Christopher Griffin has a nose for money: He spent the 1980s in the heady world of Los Angeles real estate, then jumped ship before the market crashed for a three-year entrepreneurial fling selling a new, iceless cooler touted on MTV and carried by Nordstrom.
When that fad faded, he parlayed his industry contacts into a stake in a lucrative area of the clothing business in the early '90s: garment dyeing.
At first, his new business seemed to mint money: "Every month it was sort of like you pinch yourself," said Griffin, president and co-owner of Spectrum Dyeing & Finishing Corp. in Gardena. The dye house did $1.3 million in sales in 1992, its first year. The next year, sales soared 65%, then rose 11% in 1994.
Griffin attributed the company's success to "burying the customer in service." At the time he entered the business, good service from a dye house "was to answer the phone after the 10th ring," he said. Big-name apparel companies attracted to his emphasis on service, quality and consistency included Guess, Victoria's Secret, Mossimo, Union Bay, David Dart and Authentic Fitness.
Despite the booming sales, Griffin was wary. He knew from his iceless cooler business that "too much growth can just drown you."
"At the same time, you either keep up and go after it or you're not a player," he said.
Then in 1995, fickle fashion turned against the garment-dyeing business. The over-dyed denim popularized by Cross Colors was out. Neon was long dead. Sales at Spectrum plummeted 46%. Venerable competitors closed their doors.
"Every day was like fighting a 15-round fight" for survival, Griffin said. The company began taking in commercial washing just to keep its machines running.
Over the last two years, Spectrum's sales have recovered slightly--up 12%--due in part to the popularity of tie-dye. Griffin, who has also begun to dye Tencel, a hot, new, natural-fiber fabric, is still looking for a way out of the feast-or-famine cycle of the business.
Realistically, that is not going to happen, said business consultant Paul Ratoff of Moss Adams, an accounting and consulting firm specializing in the apparel industry. And the path to profitability should not rely on sales volume alone, he said. That's particularly true for a moderate-size dye house, or any manufacturing-related business, where physical capacity limits the volume of business the company can handle.
If a company's break-even point gets close to its normal operating level, or close to capacity, it loses flexibility and the potential for profitability, Ratoff said.
"You don't want to be at a point where you've almost maxed out your resources to get to a break-even point, because then your ability to make additional profits becomes much harder and the possibility of losing money increases," the consultant said.
Spectrum, he noted, is operating with a relatively high break-even point. That needs to change.
"You want to get your break-even point down to a level which is very comfortable and achievable 90-plus percent of the time," he said.
While Griffin has tried to reduce Spectrum's break-even point by charging more for its services, he can raise prices only so much in a competitive market, Ratoff said. Griffin, he said, has done an excellent job with Spectrum's cost structure. He has bought used equipment, for example. But like many new companies, Spectrum's debt level is high, which pushes its break-even point higher than most of its established competitors.
The answer: The company must focus on profit margins, not sales volume, the consultant said. That way, even if Spectrum is not working to capacity during a slow period, it has an easier time turning a profit.
In the dyeing business, the guide for tracking profitability has traditionally been the price per pound of goods dyed. In today's market, Ratoff said, "it's not so simple. What you really have to look at is your profitability per pound." Tencel, for example, commands a high price per pound for dyeing, but is difficult to work with and expensive to process, making it less profitable for Spectrum.
Griffin reviewed the different types of business Spectrum was doing, at Ratoff's request, and tried to figure out the profit margins for each. He discovered that the margins varied from 20% to 40%, meaning Spectrum's direct costs--labor, utilities, materials, etc.--account for 60% to 80% of the prices it charges.
The analysis clearly showed that special treatments, such as tie-dyeing, were more profitable than other services the company offered, Ratoff said.
Since it cannot cut costs much more, it has to do more high-margin special treatments to boost profitability. Spectrum has a choice: it can either wait around for a new trend like tie-dyeing to hit, or it can work on developing its own cutting-edge fabric treatments to offer customers, Ratoff said.