Cia Hering

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Cia Hering

Rua Hermann Hering 1790
Blumenau, Santa Catarina 890 10-900
Brazil
Telephone: ( + 55) 47 321-3544
Toll Free: ( + 55) (800) 473-114
Fax: ( + 55) 47 321-3434
Web site: http://www.ciahering.com.br

Public Company
Incorporated: 1880 as Hering Têxtil S.A.
Employees: 3,588
Sales: BRL 336.59 million ($114.88 million) (2003)
Stock Exchanges: Sao Paulo
Ticker Symbols: HGTX3
NAIC: 313210 Broadwoven Fabric Mills; 448140 Family Clothing Stores; 551112 Offices of Other Holding Companies

Cia Hering is a Brazilian holding company whose units are engaged in the production and sale of textiles and casual-wear clothing. These clothing items consist of intimate apparel, pullovers, and other general textile products, including T-shirts, pajamas, shirts, jackets, jeans, and fashion clothes. Hering subsidiaries are licensed to produce, sell, and export clothing under the Disney trademark. The company also operates and franchises retail clothing stores in Brazil.

A Century of Textile Production

Hermann Hering was a German immigrant to Brazil who settled in the small southern state of Santa Catarina, which was also home to many other migrating Germans. In 1879, he acquired a circular loom, and the following year he and his brother Bruno opened a cotton-textile plant in Blumenau. The products of this family enterprise were well received, and as a result more looms were acquired and installed. The machines were originally driven by steam, later by waterpower, and still later by electrical energy. Hering began doing business outside Santa Catarina in 1900, when its first agent was sent to Porto Alegre in the neighboring state of Rio Grande do Sul. The company began selling systematically in Sao Paulo between 1908 and 1910 and later in Rio de Janeiro. By 1914, the company, now called Hering & Cia., was able to import its first spinning mill, enabling it to become one of the first textile companies in Brazil to make its own cotton yarn. By 1929, it had adopted its present name, Companhia Hering.

In the course of time, Hering established another cotton-textile plant outside Recife, in Brazil's cotton-growing belt, far to the north of Santa Catarina in the state of Pernambuco. Hering's apparel was well-suited to a poor, tropical country. Its simple unadorned T-shirts, worn by generations of Brazilians, were so unremarkable that they later became "in" for young people. Hering was among the largest of the textile firms, and in 1929 the company employed more than half of all Brazilian workers engaged in manufacturing. In the late 1960s, textiles were still supporting 300,000 people directly and 600,000 indirectly. By this time, however, the industry was in trouble due to obsolescent machinery, poor management, and inadequately trained labor. For many years, in an inflationary climate, easy credit had been repaid in devalued currency. Customers quickly spent their money before it lost still more value, and the profits were put into real estate and other such outside investments instead of new machinery.

This situation ended in 1964, when a military government assumed power and stabilized the currency, leading to a crisis in the textile industry but also to a restructuring opportunity. By the early 1970s, new equipment had been installed in most of the largest mills, and the quality of finished goods improved. Hering's spinning and weaving operations had sales of $25.4 million in 1973 and were producing such garments as pajamas, underwear, and sports shirts as well as T-shirts. The company also began making Wrangler jeans, under license, in 1983, and selling them in stores.

Hering's annual sales from textiles and clothing came to about $300 million in the late 1980s. In the trade journal Knitting Technique, a visiting group of German and Austrian manufacturers called the company "one of the largest textile manufacturers in the world" and described the size of the Blumenau plant as "well above those appertaining in Europe" and exceeding "even the most imaginative expectations." Of the large numbers of circular knitting machines, almost 500 had been built by the company itself. The group was surprised to find that hundreds of workers were still color-printing fabrics manually—a practice that had ceased to exist in Western Europe—and that the company employed ten doctors and paramedics to tend to workers around the clock. The group continued on to Recife, where they visited the Tecanor circular-knitting plant and described the manufacturing hall of the Hering do Nordeste factory as one of the largest textile-manufacturing buildings in the world.

Food Production Foremost: 1972–97

By this time, however, Hering's fortunes had taken an unusual direction. Soybeans had become a major crop in Santa Catarina, and Hering decided it could make money by crushing the beans into meal and oil and marketing these products abroad. For this purpose, it formed a company named Ceval Agro Industria S.A. in 1972, establishing its headquarters in Gaspar, a town about 25 miles from Blumenau. Two years later, Ivo Hering, president of the Hering group and a great-grandson of one of the founders, appointed Vilmar de Oliveira Schürmann to be Ceval's general manager. Under Schürmann's capable leadership, Ceval Agro Industrial, which later became Ceval Alimentos S.A., grew rapidly, becoming Brazil's chief processor of soybeans and its fifth-largest exporter. However, after a government-imposed freeze on the Brazilian currency's rate of exchange resulted in an unexpected $3-million loss in 1986, Hering decided the company should diversify its activities and exploit the domestic market. During the late 1980s, Ceval became a major producer of foods for the Brazilian retail market by spending more than $200 million to acquire 17 companies in six states. Its annual revenues rose from $149 million to $1.2 billion in the decade, eclipsing the amount that Hering derived from textiles and clothing.

The original impetus for this diversification came in 1980, when the Hering group acquired the Seara meat-packing business for the purpose of marketing slaughtered chickens and pigs that had been raised on Ceval's soybean meal. Three years later, it bought another meat-packing plant, a large chicken producer, and a Swift Armour pork slaughterhouse. By 1990, Ceval was processing seven million chickens a month as well as three million hogs, making it the nation's third-largest pork producer. It was also processing four million metric tons of soybeans a year. In 1989, Ceval opened a $24-million margarine plant in Gaspar, and in 1991 a $60-million facility in Rondonópolis, Mato Grosso, for soybean cooking oil.

Companhia Hering, in early 1991, transformed itself into a new holding company consisting of only two units: Ceval Alimentos and Hering Têxtil. All three, the holding company and the two subsidiary units, made an initial public offering of shares on the Sao Paulo Stock Exchange in 1994. Several layers of administration were eliminated, and as many as 2,000 staffers lost their jobs. Some internal tasks were farmed out, such as the manufacture of specialized products and the transport of cargo between affiliates of the company. Others were completely eliminated, as Hering found that in many cases the same work was being duplicated within the organization. Each subsidiary, for example, had its own production planning unit even though there was a central unit for this purpose. The same applied to the recruitment and selection of workers.

Despite these efforts, Companhia Hering lost money in 1992, 1994, and 1996. Even Ceval's burgeoning revenues could not make up for the high costs of expanding its productive capacity. Hering Têxtil was the largest producer of knitwear in Latin America and the second-largest in the world, but it was losing money for a variety of reasons, including the expense of opening a factory in 1992 in Badajoz, Spain, to serve customers such as Euro Disney, major German department stores, and mail-order outlets. The following year, it sold more than half of its 79 percent share of Hering do Nordeste S.A.–Malhas, to Vicunha Têxtil S.A. for BRL 70 million. This diminished Hering Têxtil's annual revenues by one-third but also reduced the parent company's $170 million debt.

By 1995, Hering Têxtil was preferring to describe itself as a maker of brand-name products rather than of textiles and apparel. It was producing clothing under such recognized labels as Hering, Omino, Mafisa, PUC, Public Image, and Wrangler, as well as under license for The Walt Disney Co. (including a Mickey Mouse T-shirt introduced in 1960), The Coca-Cola Co., Warner Bros., and Hanna-Barbera Cartoons Inc. Various products carrying the Hering name were being sold in more than 80 licensed stores in several South American countries. In that year, Hering Têxtil became the exclusive licensee of Disney for all of Europe and the Middle East under a ten-year contract that began in 1996 and gave it the sole right to print Disney images in these markets. This arrangement was estimated to be worth revenue of $50 million in 1996 and $130 million in 2000. The firm also established Lisbon-based Studio Dream to concentrate on further development of products and marketing in Europe. Also in 1995, Hering Têxtil agreed to produce Coca-Cola's entire line of clothing for sale in Europe.

Key Dates:

1880:: Hermann and Bruno Hering open a cotton-textile plant in Blumenau.
1914:: Hering imports its first spinning mill, enabling it to make its own cotton yarn.
1972:: Hering enters the agro-industry by establishing a company named Ceval.
1986:: Ceval becomes Brazil's chief processor of soybeans.
1992:: Hering establishes two franchised retail clothing store chains.
1992:: Hering opens a clothing factory in Badajoz, Spain.
1994:: Now a holding company, Hering is publicly traded for the first time.
1995:: Hering becomes the exclusive Disney clothing licensee in Europe and the Middle East.
1997:: Hering sells its remaining share of Ceval for an estimated $550 million to $700 million.
2003:: The company returns to profitability after losing money in three of the previous four years.

Hering Têxtil was now a smaller, leaner company, with 40 percent fewer employees than a few years earlier and some of its production turned out by contractors. Its next step, taken at the recommendation of the U.S. consulting firm Booz Allen & Hamilton Inc., was to divide its operations into five units, each one with its own team of engineering, production, and sales. A fashion unit, for example, was charged with administering the Omino, PUC, Public Image, and Mafisa brands, while another handled Wrangler jeans. Fabio Hering, a nephew of Ivo, became Hering Têxtil's chief executive. He indicated that the company, until recently regarded as production-oriented, would concentrate its efforts on marketing.

In addition to strategic alliances formed with retail chains, retail franchising within Brazil was now the focus of Hering Têxtil's marketing. The company had established two franchise chains, Wrangler and Family Store, in 1992. By 1996, the 86 Wrangler branches were selling 60 percent of Hering Têxtil's production of Wrangler-label jeans. The 14 Family Store units, located in shopping centers, were scheduled to increase to 35 by the end of 1996. Hering Têxtil was also promoting its products in joint campaigns with such retailers as Wal-Mart Brasil Ltda. and Lojas Americanas S.A.

Hering Têxtil was, however, dwarfed by Ceval Alimentos, whose $2.7 billion in 1996 revenues was ten times that of its senior brother. It was the fifth-largest soybean processor in the world, the largest Brazilian producer of vegetable oil, and the third-largest producer of frozen meat. However, since the early 1990s, Companhia Hering had been raising money by selling Ceval common stock and debentures convertible to common stock. In 1997, it sold its remaining 39 percent share of Ceval to Bunge International Ltd. for a sum estimated at between $550 million and $700 million. Asked why the holding company was selling Ceval instead of the struggling textile firm, Ivo Hering replied, according to Cláudia Vassallo of Exame, "Because the textile business is in our genes. It is our true vocation." Nevertheless, there were other persuasive reasons. The sale proceeds not only went into the coffers of family members but also were earmarked for paying down the combined $250 million debt of Companhia Hering and Hering Têxtil. By contrast, Ceval was now so big that it would have been difficult to maintain its impetus without large additional infusions of money.

Redefining Itself in Retail: 1999–2003

By early 1999, Hering was seeking, even more than it previously had, to redefine itself as a company principally devoted to retailing based on brand name. There was little chance that it would ever again enjoy eminence in cheap clothing, a market lost to East Asian producers. Besides selling its Recife plants in 1994, the company now had also disposed of its spinning mill in Blumenau. Less than half of its sales now came from in-house production. However, building on its ubiquitous T-shirts (still 40 percent of its clothing sales) and knit jerseys, the company was seeking to become the Brazilian Gap: a purveyor of a wide array of basic clothing, including trousers and leather articles. In Exame, Glandinston Silvestrini quoted Fabio Hering: "Today it isn't by manufacturing that one makes or loses money. Clothing technology is basically the same. What makes the difference is the brand and the value added by a chain of stores." Accordingly, the former Family Store chain (now Hering Store) had grown to 63 branches, and a new one for children, based on the company's PUC brand, was emerging. (The license for the Wrangler operation had lapsed in 1998, and the Omino label had been dropped.)

After losing money in 1999, 2001, and 2002, Companhia Hering returned to profitability in 2003. During that year, its Hering and PUC chains, which grew to 125 and 30 locations, respectively, accounted for 32 percent of company sales, compared to 21 percent in 2002. All these stores were in middle- or upper-class shopping centers and neighborhoods, allowing Hering to sell more elaborate clothing than its iconic T-shirts. Nevertheless, the company ranked only seventh nationally in revenues from clothing and textiles, with 2.7 percent of the market, and it dropped out of the 500 biggest Brazilian enterprises in terms of annual revenue. Companhia Hering's long-term debt was BRL 494.82 million ($168.88 million) at the end of 2003.