How TFG’s big bet on making clothes at home is paying off

An hour and a half outside Cape Town  sits a town  that represents ground zero for a bold new shift in South African fashion retail.

Caledon is known for its hot springs and farming businesses, surrounded as it is by barley, grain fields and wind turbines. Yet it is here that TFG — founded 98 years ago when American immigrant George Rosenthal opened his first clothing store on Joburg’s Pritchard Street — has thumbed its nose at the notion that running a fashion empire requires a string of offshore suppliers hawking bargain-basement clothes made in Asia.

Instead, TFG’s Prestige Clothing factory, which uses its base in Caledon to make clothes for the firm’s 3,301 South African stores, is going from strength to strength. Already the factory has 750 staff, making it the largest employer in the town, apart from the farms.

The good news for South Africa’s wheezing manufacturing sector is that Prestige is one of five plants owned by TFG, which has invested R1bn into rebuilding local capacity to make garments locally.

This shift has been emphatic: in 2016, TFG produced 6-million garments in South Africa; last year, it produced 17-million; and it plans to hike that to 24-million within two years.

For the first time in years, you’re seeing far more clothes made in-house, rather than imported, on the shelves of TFG’s South African stores, including Foschini, The Fix, Exact, Markham and Fabiani.

It’s an inversion of the conventional wisdom of “offshoring” — a dominant theme in fashion retail over the past decade — where half the stock on shelves seemed to have been made in Asia, mostly China. The benefits were supposedly manifold: lower costs, looser labour rules in places where  those clothes are made, and vast economies of scale to slash costs for consumers.

“I wouldn’t share that view in the slightest,” says TFG CEO Anthony Thunstrom. “We have spent nearly a decade learning how to outcompete international suppliers across a range of strategic product categories. We have learnt lessons along the way, but today we can produce a lot of products locally at parity, or better, to imported prices, and we take significantly less fashion risk because of the reduced lead times.”

This has happened partly because the global economy changed. The gentrification of China raised the prices at which garments were made in that country, while greater pressure not to buy from firms that produce clothes in sweatshops changed the labour dynamic. Simultaneously, South Africa’s spluttering rand, which has lost 40% of its value in the past five years, made it cheaper to produce clothes locally.

In TFG’s case, its 34 store brands aren’t obliged to buy from its local factories, like the one in Caledon, but they’re increasingly choosing to do so. It’s a no-brainer: the quick response time means they get the clothes earlier, with less working capital tied up in inventory, fewer markdowns and, ultimately, greater profitability.

Exact was the first brand within the group to place large orders with Prestige two years ago, ordering garments in July and taking delivery in September. That’s a two-month turnaround, rather than the typical eight- to nine-month wait for overseas shipments.

The result: that summer season was Exact’s best yet. And the momentum was evident in its record-breaking turnover for the year to March, unveiled on Friday by Thunstrom.

The Instagram factor

Despite six months of unprecedentedly severe power cuts, and with interest rates at the highest level in 15 years, TFG was able to pump up revenue 19.4% to a record R51bn in the year to March. (Its recent purchase of Tapestry helped, but its revenue would have been up 15.4% anyway.)

There were dark spots. The group’s net profit rose just 4% to R3.03bn — partly because of rising bad debts among its customers, the extra R200m it spent on alternative power to mitigate load-shedding, and the higher interest rates it now pays on its R7.1bn debt.

But on the plus side, its local market share for women’s, men’s, children’s and babies’ clothes grew from 13.7% to 14.1%; its share in sports clothing grew from 36% to 39%; and it added 8,000 new jobs in South Africa.

Analysts from SBG Securities say while the results are “below expectations”, they still recommend TFG as a “buy” partly because of its shift towards manufacturing more locally. “Though yet to reflect meaningfully in metrics, [the] impetus behind onshoring manufacturing could further assist working capital and gross profit margins,” they say. 

Retailers might be struggling in South Africa — DebtBusters tells the FM that most South Africans have 38% less disposable income and 30% more unsecured debt now than in 2016 — but TFG is just about keeping its head above an ever-rising tide.

One of the ways it has done this, says Thunstrom, is by increasing its South African manufacturing by a remarkable 45% this year, to lower costs for its customers.

“Local, quick-response manufacturing has been a strategic advantage for us, especially [with] women’s fashion, where we’re increasingly getting [told] the fashionability in our brands is similar to the best of the international brands, but at half the price. We couldn’t manufacture that on a short lead time, if not for local manufacturing.”

What people see on Instagram today, they want to see in the stores tomorrow, he says. To compete with the best retailers — Zara or H&M, for example — Thunstrom says they had to revamp their ideas rather than try to squeeze more from an outdated model.

“One of the biggest turnarounds we’ve had in our local business in the past 12 months has been Foschini. It’s become much more fashionable through its increased reliance on quick-response manufacturing,” he says.

Today, he says, Foschini competes with the best international brands in terms of fashion, while “outcompeting significantly on cost”.

It’s a big strategic shift and one that its rivals have been slow to replicate.

Evan Walker, portfolio manager at 36One Asset Management, says while rivals such as Truworths, Woolworths and Mr Price Group source their stock largely from other countries, TFG has taken another route. “It allows the flexibility to turn volumes on and off, and be a bit more nimble and run businesses more effectively,” he says.

It’s a strategic shift that’s yet to be reflected in the share price. On the JSE, TFG’s stock has fallen  26% in the past year — worse than Mr Price (down 21.6%), Truworths (up  7%) or Woolworths (up 34%).

Yet analysts are more hopeful about TFG than any of the others, with most calling it a “buy”, expecting the share price to rise 37% in the next year.

All Weather Capital chief investment officer Shane Watkins expects that its local manufacturing strategy will bear fruit because of the weakening rand.

“The TFG share price is weak because like-for-like sales growth in South Africa is going backwards for reasons not necessarily related to TFG, but related to load-shedding and consumer demand. I guess people are concerned at how winter plays out,” he says.

Local manufacturing, the company evidently believes, will put it in a prime position for when the clouds lift from the local economy.

How to build a town

Thunstrom’s “local is lekker” philosophy — which has seen TFG invest R1bn in local clothing manufacturing, with Prestige employing 4,300 workers — hasn’t gone unnoticed.

Two years ago, at the opening of parliament, President Cyril Ramaphosa wore a TFG suit and shirt manufactured at Prestige’s Epping plant, showing symbolic support.

Part of the reason for the switch is the desire to cut costs for customers.

Says Thunstrom: “Even in our more expensive brands, such as Fabiani, our customers want to feel that they’re getting value for money. The principle has been adopted through all our brands in South Africa, and is appropriate, given that consumer discretionary spending will be restrained for some time to come.”

As an accountant, he’s well aware that having a shorter lead time frees up more working capital — which would have previously been held to cover inventory — which can then be used to open new stores, and invest in its new online retailer, Bash.

“Rather than have that money tied up in a debtors book or in stock, you’d far better utilise that money and spend it on something that will give you future growth,” he says.

The story of Prestige Clothing, which TFG bought in 2012 from an industry veteran named Graham Choice, is fascinating. Choice had opened the company in 1989 and today remains MD of TFG Merchandise Supply Chain.

The demand for locally made clothing is “insatiable”, he tells the FM.

“The uniqueness of what TFG has done, is being bold enough to be the only current retail apparel retailer saying ‘I will invest locally and on a significant scale,’” says Choice. “The more efficient our local ‘quick response’ supply chain becomes, the [closer] our retail divisions are to their customer, the bigger we grow this model.”

It was Choice who, in 2008, picked Caledon as the base for the factory, seeing it as near enough to Cape Town so that clothes could get there quickly. “Caledon was close enough and rural enough with a large underemployed population,” he says.

First, he found an empty barn, where he planned to start a school to train clothing workers. Then he asked the municipality if he could rent the barn. “They couldn’t get the paperwork done quickly enough,” says Choice.

The factory started with six employees, and today it dominates the town.

Recently the FM visited Prestige. It’s an impressive sight: the equipment is modern, training was taking place in breakaway rooms and Prestige’s in-house radio played music for the workers, many of whom are in their 20s and 30s.

Like Prestige’s four other factories, the Caledon factory uses Japanese Juki machines, an energy-efficient system which infuses smart technology into the equipment to enhance efficiency and reliability, along with Astas from Turkey for advanced automation.

Workers get food hampers every month, and sandwiches are provided every day. “The sandwich means something, as does the subsidised transport to all our staff,” says Choice.

It’s a case study in small-town economics. Prestige’s Caledon workers pump R50m of their earnings back into the surrounding economy every year, and the spin-off is more contractors, more bakeries, more electrical services.

“There are now four chicken bars, a Pick n Pay, Spar, a Wimpy, KFC ... all these have opened since 2008. Those little towns around Caledon come here on a Saturday morning to shop,” says Choice.

Reviving a depleted manufacturing sector

If it seems like sunshine and roses today, the reality is that in April 2021, at the height of Covid, local clothing manufacturing was at risk of losing it all.

It was then that TFG took the gamble of buying the ex-Seardel manufacturing companies of Monviso, Bibette and Bonwit with their 600 employees, as well as House of Monatic from Brimstone. These now form the base of Prestige’s formalwear factory in Epping, which employs 1,300 workers.

That same year, Prestige Durban was launched, when TFG bought clothing company TCI Mobeni from the South African Clothing & Textile Workers Union. This was in addition to its factories in Caledon and Maitland, and its T-shirt factory in Joburg which runs with a staff complement of hearing-impaired workers in Hillbrow.

The factories weren’t in a good state, says Choice. Efficiency and morale were extremely low. Yet within two years they’d expanded by 2,000 people and added 1,000 people on learnerships.

Choice says Prestige also created a “culture of caring” for staff, which ultimately led to better efficiency. This yielded about R250m in savings for TFG in the past year.

“A lot of unemployed South Africans would be very grateful for a job that paid R3,500 or R4,000 a month. But what they’re not going to be happy about is if you employ hundreds of people with a few toilets, minimal lighting and no fresh air. South Africa’s workforce is not unproductive as is so often claimed, provided the right conditions exist,” he says.

Perhaps, but “quick-response manufacturing” was an entirely new thing, coming into a market where a lack of investment had all but destroyed skills.

“The model is about 28-58 days lead time from order to delivery, compared with a long lead time [of] more than 180 days,” Choice says. “Planning production in a quick-response factory is more like Tetris — [there’s] a lot more preparation required beforehand and that can become challenging.”

The benefits are obvious: greater flexibility to react to consumer trends and market conditions. But over the years the apparel industry has seen the demise of manufacturing skills and leadership.

Thunstrom says there has been mass disinvestment in local clothing manufacturing for 20 years. “Most [manufacturers] were privately owned and people have sweated the assets. They’ve either emigrated, retired, or tried to sell them on, but very few have invested in the assets,” he says.

TFG wants to reverse this trend — and not just in clothing.

Besides Prestige Clothing’s five facilities, TFG has bought other local manufacturing plants and homeware retailers, including Granny Goose, Cotton Traders and Tapestry (which owns Coricraft, Volpes and Dial-a-Bed).

The Coricraft factory, for instance, has started to manufacture the sofas it used to import from China. This is 20% cheaper for customers, as the company doesn’t have to pay shipping costs, or hold this stock in inventory.

“It’s a game changer,” says Thunstrom.

TFG, it must be said, isn’t alone when it comes to local manufacturing capacity, but it is the largest overall.

Its rival Pep has the country’s single-largest local manufacturing factory, in Parow, while about a third of the products that go into Cape Union Mart stores are made locally.

Cape Union Mart group CEO Andre Labuschaigne says his group plans to boost the amount of product it buys from local suppliers too. Largely, it gets this from its two in-house factories, K-Way Manufacturers and Green Thread Manufacturers.

“We strongly believe in owning the path,” he says.

Asked why more companies don’t manufacture locally, Labuschaigne tells the FM it’s difficult, and not always profitable, to do so.

“First, there is a scarcity of capacity, capability and competitiveness, The South African apparel value chain has experienced a hollowing out of the installed manufacturing and labour base over the past two decades,” he says.

This skills deficit, as well as the lack of up-to-date machinery, makes it difficult to ensure the quality of the product is up to scratch, he says.

Where is the support?

This illustrates that despite what people such as trade, industry & competition minister Ebrahim Patel would have you believe, localisation is not universally popular. Nor is it even necessarily the winning model.

Investors, for one thing, fret about the risk that demanding trade unions impose on fashion retailers with large manufacturing arms.

Justin Barnes is an expert in industry policy development and manufacturing, and chair of BMA (Benchmarking & Manufacturing Analysts). He says TFG’s strategy is “100% correct and it’s a brave bold move in a very difficult environment — but it’s not necessarily the only winning model”.

In places such as Mauritius, Turkey and Colombia, models where the retailer doesn’t own the manufacturing company also work. “You don’t have to own the capability; it’s the nature of the South African environment that lends itself to ownership as an advantage.”

Many retailers adopt a blended model — placing part of their business in-house with their own manufacturers, and part with long lead-time, low-cost suppliers, often based far away. But one problem in South Africa, says Barnes, is that except for the automotive sector, the country’s “manufacturing capabilities have deteriorated alarmingly”.

Barnes has worked with manufacturers, in places such as Turkey, who will buy millions of dollars of fabric based purely on a customer’s phone call. But this only happens because Turkey is a “low-risk, high-trust environment” where suppliers have a relationship with retailers “who never let them down”.             

The result is that the Turks develop their factories, their products and people — there are now 1.5-million people working in their clothing, textile and footwear industry.

But South Africa, he says, is the opposite, with a high-risk, low-trust environment — and the result is the country’s industry employs fewer than 100,000 people.

It’s a tangible consequence of the crisis of confidence in the country’s business sector.

“The president can have as many investment conferences as he likes, but the only businesspeople I know that are presently investing capital in South Africa are doing so to replace ageing capital,” says Barnes.

That, and putting money into providing their own energy. TFG, for example, says load-shedding cut R1.5bn from its revenue last year and lost it 360,000 trading hours — the sort of gut punch that would have killed weaker companies.

Barnes says South Africa needs more manufacturers like Choice. “He comes from a working-class background and has great appreciation for the workers in his factories. He understands that value is ultimately created on the factory floor, and that developing workers is key to being internationally competitive”.

He says South Africa is losing these intergenerational family-run businesses where the family would kill for their workers. “Turkey is the same. There’s a pride — it’s not about making money. It’s about what the firm does, what it makes,” he says.

But while manufacturing has served as the foundation for wealth in many countries, South Africa’s government has dropped the ball by allowing industrial areas to collapse.

“Our government does very little in comparison to our competitors. In Turkey, the government builds advanced infrastructure  such as water treatment facilities, and puts in high-speed transport systems so the products can move rapidly, and workers can get through to work safely and quickly,” says Barnes.

But in South Africa, the government expects the private sector to do all of this — all while negotiating with local “community forums” that are little more than organised mafias, while the police stand on the sidelines.

Barnes says that if we want to revive South Africa’s manufacturing sector, our policymakers should do far more to assist those actually taking the lead in doing this. Companies like TFG, in other words.