Inc021

As Originally Published in Inc. Magazine

Riches from Rags
After nearly failing, the clothing manufacturer profiled in this article turned to technology, and business is booming.
From: Inc., Mar 1995 | By: Hal Plotkin

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Nearly sunk by a cash crunch, Brenda French turned to technology. Now she churns out custom-made garments with industrial-age speed

Quick Start
Challenge: To mass produce custom-made knitwear and sell it directly to the customer

Solution: Computerized knitting machines that knit the old-fashioned way but at a modern-day pace; a sell-at-home distribution scheme

Resources: Stoll knitting machines; custom software that produces knit-by-numbers templates for fast and easy switching from one garment to another; a Silicon Graphics workstation for designing the knitwear; a sales force drawn from customers.

* * *

It was one of the most amazing things Brenda French had ever seen. Mesmerized, she would sit on the floor for hours watching as the gleaming, $80,000, used, German-made Stoll knitting machine extruded fabric like so many sheets of fresh pasta. “I just couldn’t take my eyes off it,” says French, 55, as her hand unconsciously traces the spider-web tendrils of colored yarn she recalls curling atop the machine. From there, as if by magic, they would feed into just the right place at just the right moment. Unlike the traditional weaver’s loom, which creates fabric in long serpentine stretches, the sleek Stoll knitting machine employs thousands of precisely angled needles to do things the old-fashioned way — one stitch at a time — while moving at a pace a stadium full of doting grandmothers could never hope to equal.

The machine’s mix of new technology and timeless craft presented French, CEO of French Rags, with a dazzling possibility: mass customization. It would now be possible, she realized, to churn out custom-made garments at virtually the same speed needed to produce the cookie-cutter offerings of the industrial age. Equally important, the technology would enable — indeed, almost require — French to devise an entirely new distribution scheme for her products, one that simultaneously eliminated traditional intermediaries and gave her customers more choices at better prices.

“I knew I had to have that machine,” French says. She points to the decision as the first in a series of technically driven marketing leaps that transformed the scarf-making company she founded in a spare bedroom in 1978 into a $5-million, full-line clothing manufacturer. With net profits of 10% to 15%, French Rags, in West Los Angeles, is now being aped by the likes of industry behemoth Levi Strauss.

The company is a classic study in the power of technology to reinvent an entire retail food chain and of the rewards that can accrue to those who champion technical innovation along with new ways of thinking. The linchpin to French’s success is her company’s use of computer-aided design/computer-aided manufacturing (CAD/CAM) tech-nology, which has put French Rags at the cutting edge of one of the biggest makeovers retailing has seen since the advent of the supermarket. For Brenda French, the transformation, born of necessity, came just in time.

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By March 1989 the knitwear business French had carefully woven together since 1978 was coming unraveled. Although outsiders thought her company was a big success — leading department stores like Neiman Marcus, Bonwit Teller, and Bloomingdale’s were showcasing her wares — French knew otherwise. Even when her annual billings swelled past the $10-million mark in the mid-1980s, she was painfully aware of a growing cash crunch. “You don’t pay your bills with accounts receivable,” she says.

French Rags’ knitwear was being hit hard by unnecessary returns and chargebacks. One reason was that despite French’s pleas, many of the department stores that carried her line refused to follow her simple instructions about how to best display her garments. They hung the knit clothes rather than folding them, distorting the shapes and sizes. “Knitwear grows if it’s hung and not folded,” she fumes. “How could they be so stupid? They would never hang those clothes at home.” Frustrated, she would routinely watch as hundreds of her products were returned to the factory each month by inept storekeepers, as if French were running a textile Capistrano.

And then there were the buyers. “What idiots,” she hisses. With always-limited department-store floor space coveted like the Golan Heights, buyers often restricted their selections to just a few of French’s styles, sizes, and colors. Most of the women who walked into the stores that carried French Rags left empty-handed. “I was making clothes for them; the clothes just weren’t getting through the system,” says French. The retail markups were also killing her: a multicolored coat she’d sold profitably for about $400 hung stretching itself to death on the rack at Bloomies for a cool grand. “It was simply infuriating,” she sputters with a slight British accent, a remnant of her emigration more than 30 years ago from Manchester, an area known for its knit trade.

On top of all that, French’s work crew of 200 or so hand-knitters, mostly Koreans and Latinos, were targeted by union organizers. They successfully forced a National Labor Relations Board election that cost French more than $250,000 in legal and other fees, and nearly cost her the entire company. “It would have killed me,” she says of the hard-fought election, which she won by 20 votes. “I would have lost control of the company. What is the point of having a business if you can’t control it?”

Within months of staving off the union, the roof finally did cave in, when French’s factor dumped her. Like most garment manufacturers, French used a factor who paid her accounts-receivable invoices in exchange for a percentage of the take. The arrangement creates a steady cash flow to compensate for the notoriously slow payment of retail outlets. “It got to where I needed $500,000 a month to stay even,” she recalls.

French was hit with her fiscal Armageddon while she was on a rare vacation. She was on her way home hours after learning that her factor’s change of heart had left her employees’ paychecks bouncing all over town. Drawing on her personal savings to make good, she retreated, closing her showrooms in New York, Chicago, San Francisco, and three other cities. Her gross sales, she says, virtually disappeared overnight. They were down to about $1 million the following year, the revenues coming from the few stores willing to pay COD.

The disappearance of her clothes didn’t go unnoticed by French’s loyal customers, who began peppering her factory with worried queries. One, a wealthy woman from New York, called to find out why she could no longer find the French Rags line anywhere in town. French relayed her tale of woe, and the woman responded with an idea French found at once amusing and slightly offensive. “She said, ‘You bring your clothes to my house, and I know 20 people who will buy them.’ And I thought, Oh God, is this what I have come to? Selling shmattes in somebody’s living room?”

Still, the trip offered the possibility of cash — perhaps 10 grand — and French needed every penny she could get. So she packed up her entire line and flew to New York. She ended up grossing not $10,000 but $80,000 and took home orders for things she didn’t have with her but knew she could make. And she began looking into purchasing a knitting machine. The week in New York had changed her life.

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Framed by the picture window that overlooks the French Rags factory floor, Brenda French’s business partner, MilÉ Rasic, 53, seems more like an air-traffic controller than a garment mogul. Swiveling in his threadbare chair, Rasic keeps his finger on every facet of the company’s operations by peering into the computer screens that surround him. One tells Rasic exactly what each of the 11 Stoll machines is producing. Another, attached to a 500-MB Silicon Graphics workstation that programs the Stolls, walks him through the design process, helping him turn Brenda French’s sketches into full-color graphic images. Yet another displays a real-time split-screen video feed from the eight cameras scattered around the French Rags empire. With the click of a modem switch, Rasic can even see the video images coming from the security camera in French Rags’ lone showroom and store at the Eldorado Hotel in Santa Fe, N. Mex., an artifact from the company’s more traditional marketing era. A technophile with a special aptitude for computer programming, Rasic glances at the equipment around him. “I am trying to not live in the world we live in today,” he says simply.

Rasic, who immigrated to the United States from Argentina in 1971 with skills in the knitting business, was working as a supervisor in a contract-knitting operation in Los Angeles in the mid-1980s. A mutual friend persuaded him to meet with French. The friend knew that French was looking for a knitting machine and that Rasic had just acquired a used Stoll for himself. Rasic showed French the machine. She was entranced. At the same time, he looked over some of her creations and quickly realized he was talking with one of the most skilled designers he had ever met. He knew that her eye-popping color combinations and elegant designs were a perfect match for the capabilities of the modern knitting equipment he was about to sell her.

Still, French was worried. The Brother Industries hand-knitting machines she’d always used cost a mere $600 apiece. “It was like going from a bicycle to a Rolls Royce,” she recalls, amazed even now that she had mustered up the courage to do what it took to make the purchase: sell her house and move into a rental apartment. A key selling point was Rasic’s willingness to sign on as a consultant — for just three months initially — to help French program the complex machine. The temporary arrangement soon turned into a permanent one. Rasic, French’s only formal partner, now holds a significant minority equity stake in the business. “If you have a limited knowledge of what you can produce, then you will produce the same thing over and over again,” Rasic says. “I know what these machines are capable of, and Brenda knows which designs will appeal to customers. It’s a perfect combination.”

In more ways than one. Rasic’s comfort with the technology — including Sintral, an arcane computer-programming language that tells the Stoll and other knitting machines what to do — left French free to concentrate on designing clothes and growing the new, home-based marketing scheme for her products. “I took a hard look at my business, and I listed my strengths and weaknesses. The one thing I knew for certain was that nothing was wrong with my clothes,” French says matter of factly. “People loved them. The problem was with the stores, with the buyers, with the whole antiquated retail system — the lack of choices for customers and so many greedy, ignorant middlemen. It was either them or me, and I decided I was going to survive.”

Her tactic for doing so grew out of the sale in New York: she created a sales force comprising her most affluent customers, who sell her goods out of their homes. Agents, carefully culled from the list of people who’d called wondering what had become of her company, are offered a straight 15% commission on sales. Their start-up costs are nil: French supplies chic preprinted invitations, blank order forms, nine boxes of sample garments, and a card with fabric snippets of the 30 color choices. The sample clothes, grouped into several different collections, rotate from one agent’s home to another’s. There, weeklong, by-appointment-only “shows” are conducted, leaving each customer feeling as pampered as a major fashion buyer. (See “Coffee, Tea, and Knitwear,” page 4.) After customers make their selections and pick out their preferred color combinations, individual measurements are taken, a 50% down payment is secured, and the order form is faxed to the French Rags factory, where each garment is custom-made and shipped directly to the customer, usually within four to six weeks. “We have no inventory problems because we have no inventory,” French says as she strolls around her factory, the clicking from the heels on her cowboy boots keeping rhythm with the knitting machines. “Everything we make is presold.”

While French worked on her new distribution scheme, Rasic stayed glued to the technical details. Developing the unique French Rags 100%-rayon yarn, for example, required months of laborious testing and experimentation. Rayon, a natural product made from wood fibers, varies in subtle but important ways from manufacturer to manufacturer. Its velvet texture and ability to hold brightly colored dyes are assets, but its propensity to snag has limited its appeal in many commercial markets. To overcome the problem, Rasic supervised a new yarn-production process, concentrating on basic details like which chemicals are used to soften the yarn and how many twists there are per inch. As an added precaution, each roll of yarn French Rags uses is unwound and rewound at the factory to make sure the tension levels are maximized for best results. The company’s snag-resistant rayon is one of many innovations that make it difficult to knock off French Rags garments overseas.

Next, Rasic turned to his computer skills — to supplement the software Stoll provides to run its knitting machines. Using a 486 PC, he designed a program that produces portable templates with instructions about which color yarns should be loaded on which spools atop one of the knitting machines as the machine is about to knit a particular garment. The templates dramatically decrease the time it takes to go from an on-screen design to the start of production. Thanks to the Stoll-template union, an elaborate knit jacket that used to take a skilled craftsperson a day and a half to knit by hand can now be produced in less than an hour. Another jacket, in another style and color combination, can then be made in the following hour with a different knit-by-number template. Propelled by Rasic’s ingenuity, French and Rasic are able to turn yarn they buy for $14 to $15 a pound into clothes they sell, at a good value, for upwards of $80 a pound.

In November 1994 the venerable Levi Strauss company confirmed French’s sense of the custom-made future when it joined her parade, at least partially, by test-offering made-to-order Levi’s in four cities for $10 over the full price. However, it’s an open question whether the big boys can remain competitive in this area for the long term, given their fixed overhead and the inventory they have to carry in all their stores — expenses French Rags has all but eliminated.

Brenda French isn’t terribly worried right now about the competition. Without any advertising, French Rags has already signed on more than 60 agents in over 25 states. And nearly 100 employees, making $10 an hour on average and participating in the French Rags profit-sharing plan, work at the company’s West Los Angeles factory, augmenting the automated-knitting line with the necessary human touches.

What’s French Rags’ new business plan? Rasic smiles at the question, beaming at the computer terminal that’s hooked directly into the UPS computer system and watching as labels are printed and affixed to the 60 boxes that will go out that afternoon. Before he can answer, French shouts from across her humming factory floor. “I don’t believe in business plans,” she bellows. “If you have a plan, it means you’re not prepared for change.”

Hal Plotkin (hplotkin@plotkin.com) is based in Palo Alto, Calif.

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COFFEE, TEA, AND KNITWEAR

Talk about a cottage industry. Ensconced in a converted storage space above a garage that looks like a French chalet, Patty Hagen-Busch and her partner, Marion Gellatly, are getting down to business. One by one, friends and acquaintances stop by the makeshift sales room abutting Hagen-Busch’s spacious home in Los Altos Hills, Calif., filling up her 12-car driveway with so many BMWs and Mercedes that it begins to look like an uptown auto-repair shop. “It’s the perfect job for me,” says Hagen-Busch, age 48, as she points out a new style of full-length coat to one of her veteran customers.

A former sales executive at a popular San Francisco radio station, Hagen-Busch was looking for a fun way to make some money when she spotted a friend wearing a Brenda French creation. “I got in touch right away,” she recalls. Now, three years later, her mailing list holds the names of the more than 500 customers who’ve ducked their heads to avoid the irregular ceilings in her converted space while sipping tea and making purchases that average around $1,000 each.

With more than 50,000 possible style and color combinations, French Rags offers custom-made clothes at off-the-rack prices: A V-neck sweater goes for about $100. Skirts sell for about $160, pants for about $195, and full-length coats for less than $650. “The women I know don’t want to look like anyone else,” Hagen-Busch says. “And most people fall somewhere in between the standard sizes. Here, shoppers get exactly what they need.”

Conventional department stores could again become part of Brenda French’s sales network, but they’d have to play by her rules: cash up front, more choices to the consumer, and lower prices. “I don’t think that will ever happen,” she says. “They’re much too stupid. They just don’t get it, and I doubt they ever will.”

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