MONTREAL FASHIONS NC.
This case was written by Professor Patrick Woodcock as the basis for classroom discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
© Patrick Woodcock, 2011
It was 6:15 a.m., Monday, January 16, 1989. Dawn had not yet broken on the Montreal
skyline, and Louis Eisman, President of Montreal Fashions Inc. was sitting at his desk
pondering opportunities for future growth. Growth had been an important objective for
Eisman and the other principal shareholder, Joseph Segal. Initially, the company had focused
on the professional/career women's dresses, suits, and coordinates market, but by 1986 it had
virtually saturated its ability to grow within this market segment in Canada. Growth was then
sought through the acquisition of four companies: a woolen textile mill and three apparel
manufacturing companies. The result of this decade-long expansion was a company that had
become the sixth largest apparel manufacturer in Canada.
In the future, Eisman felt continued growth would require a different approach. A good
option appeared to be expansion into the U.S. market. Strong growth was forecast in the
women's career/professional market, Montreal Fashions's principal market segment, and the
recently ratified Free Trade Agreement (FTA) provided an excellent low tariff environment
for expansion into the U.S. Yet, Eisman wanted to ensure the appropriate growth strategy was
selected. He was confident that if the right approach was taken, Montreal Fashions could
become a major international apparel company by the end of the next decade.
The Industry
The apparel industry was divided into a variety of market segments based upon gender, type
of garment, and price points. Based on price points, the women's segments ranged from lowpriced unexceptional to runway fashion segments. Low-priced segments competed on a lowcost manufacturing capability, while the higher quality segments tended to compete on design
and marketing capabilities. Companies in the higher priced segments often subcontracted out
manufacturing.
The professional/career women's segment ranged from the medium to medium-high price
points. During the late 1970s and early 1980s, this segment had experienced strong growth
due to the demographic growth in career-oriented, professional women. In the U.S., it had
grown by 50 percent annually during the first half of the 1980s, but had slowed to about 20
percent in 1988. Experts predicted that by the mid-1990s, growth would drop to the rate of
GNP growth. The U.S. professional/career women's segment was estimated to be $2 billion
in 1988. The Canadian market was estimated to be one-tenth this size and growth was
expected to emulate the U.S. market. Yet, the exact timing of the slowing of growth was
difficult to predict because of extreme cyclicality in the fashion industry. During difficult
economic times, women tended to delay purchases, particularly in the mid-priced,
fashionable market sectors. Then during times of economic prosperity, women who would
not otherwise be able to afford fashionable items tended to have more resources to devote to
these items.
Competition
Some of the more prominent Canada-based companies competing in the professional/career
women's segment included the following:
Jones New York of Canada
Jones New York of Canada, a marketing subsidiary of a U.S.-based fashion company, was
thought to share the leadership position with Montreal Fashions in the Canadian
professional/career women's market. The company focused exclusively on marketing clothes
to this market segment. Manufacturing was contracted out to Asian companies.
The Monaco Group
The Monaco Group had become a major Canadian designer and retailer of men's and
women's fashions during the 1980s. By 1988, the company had sales of $21 million and a
rate of return on capital of over 20 percent. The company designed their own fashion lines,
which were merchandised through their own retail outlets as well as major department stores.
Manufacturing was contracted out to Asian companies. Recently, the company had been
purchased by Dylex Inc., a large Canada-based retail conglomerate with 2,000 retail apparel
stores located in both Canada and the U.S.
Nygard International Ltd.
Nygard International Ltd., with revenues of over $200 million, was Canada's largest apparel
manufacturer. Approximately one-third of their sales and production were located in the U.S.
This company had historically focused on lower priced clothing, but they had hired away
Montreal Fashions's former designer to create the Peter Nygard Signature Collection, a
fashion line aimed at the professional/career women's market. This new line had been out for
only six months, and sales were rumored to be moderate.
Additional competition in this Canadian segment included a wide variety of U.S. and
European imports. These companies generally manufactured garments in Asia and marketed
them in Canada through independent Canadian sales agents. Historically, most had
concentrated their marketing resources on the rapidly growing U.S. market, yet many had
captured a significant share of the Canadian market based upon strong international brand
recognition. Prominent U.S.-based competition included the following companies:
Liz Claiborne
Liz Claiborne, as the originator of the professional/career women's fashion look, had utilized
their first-mover advantage to build a dominant position in this segment. This company
started in 1976 grew tremendously during the late 1970s and early 1980s, and by 1988 they
had sales in excess of U.S. $1.2 billion, or nearly two-thirds of the market. Claiborne
generally competed on price and brand recognition, a strategy copied by many of the larger
companies which had begun to compete in this segment. To keep prices low. Claiborne
contracted out manufacturing to low-cost manufacturers, 85 percent of which were Asian.
The company's large size allowed them to wield considerable influence over these
manufacturing relationships. Recently, the company had diversified into retailing.
J.H. Collectibles
J.H. Collectibles, a Milwaukee-based company with sales of U.S. $200 million, had one of
the more unique strategies in this segment. They produced slightly upscale products which
emphasized an English country-sporting look. Using facilities in Wisconsin and Missouri,
they were the only company to both manufacture all of their products in-house and to
produce all of them in the U.S. In addition to providing stronger quality control, this strategy
enabled J.H. Collectibles to provide very last delivery service in the U.S. Limiting
distribution of their product to strong market regions and retailers also enabled them to
maintain production at levels estimated to be at or near their plants' capacities.
Jones of New York
Jones of New York, the parent company of Jones New York of Canada, was a major
competitor in the U.S. market. In fact, the majority of their U.S.$200 million in sales was
derived from this market.
Evan-Picone
Evan-Picone was a U.S.-based apparel designer and marketer which had become very
successful in the slightly older professional/career women's market. This company also
contracted out their manufacturing function, and had annual sales in excess of U.S. $200
million.
In addition, there were a myriad of other apparel designers, marketers, and manufacturers
competing in this segment. They included such companies as Christian Dior, Kasper,
Pendleton, Carole Little, Susan Bristol, J. G. Hooke, Ellen Tracy, Anne Klein II, Perry Ellis,
Adrienne Vittadini, Tahari, Harve Bernard, Norma Kamali, Philippe Adec, Gianni Sport,
Regina Porter, and Herman Geist.
Profitability in this segment had been excellent. According to data from annual reports and
financial analyst reports, Liz Claiborne led profitability in the apparel industry with a fiveyear average return on equity of 56 percent and a 12-month return of 45 percent: J.H.
Collectibles had averaged over 40 percent return on equity during the last five years. This
compared to an average return on equity in the overall apparel industry of 12.5 percent in the
U.S., and 16 percent in Canada during the past five years.
Distribution
The selection and maintenance of retail distribution channels had become a very important
consideration for apparel manufacturers in the 1980s. The retail industry had gone through a
particularly bad year in 1988, although the professional/career women's segment had been
relatively profitable. Overall demand had declined, and retail analysts were predicting
revenue increases of only one to two percent in 1989, which paled beside the six to seven
percent growth experienced in the mid-1980s. The consensus was that high interest rates and
inflation, as well as somewhat stagnant demand levels, were suppressing overall profitability.
Although initially considered a mild downturn, recent market indicators suggested that this
downward trend was relatively stable and long lasting. Industry analysts had begun to suspect
that permanent market changes might be occurring. With baby boomers reaching their
childbearing years, further constraints on disposable income might result as this group's
consumption patterns reflected increasing emphasis on purchases of homes, or the decision
by many women to permanently or temporarily leave the workforce to raise their children. In
addition, the effects of rampant growth in the number of retail outlets during the 1980s were
beginning to take their toll. Vicious competition had been eroding margins at the retailer
level, and the industry appeared to be moving into a period of consolidation. As a result of
these developments, a shift in power from the designers to the retailers appeared to be under
way.
To counter the retailers' increasing power,
integrating into retailing. The attractiveness
downstream distribution channel activities,
aggressively pursue increased market share.
some apparel designers had been vertically
of this option was based on controlling the
and thus enabling an apparel company to
The principal components for success in the
retail apparel industry were location, brand awareness, and superior purchasing skills. The
apparel companies which had integrated successfully into retailing were the more marketoriented firms such as Benetton and Esprit.
The Free Trade Agreement
Historically, developed nations had protected their textile and clothing industries through the
imposition of relatively high tariffs and import quotas. Tariffs for apparel imported into
Canada averaged 24.5 percent, and into the U.S., 22.5 percent. Tariffs for worsted woolen
fabrics, one of the principal ingredients for Montreal Fashions's products, were 40 percent
when brought into Canada, and 22.5 percent when brought into the U.S. Import quotas were
used to further limit the ability of developing country manufacturers to import into either
country. Despite these obstacles, Canadian apparel imports had grown from 20 percent to 30
percent of total shipments during the 1980s, most of which came from developing countries.
Shipments into Canada from the U.S. represented an estimated $200 million in 1988, while
Canadian manufacturers exported approximately $70 million to the U.S.
The FTA would alter trade restrictions in North America considerably. Over the next ten
years, all clothing and textile tariffs between the two countries would be eliminated, but
stringent "rules of origin" would apply. To qualify, goods not only had to be manufactured in
North America, but they also had to utilize raw materials (i.e., yarn, in the case of textiles,
and fabric, in the case of apparel) manufactured in North America. Unfortunately, these
"rules of origin" favoured U.S. apparel manufacturers as 85 percent of the textiles they used
were sourced in the U.S., while Canadian manufacturers utilized mostly imported textiles. To
ameliorate this disadvantage, a clause was appended to the agreement which allowed
Canadians to export $500 million worth of apparel annually into the U.S. that was exempt
from the "rules of origin" but would have a 50 percent Canadian value-added content. There
was much speculation as to how this exemption would be allocated when, in approximately
five years, exports were projected to exceed the exemption limit. Experts expected that the
companies successfully demonstrating their ability to export into the U.S. would have first
rights to these exceptions.
Many industry experts had contemplated the consequences of the FTA. There was some
agreement that in the short term the FTA would most severely impact the lower priced
apparel segments in Canada because of the economies of scale which existed in the U.S.
market (i.e., the average U.S. apparel manufacturer was ten times larger than its Canadian
counterpart). Yet, long-term prospects for all segments were restrained because the industry
was slowly being pressured by the Canadian government to become internationally
competitive. International negotiations would probably erode some of the protection afforded
this industry because it was quite naturally a “global” industry, but the prospects for dramatic
change in tariffs appeared to be decades away. It was with this concern in mind that Eisman
had been continuously pushing the company to become a major international fashion
designer and manufacturer.
Overall, Eisman considered the FTA a mixed blessing. Competition in Canada would
increase moderately over time, but he felt that the lower tariff rates and the company's highquality, in-house woolen mill presented a wonderful opportunity for potential expansion into
the U.S. market.
Montreal Fashionss
In 1979, a venture capital company owned by Joseph Segal acquired a sleepy Montreal based apparel manufacturer having $3 million in sales, 70 percent of which was in men's
wear. Segal immediately recruited Louis Eisman, a well-known women's fashion executive,
who proceeded to drop the men's clothing line, and aggressively refocus the company on the
career/professional women's market segment, a business he had considerable experience and
success in over the past several decades.
Eisman appreciated the importance of fashion, and for the first three years he designed all of
the new lines. In 1982, he recruited an up-and-coming young Canadian fashion designer, yet
he continued to influence the direction of designs considerably. He traveled to Europe for
approximately two months annually to review European trends and procure quality fabrics
appropriate for the upcoming season. He personally reviewed all designs. The combined
women's fashion knowledge and designing abilities to provide Montreal Fashions with a
high-quality, classically designed product which differentiated it from most other Canadian
competition. In 1989, the designer resigned, and Eisman recruited a New York-based fashion
designer, Ron Leal. Leal had excellent experience in several large U.S. design houses and,
unlike the previous designer, he brought considerable U.S. market experience and presence.
Eisman's energy and drive were also critical in establishing the merchandising and
distribution network. He personally developed relationships with many of the major retailers.
He hired and developed sales agents, in-house sales staff, and in 1983, recruited Jackie
Clabon, who subsequently became Vice President-Marketing and Sales. The sales staff was
considered to be some of the best in the industry. Clabon's extensive Canadian sales and
merchandising experience, combined with Eisman's design and marketing strength, provided
Montreal Fashions with considerable ability in these critical activities.
Initially, acceptance by Eastern fashion buyers was cool. The fashion "establishment", which
was located in Montreal and Toronto, was highly skeptical of this new Montreal -based
apparel designer and manufacturer. However, Eisman focused on smaller independent retail
stores, which were more easily swayed in their purchasing decisions. As Montreal Fashions
gained a reputation for high quality, classical design, and excellent service, larger retail
chains started to place orders. By 1988, Montreal Fashions's products were sold in over 400
department and specialty stores across Canada. Major customers included The Bay, Eaton's.
Holt Renfrew, and Simpson's, and, although initial marketing efforts had been aimed at the
smaller retailer, the majority of Montreal Fashions's sales were now to the larger retail chains.
The apparel lines were sold through a combination of sales agents and in-house salespersons.
Ontario and Quebec accounted for 72 percent of sales. In addition, two retail stores had
recently been established in Montreal and Boston; the Montreal store was extremely
profitable, but the Boston store was dreadfully unprofitable. Industry observers had suggested
a number of factors explained the two stores' performance differences. These factors included
increased competition in U.S. metropolitan areas due to increased market density, lower
levels of regulation and other entry barriers, greater product selection, and more timely
fashion trend shifts compared to the Canadian market, which often exhibited lags in fashion
developments of six months or more. Another reason for the difference was that Montreal
Fashions had a local (head office) presence in Montreal , which was believed to have helped
their store by way of reputation, ancillary promotions, and easier access to skilled resources.
Many industry experts felt that Montreal Fashions's product line success could be attributed
directly to Eisman. He was known for his energy and brashness, as well as his creativity and
knowledge of the women's fashion market. In his prior merchandising and marketing
experience, he had developed an intuitive skill for the capricious women's apparel market.
This industry was often considered to be one of instinct rather than rationality. Eisman was
particularly good at design, merchandising, and marketing (see Exhibit 1). He worked very
closely with these departments, often getting involved in the smallest details. As Eisman said,
"It is the details that make the difference in our business." Although Eisman concentrated a
great deal of his time and effort on these functions, he also attempted to provide guidance to
production. The production function had been important in providing the service advantage,
particularly in terms of delivery time, which Montreal Fashions held over imports. By 1988,
Montreal Fashions' professional/career women's fashion lines accounted for $25 million in
revenues and $3 million in net income (see Exhibit 2).
Diversification through Acquisitions
In 1986, Segal took Montreal Fashions public, raising in excess of $17 million although they
both retained one-third of equity ownership. The newly raised capital was used to diversify
growth through the acquisition of four semi-related companies. Segal was the force behind
arranging the acquisitions while Eisman concentrated on managing the various entities.
St. Viateur Manufacturing Ltd.
St. Viateur Manufacturing Ltd., a family-owned and Montreal -based firm, was purchased for
$2 million in 1986. This company was principally a manufacturer of lower priced women's
apparel and coats. The acquisition was initially made with the objective of keeping the
company an autonomous unit. However, the previous owner and his management team
adapted poorly to their position within the Montreal Fashions organization, and upon
expiration of their non-competition clauses, they resigned and started a competing company.
Unfortunately, sales began to decline rapidly because of this new competition and the
absence of managerial talent. To stem the losses, a variety of designers were hired under
contract. However, St. Viateur's poor cash flow could not support the required promotional
campaigns and the new fashion lines fared poorly, resulting in mounting operating losses.
In late 1988, Eisman reassigned Montreal Fashions's Vice President-Finance as interim
manager of St. Viateur. As Eisman stated, "The Company needed a manager who knew the
financial priorities in the industry and could maximize the effectiveness of the company's
productive capacity." Several administrative functions were transferred to Montreal Fashions,
including design, pattern making, sizing, and scaling operations. Marketing and production
continued to be independent operations housed in a leased facility just outside of Montreal.
St. Viateur now produced a diversified product line which included Highland Queen, a
licensed older women's line of woolen apparel, and Jaki Petite, a Montreal Fashions line
patterned for smaller women. During this turnaround, Eisman himself provided the required
industry-specific management skills, which demanded a considerable amount of his time and
attention. Eisman kept in daily contact and was involved in most major decisions. During this
time St. Viateur's revenues had declined from $12 million in 1986 to $10.8 million in 1988,
and net income had dropped from $100,000 in 1986 to a loss of approximately $2 million in
1988. Eisman felt that in the next two years St. Viateur's operations would have to be further
rationalized into Montreal Fashions's to save on overhead costs.
East Coast Woolen Mills Ltd.
East Coast Woolen Mills Ltd. was a 40-year-old, family-owned, Halifax-based worsted
woolen mill. Montreal Fashions acquired the company for $2.2 million in 1987. Eisman was
able to retain most of the previous management, all of whom had skills quite unique to the
industry. East Coast marketed fabric to customers across Canada. In 1986, its sales were $5
million, profits were nil, and its estimated capacity was $10 million annually. The company
was the smallest of three worsted woolen mills in Canada, and in the U.S. there were about
18 worsted woolen manufacturers, several being divisions of the world's largest textile
manufacturing companies.
The logic behind the acquisition was that both Montreal Fashions and East Coast would
mutually benefit from this acquisition. The affiliation allowed Montreal Fashions to obtain
control of fabric production scheduling, design, and quality. In particular, Montreal Fashions
had been able to significantly reduce order lead times for fabric produced at this subsidiary,
although the effects of this on East Coast had not been studied. East Coast benefited from
increased capital funding which allowed it to invest in new equipment and technology, both
important attributes in such a capital-intensive industry. These investments supported the
company's long-term stategic objective of becoming the highest quality, most designconscious worsted woolen mill in North America. This objective had already been reached in
Canada, though its quality was still below that of the fine woolen products available in
Europe.
Montreal Fashions was presently fulfilling 30 percent to 40 percent of its textile demands
through East Coast. The remainder was being sourced in Europe. By 1988, East Coast's
revenues were $6.5 million and profitability was still at the break-even point.
Olympic Pant and Sportswear Co. Ltd. and Canadian Sportswear Co. Ltd.
Montreal Fashions acquired Olympic Pant and Sportswear Co. Ltd. and Canadian Sportswear
Co. Ltd. both privately owned companies, in 1987 for $18.3 million. The former
management, excluding owners, was retained in both of these Winnipeg-based companies.
Olympic manufactured lower priced men's and boys' pants and outerwear as well as some
women's sportswear. Canadian Sportswear manufactured low-priced women's and girls'
outerwear and coats. Canadian Sportswear was also a certified apparel supplier to the
Canadian Armed Forces, and, although these types of sales made up a minority of their
revenue base, such a certification provided the company with a small but protected market
niche. The disparity in target markets and locations between these companies and Montreal
Fashions dictated that they operate largely independently. The expected synergies were
limited to a few corporate administrative functions such as finance and systems management.
Combined revenues for these companies had declined from $35 million in 1986 to $30
million in 1988. Both of these companies had remained profitable during this period,
although profits had declined. In 1988, combined net income was $ 1.2 million. Management
blamed declining revenues on increased competition and a shortage of management because
of the previous owners' retirement.
The Corporation's Present Situation
Expansion had provided the company with excellent revenue growth, but it had also created
problems. The most serious was the lack of management control over the now diversified
structure (see Exhibit 3). By 1988, it had become quite clear that without the entrepreneurial
control and drive of the previous owners, the companies were not as successful as they had
been prior to their acquisition. Therefore, in late 1988, Eisman recruited a new CFO, Judith
Madill, to coordinate a corporate reorganization experience, but had limited operating experience in an entrepreneurial environment such as the fashion industry. Madill suggested that
corporate personnel, financial, and systems management departments be established to
integrate and aid in the management of the subsidiaries. Eisman was not completely
convinced this was the right approach. He had always maintained that one of Montreal
Fashions's competitive strengths was its flexibility and rapid response time. He thought
increased administrative overhead would restrict this entrepreneurial ability, and that extra
costs would severely restrict future expansion opportunities. Thus, he had limited the
administrative expansion to two industrial accountants for the next year.
Consolidation was also occurring in the existing organization. Eisman was trying to recruit a
vice president of production. Montreal Fashions had never officially had such a position, and,
unfortunately, recruiting a suitable candidate was proving to be difficult. There were
relatively few experienced apparel manufacturing executives in North America. Furthermore,
Montreal was not a fashion centre in North America, and executives were not easily attracted
to such an “out of the way place. Furthermore, higher salaries as well as lower taxes tended to
keep qualified individuals in the U.S. Nevertheless, a manager of production was badly
needed to coordinate the internal production consolidation program.
Originally, production had been located in an old 22,000-square-foot facility. By 1986, it had
grown to 48,000 square feet located in four buildings throughout Montreal. Production flow
encompassed the typical apparel industry operational tasks (Exhibit 4). However, the division
of tasks between buildings made production planning and scheduling very difficult.
Production problems slowly accumulated between 1986 and 1988. The problems not only
restricted capacity, but also caused customer service to deteriorate from an excellent
shipment rate of approximately 95 percent of orders to recently being sometimes below the
industry average of 75 percent. Montreal Fashions' ability to ship had been a key to their
growth strategy in Canada relative to manufacturers in Asia who would require months to fill
orders. Normally, apparel manufacturers met between 70 percent and 80 percent of their
orders, but Montreal Fashions had built a reputation for shipping more than 90 percent of
orders in a relatively quick time schedule. This allowed retailers to reorder part way through
a season, which was virtually impossible with other manufacturers.
Consolidation had begun in the latter part of 1987. An old building in downtown Montreal
was acquired and renovated. The facility incorporated some of the most modern production
equipment available. The company spent approximately $3.5 million on upgrading
production equipment and technology. Equipment in the new facility included a $220,000
Gerber automatic cloth cutting machine to improve efficiency and reduce waste; $300,000 of
modern sewing equipment to improve productivity and production capacity; a $200,000
Gerber production moving system to automatically move work to appropriate work stations
as required: and a computerized design assistance system to integrate the above equipment
(i.e., tracking in-process inventory, scheduling, planning, and arranging, and sizing cloth
patterns for cutting). The objectives of these investments were to lower labour content,
improve production capacity, and reduce the time required to produce a garment.
In the last quarter of 1988, Montreal Fashions had moved into this new head office facility
located in the older section of downtown Montreal. The building, renovated by one of Italy's
leading architects, represented a design marvel with its skylights and soaring atriums. The
production department had just recently settled into its expansive space. However, the move
had not gone without incident. The equipment operators had difficulties adapting to the new
machines. Most of the workers had become accustomed to the repetitive tasks required of the
old technology. The new equipment was forcing them to retrain themselves and required
additional effort and skills. In addition, the largely Asian workforce had difficulty
understanding the retraining instructions because English was their second language.
To further facilitate the implementation of the consolidation program, an apparel production
consultant had been hired. The consultant was using time-motion studies to reorganize and
improve task efficiency and effectiveness. An example of a problem which had resulted from
the move was the need for integration between overall production planning, task assignment,
worker remuneration, and the new Gerber production moving system. If these elements were
not integrated, the new system would in fact slow production because many manual based
operations did not fit well with the technologically based system that was installed.
Unfortunately, this integration had not been fully considered until after the move, and the
machine subsequently had to be shutdown until adjustments were made. The adjustments
required converting workers from a salary base to a piece rate pay scale. The consultants
were training all the workers to convert to piece rate work, and to operate the necessary
equipment in the most efficient manner. Three workers were being trained per week. The
conversion was expected to take two years. Many of the older and highly skilled manual
workers did not appreciate the new technology and consulting studies to put it mildly.
Despite these ongoing problems, production appeared to be improving, and operational
activities were now organized and coordinated with some degree of efficiency. Eisman was
hopeful that scheduling problems would be completely rectified within the next six months.
Opportunities for Future Growth
Despite problems such as those detailed above, Montreal Fashions’ revenues and profits had
grown by 1,500 percent and 500 percent, respectively, over the past eight years. Eisman was
extremely positive about further growth opportunities in the U.S. market. During the past two
years, Eisman had tested the Dallas and New York markets. New York is a global fashion
centre while Dallas would be considered a much more regional centre. Local sales agents had
carried the Montreal Fashions line, and 1988 revenues had grown to U.S. $1 million, the
majority of which had come from Dallas. Follow-up research revealed that retail purchasers
liked the "classical European styling combined with the North American flair."
These U.S. sales had sparked tremendous interest, but it had also exposed Eisman to the
difficulties of entering the highly competitive U.S. market. In particular, attaining good sales
representation and excellent service, both of which were demanded by U.S. retailers, would
be a challenge. Securing first-class sales representation required having either a strong market
presence or a promising promotional program. In addition, Montreal Fashions had found U.S.
retailers to be extremely onerous in their service demands. These demands were generally a
result of the more competitive retail environment. Demands were particularly stringent for
smaller apparel suppliers because of their nominal selling power. These demands ranged
from very low wholesale prices to extremely fast order-filling and re-stocking requirements.
Eisman recognized that Montreal Fashions would have to establish a focused, coordinated,
and aggressive marketing campaign to achieve its desired objectives in this market.
Eisman had studied two alternate approaches to entering the U.S. market. One approach
involved establishing a retailing chain, while the other involved starting a U.S.-based
wholesale distribution subsidiary responsible for managing the aggressive promotional and
sales campaign required.
Establishing a retail chain would require both new capital and skills. Capital costs, including
leasehold improvements and inventory, would be initially very high, and an administrative
infrastructure as well as a distribution and product inventorying system would have to be
developed. Yet, starting a retail chain did have benefits. The retail approach would provide
controllability, visibility, and rapid market penetration. It was the approach taken by many of
the aggressive apparel companies in the women's professional/career market segment, such as
Liz Claiborne, Benetton, and Esprit. Furthermore, Montreal Fashions' marketing strength fit
well with this approach. It was estimated that the initial capital required would be about $10
million to open the first 30 stores, and then cost $300,000 per outlet thereafter. Sales
revenues would grow to between $300,000 and $750,000 per outlet, depending upon the
location, after two to five years. Operating margins on apparel stores averaged slightly less
than 10 percent. Experts felt that within five years the company could possibly open 45
outlets; five the first year, and ten each year thereafter. In summary, this option would entail
the greatest financial risk, but it would also have the greatest potential return.
The alternative approach was to establish a U.S. distribution subsidiary. This alternative
would require capital and more of the same skills the company had developed in Canada. In
general, the company would have to set up one or more showrooms throughout the U.S. The
location of the showrooms would be critical to the approach eventually implemented. Exhibit
5 illustrates regional apparel buying patterns in North America.
A wholesale distribution approach could be carried out in one of two ways: either on a
regional or national basis. A regional approach would involve focusing on the smaller
regional retail stores. These stores tended to attract less competitive attention because of the
higher sales expense-to-revenue ratio inherent in servicing these accounts. The approach
required the new distributor to provide good-quality fashion lines, and service the accounts in
a better manner than established suppliers. An advantage to this approach was that regional
retailers demanded fewer and smaller price concessions compared to the larger national
chains. The obstacles to this approach included the large sales force required and the superior
service capability. Even though Montreal Fashions had utilized this strategy successfully in
Canada, success was not assured in the U.S. because of the very competitive environment.
These factors made this approach both difficult to implement and slow relative to other
approaches. Experts estimated fixed costs to average $1 million annually per region, of which
75 percent would be advertising and 25 percent other promotional costs. Additional operating
costs would consist of sales commissions (7 percent of sales) and administrative overhead
costs (see below). Revenues would be dependent upon many factors, but an initial annual
growth rate of $1 million annually within each region was considered attainable over the next
five years. In summary, this approach would minimize Montreal Fashions' risk exposure, but
it would also minimize the short-term opportunities.
The national approach was also a viable option. The greatest challenge in a national strategy
would be the difficulty in penetrating well-established buyer/seller relationships. Floor space
was expensive, and national chains and department stores tended to buy conservatively,
sticking with the more reputable suppliers who they knew could produce a saleable product
and service large orders. They also tended to demand low prices and rapid reorder terms. In
summary, the national approach provided significant entry barriers, but it also provided the
greatest potential for market share growth. Clearly, if economies of scale and competitive
advantage in the larger North American context were desired goals, this had to be the
eventual strategy.
The principal costs of this approach would be the advertising and promotional expenses.
National apparel companies had advertising expenditures of many millions of dollars. In
discussions with Eisman, industry advertising executives had recommended an advertising
expenditure of between $3 and $5 million annually in the first three years and then, if
successful, increasing it by $1 million annually in the next two successive years. Additional
operating costs would be required for sales commissions (7 percent of sales) and administrative overhead (see below). The results of this approach were very uncertain and two
outcomes were possible. If the approach was successful, Eisman expected that one or two
accounts grossing $1 to $2 million annually could be captured in the first two years. Eisman
then felt the sales would expand to about $5 million in the third year, and increase by $5
million annually for the next two successive years. However, if the expected quality, design,
or service requirements were not sustained, sales would probably decline in the third year to
that of the first year and then virtually disappear thereafter.
Both the national and regional approaches would require an infrastructure. Depending upon
the approach taken, the head office could be located in a number of places. If a national
approach was taken, Montreal Fashions would have to locate in one of the major U.S. apparel
centres (e.g.. New York or California). Eisman estimated that the national approach would
require a full-time director of U.S. operations immediately, while the regional approach could
delay this hiring until required. Such a managing director would require extensive previous
experience in the industry, and be both capable and compatible with Montreal Fashions'
marketing, operating, and strategic approach. To ensure top-quality candidates, Eisman felt
that a signing bonus of at least $100,000 would have to be offered. The remuneration would
be tied to sales growth and volume, but a continued minimum salary guarantee might be
necessary until the sales reached some minimum volume. In addition, a full-time sales
manager would be required. Eisman estimated that the subsidiary's administrative overhead
expense would be $500,000 if a regional approach was taken, versus $1 million for a national
approach in both cases. These overhead costs would then escalate by approximately $0.5
million annually for the first five years.
Eisman had now studied the U.S. growth options for more than six months. He felt a decision
had to be made very soon; otherwise the company would forgo the window of opportunity
which existed. The new FTA environment and the growth in the professional/career women's
market segment were strong incentives, and delaying a decision would only increase the costs
as well as the possibility of failure. Eisman realized the decision was critical to the company's
evolution toward its ultimate goal of becoming a major international fashion company. The
challenge was deciding which approach to take, as well as the sequencing and timing of the
subsequent actions.
EXHIBIT 1
Eisman Helping in a Promotional Photo Session
EXHIBIT 2 Montreal Fashions
Inc. Financial Statements
Income Statement (000s)
1981
1982
1983
1984
1985
1986
1987
1988
9 months
Sales
Cost of sales
Gross profit
Selling & gen. admin.
Income from operations
Other income
Loss from discontinued
operation
Income before taxes
Income taxesCurrent
Deferred
Net income
Share price range: Low
High
4,592
2,875
1,717
1,172
545
22
4,315
2,803
1,512
1,117
395
25
5,472
3,404
2,068
1,458
610
25
7,666
4,797
2,869
1,898
971
10
13,018
7,885
5,133
2,434
2,699
16
24,705
14,667
10,038
4,530
5,508
564
53,391
38,165
15,226
9,071
6,155
418
72,027
49,558
22,469
18,175
4,294
117
567
420
635
981
2,715
6,072
6,573
(554)
3,857
150
47
370
194
2
224
285
(5)
355
432
28
521
1,251
24
1,440
2,874
57
3,141
$7.5
$11
2,746
245
3,582
$8
$18
1,825
(195)
2,227
$7.5
$14
Note: In 1987, the accounting year end was changed from February 1988 to November 1987. This made the
1987 accounting year nine months in duration.
Balance Sheet (000s)
Assets
Current Assets
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Income taxes recoverable
Prop., Plant & Equip.
Other Assets
Total Assets
Liabilities
Current Liabilities
Bank indebtedness
Accounts payable
Income taxes payable
Deferred taxes
Shareholder Equity
Share equity
Retained earnings
Total liabilities
1981
1982
1983
1984
1985
1986
1987
1988
—
709
464
11
—
318
—
1,502
—
874
474
15
—
349
—
1,712
—
961
684
20
—
424
—
2,089
—
1,697
736
22
—
572
—
3,027
—
2,974
1,431
201
—
795
—
5,401
5,027
6,430
3,026
398
—
4,042
273
22,196
1,794
16,133
15,431
404
—
7,789
526
42,077
495
14,923
16,914
293
1,074
13,645
513
47,857
129
490
126
84
356
435
58
86
114
678
86
81
351
963
153
109
579
1,494
809
133
575
3,100
1,047
217
1,788
4,893
546
462
4,729
6,934
—
267
127
546
1,502
7
770
1,712
13
1,125
2,097
5
1,446
3,027
4
2,347
5,401
12,252
5,005
22,196
Note: Years 1981-84 were estimated from change in financial position statements.
26,577 26577
7,811 9,350
42,077 47,857
Exhibit 3 Organizational Chart
Chairman
J. Segal
President
L. Eisman
CFO & VP Finance
Montreal Fashions Inc.
Senior Accounting
Payroll
Accounts Receivable
Accounts Payable
Corporate Controller
Divisional Controller
Data Process Manager
VP Marketing & Sales
Manager
Montreal Fashions Inc.
Design
Fabrics Research
Import Sourcing
Advertising
Sales Agents
Customer Services
Exports Control
US House Sales
Retail Store Support
Merchandising Control
Production Operations
Manager
Montreal Fashions Inc.
Piece Goods Wholesale
Planning
Grading/Marketing
Cutting
Bundling & Fusing
Shipping
Manaufacturing
Operations Manager
Montreal Fashions Inc.
Mechanics/Maintenance
Jacket Line Supervisor
Pant Line Supervisor
Skirt Line Supervisor
Finishing Line
Supervisor
Engineering Manager
Montreal Fashions Inc.
Labour Standard
Payroll
Job Training
Product Engineering
Costing
General Manager
St. Viateur
Manufacturing Limited
All of operational
functions including
production, marketing,
etc.
President East Coast
All of operational
functions including
production, marketing,
etc.
Woolen Mills
President Canadian
Sportswear Co. Ltd.
President Olympic Pant
& Sportswear Co. Ltd.
All of operational
functions including
production, marketing,
etc.
All of operational
functions including
production, marketing,
etc.
Trim Control
Costing
Product
Specifications
Fabric Control
Exhibit 4 Production Flow Chart
Design
Purchasing
Sales
Order
Product
Planning
Costing
Grading &
Marking
Cutting
Bundling
Sewing
Jackets
Line
Sewing
Sewing
Skirts
Line
Pants Line
Finishing
Imported
Garments
Shipping
EXHIBIT 5
North American Apparel Consumption by Region