear hangers with metal hooks seen at many
department stores.
Until a few years ago, most U.S. retailers inserted hangers in clothes at distribution
centers or at each store. Then, to cut labor costs, many switched to a system called
"garment on hanger," or GOH. Garments are put on hangers at the point of manufacture
and don't have to be touched till they're ready for display.
Although the change means that most hangers are purchased by garment makers, some
big retailers still negotiate hanger prices, telling garment makers whom to buy from.
Other retailers just give garment makers a list of acceptable hanger suppliers. The shift
has given an edge to larger hanger makers that have global networks of factories and
licensees. Although there are dozens of smaller manufacturers around the world, retailers
and garment companies say it is time-consuming and costly to buy from scattered
suppliers of uneven quality.
Head to Head
For years, the two biggest sources were A&E, which was part of a Phoenix plastics
company, and Batts, a family-owned Michigan company. With about 35% of the U.S.
garment-hanger market each, they had a sharp rivalry that helped drive U.S. hanger
prices down by 15% to 20% in the late 1990s, industry executives say. "Batts and A&E were
like Michigan and Ohio State," says Russell Nagel, a former Batts president. A&E would
"come in and lowball an account to get it, and we'd respond."
Tyco entered the picture in 1996 by buying A&E's parent company. Less than a year later,
Tyco bought a rival called Different Dimensions Inc. and hired its president, Mr.
Zuckerman, to head A&E.
Hangers are in Mr. Zuckerman's blood. His father started an A&E predecessor company,
and father and son founded a now-defunct hanger maker about 30 years ago, when Mr.
Zuckerman was only 18. Last April, Mr. Zuckerman became the undisputed king of the
hanger world, pulling off a coup that eliminated Tyco's major competitor: He bought
Batts. He immediately announced Tyco was closing all three Batts factories in Michigan,
eliminating 500 jobs.
Within weeks, Tyco tried to raise hanger prices.
Resisting the Move
Ms. Bennett at VF Corp. says her unit let Tyco know it had other options, including buying
from WAF, the only other supplier approved by many of VF's retailer customers. After
negotiations, she says, Tyco backed off from what she says was a proposed 10% increase.
But her unit agreed to pay shipping charges on its hangers.
Over at Kmart, Mr. Adams says he, too, was counting on WAF to curb Tyco. WAF was
supplying about a quarter of Kmart's hanger needs, and when Tyco tried to raise Kmart's
hanger prices last spring, "we wouldn't accept it -- we told them we'd take all of our
business to WAF." Tyco rescinded its increase, he says.
Mr. Zuckerman acknowledges that A&E pulled back on some proposed price increases,
which he says wasn't because of customer resistance but because raw-materials prices
briefly looked as if they might head lower. He says A&E never officially raised prices to
Kmart, although it may have suggested they would go up.
In September, A&E abruptly ended the game of chess. It bought WAF.
"WAF was going after A&E's customers. That's why they bought them out," says Ronald
Schweitzer, co-owner of Active Trimming, a garment-supply distributor in New York.
Tyco's Mr. Zuckerman denies buying WAF to remove a pesky competitor. He says Tyco
was more interested in WAF's other business -- distributing jacket linings, zippers and
other trim to the garment trade -- which was complementary to Tyco's. Nonetheless, in
hangers, "if we have more volume running through our facilities, it's possible we will be
able to produce at a lower cost," he says.
But after absorbing WAF, Tyco in December and January again told customers it was
raising prices. Mr. Zuckerman says the average increase was 5% to 6% and didn't even
cover the rising costs of raw materials. At Active Trimming, Mr. Schweitzer says his
prices went up 10%, and a new delivery charge was added. "Who are you going to
complain to -- they have a monopoly," he says.
K-Resin
Unlike last May, this time the increases stuck. Tyco's price increases to Kmart averaged
about 8%, Mr. Adams says, and in some countries they were as high as 20%. He says that
when he complained, Tyco told him that "WAF was just too cheap in those countries."
Seeking new sources for a part of its needs, Kmart has just signed agreements with three
overseas hanger companies.
VF's Ms. Bennett says Tyco's price-increase letter said raw-materials costs had "risen
dramatically." She was especially unhappy that Tyco raised prices about 25% on two
models of clear hangers made mostly from a plastic called K-Resin.
Yet K-Resin prices haven't budged since 1995, says the material's maker, Phillips
Petroleum Co. Mr. Zuckerman agrees but says other materials used in the hangers have
gone up.
Another VF unit, the one that makes Lee and Wrangler jeans, complains about the service
from A&E since it acquired Batts. "They ship late, and they ship product different from
what you order," says Frank Rakestraw, a buyer for that unit. He blames consolidation.
Mr. Zuckerman says he can't comment on relations with individual customers. But the
fact that VF buys some of its K-Resin hangers elsewhere proves "there are lots of other
choices," he says.
There are a half-dozen or so hanger companies still competing with Tyco in the U.S. But
one is focused on a niche (intimate apparel), and most others are tiny.
Industry Standard
With Tyco dominating mass merchandisers, most of the small fry rely on selling to
garment makers that supply major department-store chains. Many chains, among them
Federated Department Stores Inc., have championed a system in which they set an
industry standard for hangers and then certify suppliers as able to meet that standard.
Federated, which has five approved hanger suppliers, believes this helps keep competition
alive.
But Tyco has been trying to convince some retailers in the industry-standard camp that it
should be their sole approved supplier -- including sole supplier for used hangers, a
business Tyco entered last year with another acquisition.
Jennifer Bagley, who coordinates a new standardized-hanger program at Nordstrom Inc.,
says Tyco's pitch went something like this: The hanger industry is short on capacity, and
clothing makers are having trouble getting enough. But if Nordstrom makes Tyco its sole
hanger vendor, Tyco will make sure Nordstrom's garment suppliers get "priority." In
addition, Tyco wanted Nordstrom to require its garment suppliers to buy their used
hangers from Tyco at new-hanger prices instead of the usual 30% less.
Ms. Bagley says Tyco made clear that if Nordstrom didn't make it the sole supplier,
Nordstrom's garment makers "won't be a priority," and might not be able to get hangers
they need.
In addition, she says, Tyco said it might stop selling Nordstrom the high-end black
hangers it uses to display more-expensive garments, forcing the retailer to scramble for
another source. To sweeten the deal, Tyco offered Nordstrom a 2% rebate on the hangers
bought by the chain's apparel suppliers.
Ms. Bagley calls that a "kickback" offer, because Nordstrom would be profiting at the
expense of its clothing suppliers. Tyco "went and bought all the other manufacturers,"
she says, "which put them in a position where they could create a shortage in the
marketplace. Then they could go to the retailers and say, 'If you don't do what we say, your
program won't be successful. Therefore, you have to go with us exclusively.' " Nordstrom
has told Tyco it won't go along with a single-source arrangement.
Mr. Zuckerman agrees that Tyco made a proposal along those general lines, but he says
Tyco "never even implied" that it might stop selling black hangers to Nordstrom, and it
never uses priority delivery or the lack thereof in its pitches. Threatening not to deliver
hangers bound for a particular retailer would be "impossible," he says, because a given
garment maker serves many retailers, and Tyco couldn't tell which hangers were destined
for which chains.
Mr. Zuckerman also says Tyco didn't create shortages but, in fact, has added to capacity.
As for the 2% rebate, he says that was a "volume discount" to reward Nordstrom for more
business.
On Friday, Nordstrom sent its final rejection of Tyco's proposals, Mr. Zuckerman says. The
retailer told Tyco it would be one of several approved hanger vendors, he says, and chose
someone else to handle its used hangers. The rejection, Mr. Zuckerman adds, proves that
"there is competition in the market."
Write to Mark Maremont at mark.maremont@wsj.com
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