Denimatrix Launches in Troubled Waters

By Masha Zager — July 14, 2009

A Spanish proverb says: "In a turbulent river, fishermen profit." The financial and economic waters could hardly have been more troubled than they were in February 2009, when Denimatrix launched a full-package apparel production business in Guatemala City, but the company already seems to be reeling in a good catch - and its president, Carlos Arias, says he's demonstrating the truth of the old saying.

Denimatrix arose from the ashes of another full-package production firm, Koramsa, a high-volume, low-cost operator that became a casualty of the recession and started shutting down its operations in November 2008. By January, Koramsa's employees had all been laid off and the final shipments of goods to customers had been completed.

Arias, then an executive at Koramsa, began looking for a way to preserve the physical and organizational assets that Koramsa had developed over the years, including the talent base the company had accumulated. Arias says: "We had the support of customers who believed that the services and systems we had created were worth defending." At the same time, to avoid repeating Koramsa's fate, he knew a new company would need a business strategy more appropriate for the needs of today's apparel industry.

Synergy and strategy
Late in 2008, as Koramsa's business was winding down, Arias and others approached the Lubbock, Texas-based Plains Cotton Cooperative Association (PCCA) about investing in Koramsa's assets in order to start a new project. PCCA, a farmer-owned cooperative that markets and warehouses cotton and manufactures denim, had been a major supplier to Koramsa for several years and was interested in preserving viable denim production capability in the region.
Both PCCA and the Koramsa executives believed there was great synergy between Koramsa's stranded assets and PCCA. PCCA represents more than half of U.S. cotton acreage, and its ACG division, a manufacturer known for high-fashion denim fabrics, produces enough denim to make 20 million pairs of jeans per year. Koramsa had the capability to design, cut, sew and finish the jeans. Together, they could form a vertically integrated supply chain reaching all the way from raw cotton to finished jeans - the first of its kind in the Western Hemisphere.

But both parties knew they could not compete with Asian producers on price alone. In terms of "first cost," or cost of the finished product entering the United States, Asia would almost always come out a dollar or two ahead. "We have to be price competitive, but we cannot focus on the strength of Asia," Arias explains. "We have to focus on the strength of our region."

The new company's greatest competitive advantage, its founders decided, was its proximity to U.S. markets. "Guatemala is so close to the United States that I can be here now and in Miami tomorrow," Arias says. "Proximity isn't only about shipping and timing of vessels, but about people, ideas, coordination, being in the same time zone." By working closely with U.S.-based customers, they believed, they could reduce turnaround time from concept to store by as much as two to three months. Responding quickly and accurately to customers' demands for innovative fashions - especially for notoriously fickle markets such as teenagers - would help them produce goods that would succeed in the marketplace.

While in the past retailers tended to buy in quantity, hold inventory and sell it over time, today's market conditions make this strategy problematic. Financing for inventory is difficult to obtain, and in any case customers getting their fashion ideas from the latest YouTube video will want something new before the inventory is depleted, making markdowns inevitable. "The punishment for getting things wrong is way more expensive nowadays," Arias says. "When the product is right, pricing is not an issue. When consumers are not convinced, they expect to be convinced through price. ...You can sell jeans for $80 if they're right, and not have to discount them. With just $2 more in expense, they can sell them for $20 more."

Building an agile company
An agile, market-driven company that could produce the right product at the right time would need to meet three conditions: First, a vertically integrated supply chain, which the alliance with PCCA would provide, would guarantee control over all stages of production. Second, a smaller scale of operations than Koramsa had would keep the company nimble. Arias and his cofounders aimed for a company that, at full scale, would have a workforce only about half of Koramsa's 9,000 employees, and a capability of producing about 150,000 pairs of jeans per week.

Finally, design and production would have to be much more closely integrated than they are in most companies. This isn't an issue of technology, Arias says, but of corporate culture. Design and production managers would have to be involved together from the outset in all projects, so that "the left and right brain are thinking of the same objective." Instead of designers focusing on style and trends without regard to manufacturing, only to be told later their ideas were unworkable, manufacturing solutions would be developed as the creative process unfolded. With designers and production people working closely together - as well as with customers - valuable time could be saved.

By February the strategy, business plan and financing had come together, PCCA purchased a number of Koramsa's key assets from that company's owners, and Denimatrix came into being. The management team is largely from Koramsa, as are about two-thirds of the 2,600 employees.

A model for the region
Along with its vertically integrated supply chain and agile response, Denimatrix prides itself on offering customers a wide range of fabrics and finishes. While the company has ready access to the denim produced by PCCA, it isn't limited to PCCA products; customers can specify fabric from any source they prefer. In order to do this - and, of course, to provide trims that aren't made in house - a strong supply chain is important. Most items are sourced in the Western Hemisphere, and the company keeps close tabs on the supply chain. As Arias points out: "It doesn't matter how fast I am on everything else; if the label isn't here on time, I can't ship."

Another of the company's strengths is its ability to provide specialized high-end washes, such as clean resin finishes for dressy jeans and manual destruction and repair for the "true vintage" look. Arias says these finishes are designed to respond to what customers are trying to accomplish in their stores.

"Consumers now are more savvy than ever about denim," he says. "If a new technique in wash, fit or silhouette happens today, the quicker you can react, the more accurate you'll be in sales. If you're slow, you're already too late, even if you're a dollar cheaper."

Denimatrix had already won several large orders by the time it opened for business, and the first shipments of goods were made in April, ahead of schedule. The company is hoping to attract higher-end brands than was typical for Koramsa, because its strengths offer a greater advantage to these brands. Arias believes this formula will prove to be a good model for Central America generally, because it plays on the region's natural advantages.

Although he admits some observers have called launching an ambitious new venture in the midst of a deep recession "absolutely crazy," Arias is confident that Denimatrix is on the right track. While a recession always brings gloom and doom, he says, it's also a "great moment to re-focus on what really matters."

Masha Zager is a New York City-based free-lance writer who specializes in business and technology.


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