Dian’s Daring Partnership

By offering share options to senior leadership, Dian Gomes is upending the Sri Lankan apparel industry’s ownership model of founding family control. His challenge now is to grow Hela Clothing fast enough for shareholders to reap a windfall

UK-based millionaire Dominic McVey had a soft spot for Sri Lanka. The island’s long conflict ending encouraged him to invest in an apparel manufacturing firm that was two years later looking like a dud. McVey’s problem was the firm lacking the right people to manage its seven factories. By 2015, it was clear the firm needed better leadership, and McVey thought he knew the man for the job – someone who had everything, but was mad enough to risk it all for a legacy.

McVey was a prodigy, having made his first million dollars before he turned 15 by importing collapsible scooters to the UK. At 18, the Londoner was honored by Her Majesty, Queen Elizabeth with the title ‘A Pioneer for Britain in Entrepreneurship’. By 2014, the 29 year old was running a diverse bunch of business ranging from cosmetics to fashion. But his Sri Lankan investment wasn’t meeting expectations.

Gomes laid down one condition to joining Hela. McVey would have to offer more than attractive remuneration to attract the talent Hela needed

McVey’s investment firm Ellestone Apparel acquired Hela Clothing in 2013, which supplied UK labels Tesco, John Lewis, Asda, Moss Bros and Marks & Spencer from its seven factories, from British firm Fielding Group, which had run the business for a quarter of a century earlier. His partners at Ellestone included Robert Wigley, former chairman of Merrill Lynch Europe, the Middle East and Africa, and Tom Singh, an entrepreneur and founder of UK fashion retail brand New Look with over a thousand stores worldwide and $2 billion in sales.
McVey soon realized that the return his Sri Lankan investment was generating despite its revenue more than doubling to $140 million in the two years after his acquisition was inadequate. “My biggest challenge was getting the management to see Hela Clothing’s potential. I knew Hela and its 5,000 staff deserved better. It was extremely frustrating to be relying on a reluctant team,” McVey says.

Dian Gomes joined Hela Clothing soon after retiring from MAS Holdings, lured by the chance to build a global company

Dian Gomes joined Hela Clothing soon after retiring from MAS Holdings, lured by the chance to build a global company

McVey learnt of the larger-than-life Dian Gomes when he saw a magazine featuring Gomes on the cover at his lawyer’s Colombo office in early 2015. Gomes, a boxing enthusiast, was a group director at MAS Holdings, Sri Lanka’s largest private company.

“I need him! I want him to lead Hela,” McVey told the Hela director accompanying him to the lawyer’s meeting, much to his colleague’s amusement. “Dian will give you the finger,” his colleague smirked. “Dian is soon retiring, but I doubt he will waste his time with your small company,” he told McVey.

McVey was resolute. He knew the carrot to dangle.

Gomes was introduced to McVey by a friend in April 2015 over dinner at a restaurant in Colombo. McVey sought Gomes’ advice on boosting Hela Clothing’s fortunes, a clever ruse to interest the man he hoped would soon lead his firm. McVey said he was skeptical about the ability of Sri Lankan management professionals. Gomes predictably disagreed, pointing to how Sri Lankan managers had led the largest apparel export firms here to the top of global league tables. “I am a determined man. Meeting Dian for dinner was no accident,” McVey says.

McVey’s brief stop at MAS’s Unichela office in Panadura while on his way to Galle for a break, for a second meeting, changed Gomes’ retirement plans for good.

“I thought I had achieved everything I wanted and was looking forward to focusing my energy on my pet ventures, Gandhara, Villa Republic and teaching leadership after retirement in 2015,” Gomes recalls. In the last couple of decades, Gomes has transformed his childhood home and a section of Stafford Avenue around the house to a haven for art and artifact retail. More recently, he has built and markets a couple of small luxury hotels under the Villa Republic brand.

“Potential,” was McVey’s potent reply to the puzzle that gnawed Gomes since their first meeting over dinner: why had they invested in Hela Clothing in the first place.

McVey dangled the carrot. He proposed Gomes take over as Chairman of Hela Clothing, a firm a tenth the size of his then employer MAS and a third the size of the unit there that Gomes managed. “Dian, you are too young to retire,” he said. “Why not build another company that Sri Lanka can be proud of?”

“He had me,” Gomes says, recalling the conversation. “That young guy made me devour the proverbial carrot.” Gomes became chairman of Hela Clothing in December 2015 soon after retiring from MAS. Having staked his reputation on transforming Hela into a world-class company, Gomes identifies four challenges: changing the 25-yearold culture at Hela Clothing, attracting key management, quickly scaling the business through mergers and acquisitions, and securing credit to fund acquisitions.

The share options helped attract key senior talent, but many young, second layer managers risked their careers to join Hela purely out of loyalty to Gomes

War on talent, culture…
Three closely-held family firms dominate Sri Lanka’s export apparel industry. The Amaleans control MAS Holdings, Omars the Brandix Group and the Hirdaramani family controls a group with the family name as its brand. Up-market clothing exporters MAS and Brandix are the largest. MAS manufactures clothing for a range of global brands including lingerie for Victoria’s Secret and sportswear for Nike. It claims annual group revenue now tops $1.6 billion from its facilities in Bangladesh, India, Indonesia and Jordan, as well as 30 factories in Sri Lanka.

Dian Gomes’ first two challenges were attracting talented management professionals and changing the corporate culture at Hela Clothing by introducing lean production techniques to keep pace with the fast-changing global fashion industry.

The three family owned companies have all the best talent within the apparel industry. Over several decades, MAS, Brandix and Hirdaramani Group have evolved from labour-intensive clothing manufacturers to highly sophisticated, technology and innovation-driven apparel companies, investing heavily on talent. Their top managers are favourite targets for poaching by apparel companies based in Africa and Asia.

For a small company like Hela Clothing, recruiting talent away from MAS or Brandix is daunting. Hela must better the salaries and performance-linked bonuses paid by these apparel export companies to attract talent. Also, remuneration must offset the risk of leaving a large and successful company for a smaller one. For Hela, this makes little business sense, as high staff costs will only eat into its single-digit margins.

Hela Clothing Director and main investor Dominic McVey was barely 15 when he made his first million dollars

Hela Clothing Director and main investor Dominic McVey was barely 15 when he made his first million dollars

Gomes laid down one condition to joining Hela. McVey would have to offer more than attractive remuneration to attract the talent Hela needed. “I felt it was important that key management be given some ownership in Hela Clothing. Big companies in the industry are family owned, so their best talent will never feel ownership, they will always be employees,” Gomes says.

This is a sustainable alternative to exorbitant salaries and probably a better inducement to attracting talent.

McVey had already made it clear about taking Hela public with a listing on the Colombo Stock Exchange. To meet Gomes’ condition, he agreed to carve out a 10% stake to be offered to key senior managers as stock options. Stock options give their holders the right to buy a specific number of shares at a future date at a price determined at the time they are awarded, usually the present value of a share.

Assuming that in 10 years Hela Clothing’s revenue and hence its valuation is $1 billion, a one percent stake will be worth $10 million, a windfall for most. Even if a one percent stake is diluted to a quarter of a percent (0.25%), on account of an aggressive series of mergers, the stake will still be worth $2.5 million. Share options combined with remuneration and performance pay for senior management is an offer hard to resist.

Gomes was now able lure several top industry talents by offering stock options. He himself purchased a 20% stake in Hela, but it’s not known if the shares were bought at their present value or a discount. The managers Gomes attracted included Harsha Guneratne, who joined Hela as managing director, and Ananda Weerakoon, who took up the role of marketing director. Guneratne has over 20 years of manufacturing experience with multinationals in Australia and Sri Lanka. He was the founding managing director of Textured Jersey PLC, a listed fabric maker controlled by Brandix. Weerakoon retired after counting 31 years with Hirdaramani Group, where he also sat on the board. Nipuna Dias, who held the role of manufacturing director at MAS intimates and Gomes’ right hand man for nearly 25 years, also took up the challenge at Hela as its group director of manufacturing. Not everybody needed stock options to join Hela. An opportunity to work with Gomes was good enough.

When Dian Gomes started his career with MAS 25 years ago, the firm’s annual export earnings were around $6 million. When he retired in 2015, revenue had reached $1.6 billion. Gomes headed the group’s intimates cluster, which reported $500 million in export revenue. The Amaleans gave him a free hand to run the organization, which he did as if it was his own serfdom.

“In my early days, I was an accountant and was driven by numbers. Later, I realized that it is not numbers that make an organization grow,” Gomes says. As head of MAS Intimates, Dian helped MAS expand and consolidate, moving overseas to Bangladesh, India and Indonesia. His drive for bottomline results was only rivaled by his enthusiasm to help people, to be their mentor and benefactor, and make MAS a great place to work. “It is the people and the brand that make employees proud of an organization imbued with a culture built on meritocracy, respect and fun,” Gomes says.

Competition for talent among the top family owned businesses is tough, and soon even MAS’s competitors acknowledged Gomes’ greatness. Rival firm Brandix’ chief executive Ashroff Omar says, “Gomes has a cult-type following. His strength is his ability to lead people and select the right people to follow him.” Acknowledging this strength, when Brandix acquired a controlling stake of fabric maker Textured Jersey from MAS seven years ago and made a hostile takeover bid for one its subsidiaries MAS Linear Clothing, Gomes was offered a $2 million signing up bonus and stake just for changing his allegiance from MAS to Brandix – an offer Gomes declined.

Gomes says his loyalty to his former employer has not changed, but he relishes the opportunity to be more than an employee working for someone else.

The share options helped attract key senior talent, but many young, second layer managers risked their careers to join Hela purely out of loyalty to Gomes. “Many of the key managers Dian brought into Hela did not get share options. I was pleasantly shocked that they joined purely out of loyalty to Dian,” said Dilanka Jinadasa, a director at Hela, heading its intimates cluster.

Jinadasa knows too well the challenges small apparel firms face when it comes to finding the right people. “It is impossible to attract people away from bigger companies. The kind of salaries they expect to set off the risk of joining a smaller family-held firm will reduce margins into nothing,” he says.

Jinadasa, who turns 29 this year, revived his family’s small apparel business, Foundation Garments, founded by his father 30 years ago. When he took the reins in 2012, annual revenue was $6 million. Today, the company is bringing in $50 million. Jinadasa’s long-term plan was to achieve the $100 million annual revenue milestone and then invite investors to finance overseas expansion in Africa and South America. “When Hela approached me with a proposal for a joint venture, I did not think twice because of Dian Gomes. He is a legend in the industry. With his expertise and capabilities, and ability to attract talent, I realized growth will come much faster,” Jinadasa says.

Lean manufacturing expert Harsha Guneratne joined Hela as its managing director

Lean manufacturing expert Harsha Guneratne joined Hela as its managing director

While Gomes found immediate success on the recruitment front, he also had to change the culture at Hela and transform production processes at the seven Hela factories to turn out high-quality garments fast.

Speed is everything in the fashion industry. MAS and Brandix have made an art out of arranging their production floors to maximize speed so their buyers get their orders on time. Gomes was instrumental in setting up MAS’s intimates cluster and converting factories into lean production models. He found Hela’s seven factories disorganized. “The first thing I had to do was introduce lean manufacturing at Hela. I had to rearrange entire production floors,” Gomes says.

The task fell on lean manufacturing expert Harsha Guneratne. After leaving Textured Jersey in 2004, he worked for several firms in Australia including MNCs Cadbury, Schweppes, Carlton United Breweries and Unisys, before returning to join Hela as its managing director in August 2015.

In Australia, Guneratne had to work closely with tough, highly influential worker unions, so he is well placed to manage change. Apparel trade unions can sometimes be disruptive and unforgiving on firms when their demands are not met. Strike action can cause major disruptions, leading to delayed orders and loss of business in the tight margin, need-for-speed game.

In April, workers at Brandix’ Indian factory began strike action demanding an increase in wages from $74 a month to $150. This could potentially wreak havoc on Brandix India’s bottomline. Sri Lankan workers are paid between $75 and $120 a month including attendance, productivity bonuses, and subsidized transportation and meals. At Hela, Guneratne has to balance his role of getting seven Hela factories into shape and managing worker anxiety over the significant changes taking place across production lines.

“It is a travesty that many large Sri Lankan companies are yet to create schemes to reward the thousands of staff who make their business success possible”  – Dominic McVey

“We are yet to face resistance to change. I believe that people are extremely smart and they know that the underlying intentions of the management are solid. The environment that we are creating at Hela is going to be transparent, so people have the opportunity to be more assertive to raise their concerns,” Guneratne says.

Gomes prides himself for his ability to connect with each and every factory worker, and he says Guneratne has the same knack. “Harsha and I have our feet firmly on the ground. We easily blend in, enjoying a casual chat with them over a cup of tea. No owner of a large factory can ever do this, they can never fit in,” he says.

At MAS, Gomes worked hard to improve the working environment, setting up canteens and coffee shops serving healthy food, introducing boxing and fencing as a competitive tool, and branding the organization. Being chief executive did not necessarily make it easy for him to do all these things, but Gomes was able to convince owner Mahesh Amalean that if the people were happy, the company will automatically succeed. He plans to do the same for the 15,000 people working at Hela. “It took me 25 years to learn how to build a happy culture at MAS where people were driven to succeed and win, and have fun doing it. Now, I can do the same at Hela, but much faster,” Gomes says.

Gomes can be absolutely ruthless too, according to his colleagues. He is driven by performance. He does not waste time with people who are not aligned to his vision and drive. The 1975 National Junior Light Flyweight Champion and former president of the Amateur Boxing Association who currently sits on the Finance Commission of the International Boxing Association (AIBA), Gomes will take them out without batting an eyelid. That is how he cleaned up acquisitions at his previous job, and he will do it at the senior level first.

Building scale…
For Hela to grow beyond its $140 million revenue mark from last year, the company will have to invest in more factories with lean production models. This was Gomes’ third challenge.

“I cannot wait for 25 years to achieve the kind of success I had at MAS. I cannot waste time building factories from scratch. There are hundreds of small family owned apparel companies in Sri Lanka that are well managed, and my plan is to merge or enter into joint ventures with them. This will help us build scale,” he says.

Does Dian Gomes’ strategy of merging with mid-sized clothing manufacturers make sense? The four largest companies, MAS, Brandix, Omegaline and Hirdaramani together account for nearly $3.5 billion in clothing exports, but being private companies, the accuracy of the numbers they claim cannot be verified. Sri Lanka’s apparel and textile exports in 2015 amounted to $5 billion, which means other clothing export companies account for 30% of industry earnings, or $1.5 billion, translating to huge potential for Hela.

Head of Hela Intimates and Director Dilanka Jinadasa merged his family business with Hela for faster growth and faster implementation of plans to expand in Africa and South America

Head of Hela Intimates and Director Dilanka Jinadasa merged his family business with Hela for faster growth and faster implementation of plans to expand in Africa and South America

Global fashion retailers and labels have high demands of their clothing suppliers—low costs, quality, speed and innovative clothing. For clothing manufacturers to get more orders, they not only must deliver all this, but also be global manufacturers to diversify country risk.
Apparel manufacturing is a tight-margins game. Most retail clothing items like shirts, jeans, dresses and children’s wear give single-digit margins, while margins for segments like lingerie and sportswear can reach double digits. This means that successful manufacturers must have the right mix of specialist clothing and enough volumes to be taken seriously by global fashion brands. This is why scaling a business is so important.

Since assuming the chair at Hela Clothing, Gomes has been successful in merging with one such small family owned business, doubling the Hela factory count from seven to 15 and driving revenue up to $200 million.

Dilanka Jinadasa struggled to revive his father’s ailing business, Foundation Garments; his biggest challenge was attracting talent without paying exorbitant salaries, making them leave established players in the industry. Graduating from the University of Nottingham with an Honours Degree in Industrial Economics, Jinadasa was making a career for himself at Zurich Insurance & Financial Services in Canada before his father challenged him to take over Foundation Garments and its eight factories.

Jinadasa turned around his father’s $6 million apparel export business to $50 million this year just before entering into a joint venture with Hela Clothing, taking over its intimates arm. “I could not recruit the people I wanted to because I was unable to pay them more than MAS or Brandix to make them risk joining a smaller family owned business. But Dian changed all that,” he says.

The legend at spotting talent and commanding their loyalty, Gomes was quick to realize the value of the young Jinadasa who not only brought a well-managed company to the table, but also feasible plans to expand operations into Africa and South America to make use of lower cost bases there.

Jinadasa had a long-term plan to invite investors to his family’s business when Foundation Garments reached the $100 million revenue mark. Meanwhile, he wanted a third-party opinion on his business plans, which included setting up production facilities in Ethiopia, Kenya and South America. Jinadasa approached two private equity firms for their insights and they ended up making offers for a stake in the company. “I declined because it was not part of the plan, but when the Hela offer came, I realized we could achieve our goals much faster now,” Jinadasa says.

The Kenyan plant is up and running and the Ethiopian factory will come online by the end of the year. According to Jinadasa, Africa is the last frontier of low-cost garment manufacturing, and Hela is the first company in Sri Lanka to venture there.

Hela Clothing is also eyeing South America. Plans are being drawn up for production facilities in Mexico and the Dominican Republic, paving the way for the company to deliver faster lead times.

Jinadasa was paid in cash and equity to merge with Hela. He has a seat on the board and heads Hela Clothing’s intimates cluster, supplying top brands like Calvin Klein, Warnes, Hanes, Tommy Hilfiger and Soma. Hela used retained profits and a bank loan to raise the necessary funds. Gomes says the valuation was based on net asset values and the future earnings potential of Foundation Garments. The actual valuation is a closely guarded secret as Gomes continues to talk to other family owned businesses.

Gomes helped Hela raise $16 million from listed private bank HNB for part of the deal with Foundation Garments, something the company would have found difficult to do without Gomes who had the right credibility. Expectation is high for him to keep the banks happy as the company continues its expansion drive. “It will only get tougher,” Gomes says, gleeful at his fourth challenge.

Not disruption, game changing…
Leading companies in Sri Lanka’s apparel industry MAS and Brandix are where they are today because of the visionary leadership of their founders and owners Mahesh Amalean and Ashroff Omar. They built scale by entering into joint ventures with global retailers. After the phasing out of trade concessions to the US (multi-fiber agreement) and the EU (GSP Plus), they cannibalized many smaller apparel firms.
Dian Gomes and Dilanka Jinadasa both believe that Hela Clothing does not have to compete with the big players. They hold them in near-reverence and are quick to claim that they are not out to disrupt the industry. “We don’t need to compete with anyone here, there is enough market share for everybody. Our competitors are actually outside Sri Lanka, in Cambodia, China, Bangladesh and Vietnam. But the war on talent will go on, there has always been a war on talent,” Gomes says.

But Hela is certainly changing the game in Sri Lanka in many ways. “Hela will revolutionize the apparel industry, and I believe we will smash our targets. Many industries have changed, but apparel is yet to do so. We are creating that change and leading the charge on the global stage. Just like Tesla has changed the car industry, Hela is already doing the same for clothing,” McVey says.

dd5Hela Clothing’s share option scheme to attract key talent is something new for Sri Lanka’s apparel industry. “I am surprised no one ever gave employees a stake in their companies, this will have to change now and this is something we have started,” says Jinadasa. “We are not competing with the big players, but our strategy for attracting and retaining talent is no doubt an unwanted headache for them,” he says.
The company’s venture into Africa and South America is expected to be a game changing move as well.

Ethiopia has some of the best free trade agreements in the region and will give Hela duty-free access to Australia, India, Europe, Canada, Japan, China and the US. Hela would have a 32% cost benefit for a synthetic t-shirt or under shirt compared with the rest of the competition. “We could cost $1.25 and our competitor $1, but we would still be cheaper. So embarking on the African journey was the first step in differentiating ourselves from the top companies,” Jinadasa says. The next strategy is offshoring. Thereby, Hela Clothing is not only providing cost benefits, but speeding up the process by being in Mexico and the Dominican Republic, where the company hopes to set up facilities in 2017.

Hela Clothing is also taking a different approach to how big clothing companies manage separate business units or clusters. Large family owned businesses reward managers based on the performance of their respective clusters. This has led to intense internal rivalry bordering on animosity and professional feuds.

For Hela Managing Director Harsha Guneratne, cluster competition is not a healthy practice to emulate because it prevents the sharing of best practices across the group. “We need to ensure that cluster competition does not get out of hand. If the reward system is not designed in a holistic way, cluster competition may drive the wrong behavior of individuals,” Guneratne says. He suggests a broader rewarding structure that takes into account the performance of each cluster and the entire group. “This will make a big difference in the industry here,” he says.

The apparel industry is no longer a cut-and-stich, labour-intensive industry. Innovation and technology are changing how clothes are produced and changing the functionality of clothing itself. The big players invest heavily on innovation, and have large teams spearheading innovation and design. They even have labs for innovation. Hela Clothing cannot match this capacity, but they are doing things differently.

Hela has a small team that operates under a division called Helavation. Its chief executive is 30-year-old Nissanga Warnapura, an engineer from Nottingham University, who worked with Gomes at MAS. The team monitors new technology developments in Silicon Valley in the US, and startup incubators in the UK and the Netherlands. “We see what others have developed and how their prototypes can be integrated into a garment, and how we can give them access to markets by approaching our customers,” Jinadasa says.

Hela is in the process of commercializing four innovative products exclusively for fashion labels. Non-disclosure agreements prevent Hela from talking about them yet. Once these come onboard, they will generate a sizable business at least comprising a tenth of Hela Clothing’s revenue.

Hela Clothing had earlier forecast to reach $300 million in revenue by 2020, but having reached $140 million in March 2016, it is likely the company will reach this target by 2018, with its African units contributing half the revenue.

“Anything less than 10% net margin is not worthwhile; we are not there yet because we need to build scale, but we will reach our goals much faster than others ever did. We can’t afford to wait 25 years,” Jinadasa laughs, although he and his young team have the years ahead of them, unlike Gomes who is over 55.

dd6The country’s apparel industry is likely to survive the next 20 years as long as it constantly moves up the value chain. Jinadasa strongly believes the time will soon come when global supply chains for clothing will end. “Each region will produce its own clothing, that’s the future,” he says.

As for Gomes he wants to retire long before that.

“If I can build Hela into a $400 million company over the next five years, that is enough for me. The company will be both sustainable and global,” he says adding, “Who knows, we may even diversify into other sectors.” But McVey wants to focus on Hela right now. “What we are doing is too important for me to get distracted from at the moment. Although one day a nice house on the beach would not go amiss,” McVey says.

On the subject of going public when it reaches the $300 million revenue mark, Gomes said it will secure the company’s future, with governance and succession plans well in place. Funds from the future IPO will be used to buy out an international fashion label, so Hela could further cement its place as a multinational company.

The share options, mergers and the IPO will dilute the stakes of existing investors, a bet investors are willing to take so that the company grows fast.

“I cannot do this alone, nor do I want to relish in the wealth alone. It is a travesty that many large Sri Lankan companies are yet to create schemes to reward the thousands of staff who make their business success possible,” McVey says adding that the company may opt for a dual listing in London or the US alongside the Colombo Stock Exchange, “allowing us to raise even more money to finance growth”.
“Dominic McVey believes in sharing the wealth and so do I. Whether our model will succeed, only time will tell,” Gomes says, a knowing smile lighting up his face.