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Survey Uncovers High Customer Concentration Levels Among Apparel and Home Goods Manufacturers

From: ASAP

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More than half of the companies within the apparel and home goods industries have failed to diversify their customer base in light of recent retail collapses, resulting in 20 percent or more of their business with just one customer, according to a joint survey on sales concentration levels by CIT Commercial Services, a unit of CIT Group Inc. (NYSE:CIT) and Home Furnishings News (HFN). Companies with high customer concentration levels are susceptible to severe financial loss if key customer(s) default on debt payments.

The CIT/HFN Customer Concentration Survey is the first in-depth look at suppliers' sales concentration levels -- the percentage of sales to each retail customer -- as well as the strategies suppliers use to protect against bad debt losses. Conducted during the fourth quarter of 2002, the survey results are based on the responses of more than 300 manufacturers and importers in the apparel and home goods industries.

"Although business managers know it is not prudent to have all their eggs in one basket, many vendors that sell into retail channels of distribution tend to conduct business with a small core of key retailers as a result of retail consolidation and store closings," said John Daly, President, CIT Commercial Services. "The CIT/HFN Customer Concentration Survey uncovers the sales practices of these vendors and emphasizes the importance of having a risk management tool like factoring."

Key findings of the CIT/HFN Customer Concentration Survey include:

Single customer concentration levels * Over half (51 percent) of suppliers have 20 percent or more in sales with their single largest customer. This level is unchanged from five years ago. * Thirty-two percent of suppliers have 30 percent or more with their single largest customer.

Top three customers concentration levels * Three-quarters of suppliers have 20 percent or more with their three largest customers. * Sixty-one percent of suppliers have 30 percent or more in sales with their top three retailers.

Customer concentration level high-water mark * Eighty-five percent of survey participants say there is a level at which sales can become "too concentrated." * The average concentration level deemed too high is 31 percent while the median is 26 percent.

Risk Management Strategies * Sixty-four percent of suppliers use a risk management tool, such as factoring or credit insurance, to protect against bad-debt losses.

The premier CIT/HFN Customer Concentration Survey identified trends in supplier's sales practices. One such trend is the steady customer concentration levels over the years, regardless of changes in suppliers' customer bases. According to 82 percent of surveyed suppliers, their three largest customers have changed over the past five years, yet the concentration levels for suppliers' top three customers remained constant over the same time period.

"These survey results reveal that although major retailers like Ames or Bradlees may have comprised a large percentage of suppliers' sales five years ago, suppliers fail to diversify their customer base after retailers like these go out of business. Apparently, rather than seek new customers to diversify their distribution channel, suppliers increase sales to a few other key customers, and consequently fall back into the same levels of customer concentration," said Daly.

"It is important for any company to diversify sales among a broad base of customers. A diverse customer base will lead to low customer concentration levels while better positioning a company to survive retail consolidation and store closings," said Jon Lucas, Senior Vice President, Northeast Regional Manager of CIT Commercial Services. "There are a few ways that suppliers can diversify. One method is to restructure the commission structure of their sales force to provide a financial incentive for winning new customers. Incentives can also be given to smaller customers to encourage them to purchase more. When it comes to making an acquisition, suppliers should target companies with a distribution channel and customer base different from their own to prevent further concentration. In the cases in which high concentration levels can't be prevented, business owners should seriously consider some form of credit protection."

Factoring versus Credit Insurance

A majority of survey participants (64 percent) realize there is a financial risk associated with high customer concentration levels and therefore use a risk management tool to protect against bad debt losses. Factoring, cited as the most frequently used form of credit protection, is used by 64 percent of survey participants, while 20 percent use credit insurance and 17 percent employ another method.

Factoring was found to be more prevalent among apparel companies than among home goods manufacturers. Eighty four percent of apparel manufacturers and 50 percent of home goods manufacturers utilize the services of a factor. Credit insurance is used by eight percent of apparel respondents and a quarter (25 percent) of participants in the home goods industry.

Factoring is a complete financial package that combines credit protection, accounts receivable bookkeeping and collection services. Credit insurance is an insurance policy that protects a company's account receivables for the term of the policy.

"The CIT/HFN Customer Concentration Survey found a surprisingly high percentage of manufacturers -- 36 percent -- that don't have any form of protection for their accounts receivable," said Lucas. "We learned, however, that these results vary by industry. Only seven percent of apparel respondents don't use credit protection, but I was surprised that 43 percent of home goods respondents fail to protect themselves against bad debt loss. Companies take great care to protect their inventory, capital equipment, buildings and employees, so why wouldn't they protect the asset that is the source of cash flow -- their accounts receivable?" Lucas asked.

"Credit protection is a vital component of any business plan. Risk management tools, such as factoring or credit insurance, provide security against bad-debt losses. In times like these when large retail bankruptcies occur every year, vendors need credit protection," commented Daly. "For more than 90 years, CIT Commercial Services has tailored financial solutions for companies in the apparel, footwear and home goods industries, among others, to increase their sales, improve cash flow, reduce operating expenses and eliminate credit losses."

30 Percent Concentration. What does it mean?

"If a $10 million company has 30 percent of its sales with one customer, that is $3 million in sales a year or $250,000 a month," explains Lucas. "If that customer goes bankrupt, it is likely the company may be owed for several months of shipments; $750,000 is a realistic amount. Could the $10 million company sustain $750,000 in bad debt losses and continue to operate?"

Lucas added: "Let's see what would happen to a company with $50 million in annual sales. Thirty percent of its sales are $15 million. This company stands to be hit with a loss of between $3 million and $5 million in unpaid invoices should their largest customer go bankrupt. Frankly, I don't know a lot of $50 million companies that could withstand a $3 million to $5 million loss."

Concentrations by Industry

By industry, home goods suppliers tend to have lower sales concentration levels to their largest retail customer(s) than vendors in the apparel industry. About half (51 percent) of the home goods respondents had sales concentrations of 20 percent or more to their single largest customer while about 53 percent of the apparel respondents have the same concentration levels.

Regarding sales to their three largest customers, 73 percent of home goods suppliers and 78 percent of respondents in the apparel industry reported concentration levels of 20 percent or more.

Evaluating companies by their annual sales volume found slight variation. Forty-four percent of survey participants with under $10 million in annual sales and 56 percent of companies with over $100 million in annual sales have more than 20 percent of sales with their single largest customer. Approximately 48 percent of companies with annual sales levels between $10-$100 million also have single customer concentration levels over 20 percent.

Methodology

Results from the CIT/HFN Customer Concentration Survey are based on the responses from 307 companies in the apparel and home goods industries. During the fourth quarter of 2002, survey questionnaires were mailed to senior executives at CIT Commercial Services client companies and to HFN subscribers. Home Furnishings News (HFN), the Newsweekly of Home Products Retailing. Respondents from the apparel industry (26 percent of survey participants) include women's, men's and children's apparel companies as well as footwear and accessories manufacturers. The remaining 74 percent of respondents were from the home goods industry (defined as bedding, textiles, electronics, floor covering, furniture, giftware, housewares, small and major appliances, home decor, lighting, tabletop and other companies).

For a complimentary copy of the CIT/HFN Customer Concentration Survey, please contact Ann-Margret Crater, Vice President, Strategic Marketing, CIT Commercial Services, at (212) 536-9310 or [email protected]

About CIT Commercial Services

CIT Commercial Services is a unit of CIT Group Inc. and is one of the nation's leading providers of factoring, accounts receivable management, credit protection, and lending services. Commercial Services specializes in serving the apparel, footwear, textile, furniture, home furnishings and other industries that sell into retail channels of distribution.

About CIT

CIT Group Inc. (NYSE:CIT) , a leading commercial and consumer finance company, provides clients with financing and leasing products and advisory services. Founded in 1908, CIT has nearly $50 billion in assets under management and possesses the financial resources, industry expertise and product knowledge to serve the needs of clients across approximately 30 industries. CIT holds leading positions in vendor financing, U.S. factoring, equipment and transportation financing, Small Business Administration loans, and asset-based and credit-secured lending. CIT, with its principal offices in New York City and Livingston, New Jersey, has approximately 6,000 employees in locations throughout North America, Europe, Latin and South America, and the Pacific Rim. For more information, visit http://www.cit.com/.

CIT/HFN Sales Concentration Survey Results:

Total Survey Results:

What percent of sales are with your single largest customer today?

Percentage of sales with Percentage of respondents single largest customer 0% to 19% 49% 20% to 39% 34.8% 40% to 59% 12.5% 60% to 79% 2.7% 80% to 100% 1%

Five years ago, what was the percent of sales you had with your single largest customer?

Percentage of sales with Percentage of respondents single largest customer 0% to 19% 49% 20% to 39% 33.6% 40% to 59% 11% 60% to 79% 3.5% 80% to 100% 2.9%

What percent of sales are with your three largest customers today?

Percentage of sales with Percentage of respondents three largest customers 0% to 19% 25.5% 20% to 39% 27.3% 40% to 59% 23.6% 60% to 79% 16.3% 80% to 100% 7.3%

Five years ago, what was the percent of sales you had with your three largest customers?

Percentage of sales with Percentage of respondents three largest customers 0% to 19% 25% 20% to 39% 29.3% 40% to 59% 24.1% 60% to 79% 13.7% 80% to 100% 7.9%

Have your three largest customers changed from five years ago?

No 18.1% Yes 81.9%

Have your three largest customers changed from 10 years ago?

No 5.5% Yes 94.5%

Is there a point where sales concentration to one customer is too high?

No 15 % Yes 85 %

What percent of sales to one customer do you consider too high?

Percentage of sales with Percentage of respondents single largest customer Less than 10% 9.8% 11-20% 20.8% 21-30% 27.9% 31-40% 17.4% 41-50% 14% 51-60% 5.3% 61-70% 1.9% 71-80% 1.9% 81-90% 0% 91-100% 1%

Are you using a risk management tool to protect against bad debt?

No 35.8% Yes 64.2%

What risk management tool are you using?

Factoring 63.6% Credit Insurance 19.6% Other 16.8%

What type of business is your company?

Manufacturer 39.1% Importer 27.9% Both 28.9% Other 4.1%

Survey Results By Industry: Home Goods(1) versus Apparel(2):

What is the percent of sales you have with your single largest customer today?

Home Goods Respondents: Percent of sales Respondents 0% to 19% 49.2% 20% to 39% 35.8% 40% to 59% 12% 60% to 79% 2% 80% to 100% 1%

Apparel Respondents: Percent of sales Respondents 0% to 19% 46.6% 20% to 39% 37.6% 40% to 59% 10.1% 60% to 79% 4.3% 80% to 100% 1.4%

What is the percent of sales with your three largest customers today?

Home Goods Respondents: Percent of sales Respondents 0% to 19% 27% 20% to 39% 26.7% 40% to 59% 23.2% 60% to 79% 16.5% 80% to 100% 6.6%

Apparel Respondents: Percent of sales Respondents 0% to 19% 22% 20% to 39% 23.9% 40% to 59% 28.3% 60% to 79% 15.3% 80% to 100% 10.5%

Are you using a risk management tool to protect against bad debt?

Home Goods Respondents: No 42.7% Yes 57.3%

Apparel Respondents: No 7.1% Yes 92.9%

What risk management tool are you using?

Home Goods Respondents: Factoring 50.4% Credit Insurance 25.6% Other 24%

Apparel Respondents: Factoring 84.4% Credit Insurance 7.8% Other 7.8%

(1) Home goods include bedding, textiles, electronics, floor covering, furniture, giftware, housewares, small and major appliances, home decor, lighting, tabletop and other companies.

(2) Apparel includes women's, men's and children's apparel companies as well as footwear and accessories manufacturers.

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