Survivor Featured

8:00pm EDT May 18, 2006
Darwin’s theory of evolution stated that survival is granted to the fittest of any species. In business, the same principle applies — the companies that are best able to foresee trends and adapt to changes stay profitable in the long term.

For Homi Patel, chairman, president and CEO of Hartmarx Corp., a century-old producer of men’s suits, changes in business culture posed a life-or-death dilemma: Stay focused on a product with declining market share, or adapt.

So Patel established a diversification strategy that used acquisitions and internal product development to propel Hartmarx toward a successful future. And with dedication and hard work, that strategy has paid off.

Cultural changes
To many members of corporate America, the advent of casual Friday was a relief — a day to work in comfort, without being hampered by suits and ties. But to Patel and Hartmarx, the popularity of casual Friday signaled a disheartening trend.

“The suit market, back about 10 years ago, 15 years ago, started to decline rather precipitously with the casualization of America,” says Patel. “It started off with casual Friday, and soon it became casual every day. It was just very obvious that the market that we were in was declining at 5 to 7 percent a year, and I don’t care how good you are, if the global market is declining, it’s not a good place to be.”

Patel and other company executives took stock of what they had — a 118-year-old company with a respected and trusted brand that was intensely focused on a failing market. They needed to get into growing markets — women’s wear, sportswear, golf wear.

Hartmarx could no longer be just a men’s suit company. It needed to diversify.

There were only two ways to achieve product diversity: Create new products internally, or acquire companies that were already producing them. Rather than pick and choose, Patel decided to pursue both.

Building on relationships
For Patel, acquiring companies is an ideal diversification strategy. By purchasing another company, Hartmarx not only gets a time-tested product with established market share, it also gets an experienced management team that understands the product and its consumers.

In fact, a competent management team that is willing to stay with the company after an acquisition is one of the main criterion that Patel and his executive team look for in a potential acquisition because, as Patel learned the hard way, the production of men’s suits takes niche talents that may not transfer well to other apparel niches.

“When you’ve done something for a long period of time, that’s your expertise,” says Patel. “As we moved into another level of products, we thought we could take our own people who have done tailored clothing and introduce them to other products and let them do other things. We found out very quickly that that doesn’t work.

“Even though apparel is apparel, men’s wear is not women’s wear, and tailored is not sportswear, sportswear is not golf wear. There’s significant differences and nuances between each subset of the industry. You do need whole new teams.”

Patel also looks for other things in potential acquisitions: an upscale product line, high inventory turnover and profitability. And he often finds those companies through Hartmarx’s employees.

“We ask all of our divisional people, people who run the businesses, the sales managers, etc., to keep their eyes and ears open when they go to shows, when they talk to retailers and when they’re in markets,” Patel says. “(We ask them) to try to figure out who are the up-and-coming companies and who would make a good fit. We get names of people and companies that we would like to acquire from the ground up.”

By identifying companies through business networks, Patel often finds that the companies he wants to acquire aren’t looking to sell. The Hartmarx team works to establish a laid-back personal relationship with the leadership of the potential acquisition, giving the acquisition’s leaders take time to understand Hartmarx, its businesses and philosophies and giving Patel the opportunity to gauge whether the company’s leaders will be a good fit with Hartmarx.

“We’re looking for people who still have an interest in working for some length of time, [at least] five to 10 years,” says Patel. “We are looking for people who have creativity. And I think what we look for is the fit of the human beings more than anything else. We use an expression — are they our type of people?

“It’s one of those things that’s kind of hard to define, but when you go through an acquisition ... you get a sense whether you’ll fit with the rest of the organization or not. We know it when we see it.”

This relationship-based approach is often successful, if time-consuming, and it allows Patel to avoid a significant hurdle that he doesn’t want to face: competition for the purchase.

“While we will look at businesses that are for sale, we generally don’t like to get into bidding wars, particularly of late because the price of businesses skyrocketed,” he says. “In the last two or three years, private equity has come in and really raised the prices of retail businesses and apparel business significantly. And so it’s hard for us to compete with private equity in particular bidding for a business.

“We prefer not to get into bidding wars; we prefer to identify individual companies and then work with their management.”

Once a company agrees to join Hartmarx, leaders from both sides establish a five-year plan. This plan is vital in two ways. First, it establishes clear expectations for the acquired company’s performance, post-acquisition. Second, it establishes a profit-sharing payout for the acquired company’s owner, based on reaching those goals. As a result, says Patel, acquired companies don’t need intense supervision or management.

“We don’t manage the business,” he says. “Our general propensity is to leave entrepreneurs alone — they become our general managers. We have a very clear set of guidelines as to what is expected of both parties, what the financial rewards are. We’re here to help, if we can help add synergies to retail relationships, sourcing relationships, but we let them run their businesses very autonomously. As long as we’re meeting targets, then we’re good.”

From the inside out
While Hartmarx devotes many of its resources to securing the right acquisitions, its leaders also encourage the development of new ideas and concepts internally. This internal production is vital, says Patel, because with the increase in the number of private equity firms, Hartmarx may not always be able to afford new acquisitions.

“As the price of acquisitions continues to get higher and higher, growth through new, internally generated, organic programs is going to become more and more important for us,” he says. “And we’ve embarked on a number of new projects which are growing from within — a greater number of products being offered under existing brand names, the development of new brands, etc.”

These new products and brands may be the future of Hartmarx, so the company does everything it can — including offering financial incentives — to encourage leaders to continually generate new ideas.

A large portion of Hartmarx’s executives’ compensation is based on the short-term and long-term performance of the businesses they oversee. And the only way those businesses reach their goals is if they are continually energized by an influx of new products.

“We have think-tank teams in each group or each business who are coming up with ideas as to what they should be doing, and then we decide which ones merit” funding, he says. “For them to reach their long-term goals and earn long-term bonuses, they need new ideas to be funded, and to be funded the ideas need to be good. So there’s an internal competition for funding.”

And while the competition can be fierce, when it’s time to fund ideas, leaders turn from competitors into collaborators. That’s because the decision to fund an idea is reached by consensus among Patel, the CFO and other executives, and the leaders of each business. By including everyone in the decision-making process, leaders not only get to promote their own concepts, they also get to see whichconcepts are gaining approval, increasing their own chance for success in the future.

A balanced approach
This diversification, while necessary, doesn’t mean that the company has forgotten its roots — Hartmarx is still devoted, at least in part, to its tailored clothing lines. In 2006, the company will achieve what Patel identifies as the perfect product mix: half of its business will be focused on tailored lines (suits) and the other half devoted to nontailored lines (sportswear).

By maintaining its traditional product lines, Hartmarx has also maintained a steady influx of revenue. While the tailored market is on the decline, it still brings in enough to fund the company’s diversification efforts, and its two sides work together to keep Hartmarx a major player in the apparel market.

“We have a suit business that is basically large market share, nongrowth, generating a lot of cash,” says Patel. “The strategy essentially is to take the cash generated by this static business and invest it in growth businesses where we don’t have large market shares. One generates cash and one uses cash, so we take the cash from one and put it into the other, and use it to either grow from within or find acquisitions.”

Hartmarx’s dual-diversification strategy helped the company achieve nearly $600 million in total revenue in 2005 and increase its 2005 net earnings by 48 percent over 2004.

Beyond the company’s financial success, its diversification has added a level of security in the face of the recent trend toward consolidation of retail stores and suppliers.

“Consolidations continue unabated,” says Patel. “As a result of that, the power structure continues to move toward the large stores, who are more interested in creating their own brands and doing private label. Private label is probably the most important element in their strategy of gaining profitability.

“If they can do it on their own without manufacturing, they’ll put that margin in their pocket.”

That margin is good for the large stores but not so good for Hartmarx. Not only do private labels mean more competition for consumers’ attention, they also mean Hartmarx has to work harder to sell its apparel to retailers, because now the company’s sales team has to convince retail buyers to purchase a brand that will compete with its own label. Not an impossible task, but one that’s more challenging than selling to a retailer without its own label.

But by acquiring many brands and expanding into niche markets, such as golf wear, Hartmarx has built a relative safety net for itself.

“No brand accounts for more than 20 percent of our business,” says Patel. “We’re diversified enough that we’re not too terribly affected by consolidation.”

Overall, the diversification strategy has created a stronger, more balanced and more adaptable Hartmarx, providing a foundation for increased future success.

Says Patel, “It helped our earnings, and it’s helped us position ourselves as a broad apparel company, as opposed to a narrow segmented company. Overall, we’ve been pleased.”

How to reach: Hartmarx Corp., www.hartmarx.com