What happened at Hela

HELA CLOTHING OBSESSED OVER FAST GROWTH TO ACHIEVE GREATNESS QUICKER THAN IT TOOK BRANDIX AND MAS; NOW IT'S SCALING BACK AFTER BURNING CASH

SRI LANKA’S LARGER-THAN-LIFE DIAN GOMES AND BRITISH MILLIONAIRE DOMINIC MCVEY HATCHED AN AUDACIOUS STRATEGY TO TRANSFORM HELA CLOTHING, THEN A DUD CLOTHING MANUFACTURING BUSINESS, INTO AN INDUSTRY GIANT LIKE MAS OR BRANDIX.

Echelon published a story on this in May 2016 called ‘Dian’s Daring Partnership’. They set a target to double revenue in four years to $300 million by 2020. They had all the ingredients to replicate the successes of MAS and Brandix, but also to grow much faster.

Hela’s bold plans to boost revenue led to a drawback. By 2017, it was reporting cash flow constraints that were not
budgeted for. Many new businesses were haemorrhaging money. McVey, who got Gomes onboard to lead the business, refused to invest more money. “You need deep pockets for this game,” says Gomes who was then chairman at Hela. He retired in January 2019. Hela’s strategy for building scale and attracting talent was particularly risky. The board was willing to stake money and reputations. But the plan unravelled.

Hela Clothing’s revenue grew from around $100 million in 2016 to over $170 million in 2018, but swelling overheads bored into earnings and impacted cash flow.

“We had no choice but to venture into Kenya and Ethiopia. But we didn’t have enough capital to grow operations in those countries and Sri Lanka,” Gomes said. He wanted investors to infuse capital or dilute 30% of Hela to raise $10 million from local investors. Gomes also wanted to suspend a $1 million annual management fee paid to the majority shareholder, Ellestone Apparel, the investment firm headed by McVey. “This strained the relationship between McVey and myself,” Gomes said.

Hindsight is always 20-20. The present Hela management believes the company could have taken things slower. “When you add overheads for growth, there is a time lag before that business grows,” a member of the board said. “That mismatch is a hit to your bottomline, and it keeps expanding the faster you grow.”

Despite Hela’s short-term cash flow problems, several investors were circling the firm due to the long-term potential they saw.

MCVEY WAS A PRODIGY. He made his first million dollars at 15 importing collapsible scooters to the UK. With business interests ranging from cosmetics, fashion, media and music, McVey invested in Hela Clothing in 2013. Hela was making clothing out of seven factories for UK labels Tesco, John Lewis, Asda, Moss Bros and Marks & Spencer. UK-based Fielding Group had run Hela for over 25 years before the acquisition. McVey’s partners at Ellestone Apparels 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. Singh, an Order of the British Empire honouree, also heads Rianta Capital, an investment firm. Two years after the acquisition, Hela’s revenue had doubled to $70 million. The returns, however, were inadequate. “It was extremely frustrating to be relying on a reluctant team,” McVey said in 2016.

Upon learning about and then meeting Dian Gomes, McVey became keen to have the apparel industry veteran join the leadership team. Gomes was soon to retire from MAS, a firm then about ten times bigger than Hela Clothing. “I thought I had achieved everything I wanted and looked forward to spending time on my pet ventures,” Gomes said.

aOver the last couple of decades, Gomes has transformed his childhood home and a section of Stafford Avenue around the house into a haven for art and artefact retail. More recently, he has built and markets a few small luxury hotels under the Villa Republic brand. It wasn’t going to be easy to convince Gomes to stake his reputation at a struggling firm. To entice him, McVey offered Gomes a chance to cement his legacy. He proposed Gomes take over as chair at Hela, and build a company like industry giants MAS, Brandix and Hirdaramani.

An opportunity to cement his legacy was too appealing to pass up for Gomes, who took up the role in 2016. Gomes would have to grow the company fast. He didn’t have the decades it took MAS or Brandix to get where they are.

MAS and Brandix are the largest firms specialising in up-market clothing. They accounted for around 60% of Sri Lanka’s total clothing export earnings of $5 billion in 2018. Being private companies, the revenues they claim could not be verified. MAS manufactures clothing for a range of brands including lingerie for Victoria’s Secret and sportswear for Nike from over 30 factories in Sri Lanka, Bangladesh, India, Indonesia, Jordan and Vietnam. It claims $1.8 billion in group revenue annually. Brandix, with reported annual revenue of $1.2 billion, also has operations in India, Bangladesh and Cambodia. Hirdaramani has factories in Ethiopia, Bangladesh and Vietnam.

The Hela board set an audacious target: to double revenue in four years to $300 million by 2020 and list the company in the stock market. McVey and Gomes were insistent in sharing Hela’s wealth with employees and the public. Going public would have made Hela a maverick in an industry dominated by tightly controlled, family-led firms. Achieving these goals, and quickly at that, meant solving four problems.

First was changing the quarter decade culture at Hela; second, attracting key management; third, quickly scaling the business through mergers and acquisitions; and fourth, securing credit to fund acquisitions.

OBSESSING over topline growth created several difficulties for Hela. Three years later, Gomes retired, and McVey significantly diluted his stake to admit new capital to bail out the company. Several large Sri Lankan companies had offered to buyout cash-strapped Hela. The shareholders were not interested. As finances tightened, a consortium of new investors agreed to infuse $10 million in two stages. The first cash call was in November 2018, and the second in April 2019. The new investors also bought out Gomes’ 17% stake. The cash infusion retired some debt and replenished working capital.

Th e investor consortium was led by Channa Palansuriya, a former chairman at listed Sampath Bank. His family once owned a clothing manufacturing business, Orit Apparel. A. R. Rasiah, former Finance Director at listed Nestlé Lanka, replaced Gomes as chairman. Tom Singh, a partner in McVey’s equity management fi rm which invested in Hela, increased his stake, as did Dilanka Jinadasa, who heads Hela Intimates.

Jinadasa’s family business Foundation Garments merged with Hela in 2016. With that merger, Dilanka Jinadasa, who was paid in cash and equity to merge, entered Hela. He was appointed to the board and took over executive leadership of Hela Clothing’s Intimates cluster, supplying top brands like Calvin Klein, Warnes, Hanes, Tommy Hilfi ger and Soma.

TO SCALE QUICKLY , Hela Clothing acquired eight factories from Foundation Garments. In total, it then had 15 factories. Hela also established factories in Kenya and Ethiopia to make use of low-cost labour and duty-free concessions for exports to around 80% of the world’s retail markets. All these factories were added in a couple of years.

Hela Clothing is split into two business units: Hela Intimates and Hela Casuals. Apparel manufacturing is a tight-margins game. Most clothing items like shirts, jeans, dresses and children’s wear give single-digit margins. Margins for segments like lingerie and sportswear can reach double digits.

As Hela Casuals began to expand, it caused a cash fl ow crunch on the rest of the group, which was held up by the Intimates business. When Hela Intimates started investing in its own expansion, the group’s bottomline began to shrink. “Th e cash cow was now struggling. So we had expansionary businesses across the group and limited cash to fund them,” one member of the board said. The plants in Kenya and Ethiopia also experienced a surge of new orders and clients, but instead of being a windfall, it turned into a challenge.

East Africa has some of the best free-trade agreements in the region, giving Hela duty-free access to Australia, India, Europe, Canada, Japan, China and the US. Hela was enjoying up to 32% duty benefits for a synthetic t-shirt or undershirt compared to its competition, which is a huge deal for a global industry operating on tight margins. East Africa is the last frontier of low-cost manufacturing. Labels rushed in to enjoy cheaper price points, as traditional hubs like China and South Asia became expensive.

“When labels noticed how well we were doing in Kenya in terms of pricing and quality of finish, they increased orders with us,” a member of the board said.

cThe factory, which specialised in manufacturing men’s undergarments, was now producing polo shirts, swimwear,, and other items of clothing. “All of a sudden, we needed experts and machinery for these products Each product line needed dedicated machinery, shop floor workers, production heads, marketing and product development personnel,” a board member said.

Th e company was building multiple teams to supply new clients. These generated new revenue streams, but the overheads made them unsustainable. Obsessing over revenue, it was difficult to refuse the new orders. Global fashion labels have high demands on their clothing suppliers—low costs, quality, design speed and innovative clothing. It takes years for manufacturers to build relationships, demonstrate scale, and maintain a credible track record that can secure steady streams of orders. Hela was offered orders from new customers on a platter.

“We were offered very tempting and mouth-watering volumes. If we didn’t take them, then someone else would, and we may even lose existing business to competitors,” one senior manager said. Each client has a breakeven point, or a minimum value of orders, to cover production costs. As Hela was using the same factory space for multiple products and labels, scaling up was difficult. Hela struggled to reach the breakeven point for many of these labels. In other words, they were not making enough revenue to cover overheads related to manufacturing clothing for those labels.

As separate businesses units, all new teams and machine operators need three to six months to become profitable. But Hela kept adding additional lines and new teams that kept burning cash.

“The board was distracted from the core and focusing on the expansionary businesses,” a board member said.

Gomes claims there was more to it.

The company borrowed $16 million from listed private bank Hatton National to fi nance expansion. Gomes was able to secure the credit facility because of his reputation.

A clause in the loan contract with Hatton National needed Hela to take out a key person insurance policy on Gomes. These policies were not available in the country. “Out of the blue, quoting a breach of contract, the bank for some reason recalled half the loan, around $8 million, immediately. Th is threw our finances into a spin. The management was devoting its time restructuring finances than on the business,” Gomes said. Th e matter with the bank was later resolved, but not before unsettling the management. Financial markets were not helpful either. Rising interest rates led to higher finance costs, which eroded profits. Th e benchmark 12-month London Interbank Offered Rate for US dollars gained from about 1% since 2015 to nearly 2.75%. Hela’s finance costs had steepened over a few years. The company quickly exhausted its reserves and had to rely on banks to finance working capital.

IN LATE 2017, the board realised the company was burning cash too fast. Some painful decisions had to be made. First, it had to renegotiate credit terms with suppliers to manage the growing working capital requirement. Second, it had to trim its staff and streamline processes. The third was letting go of labels that were not profitable Relationships and reputations, hard currency in the fashion industry, were on the line.

Investing in East Africa is proving to be lucrative. Hela was one of the first to operate in East Africa making clothing for labels like PVH and Vanity Fair. It began production there at a time when global fashion retailers were consolidating suppliers. Earlier, labels would buy clothing from many suppliers. This was to minimise significant exposure to a single company or country. Pressure for tighter margins was changing all that. “Some labels had reduced the number of suppliers by as much as half,” a member of the board said. “Because we had plants in East Africa, we were able to remain on our clients’ sourcing lists.”

He also said Hela was able to aqcuire new clients that were not interested in sourcing from Sri Lanka. These new brands included The North Face, Lee & Wrangler, Nautica, and Speedo. The acquisition of $13.8 billion revenue global fashion company VF Corp as a client was a big win. The firm owns Wrangler, Lee, The North Face and Nautica (sold to Authentic Brands Group in 2018). The group last sourced clothing from Sri Lanka over 10 years ago.

While Hela shed some of its less profitable clients, it held on to labels like these that could offer scale. Hela management did not say which labels they were compelled to drop.

bSuppliers were also approached to negotiate new terms. Hela asked for extended credit terms for the next couple of years, which almost all agreed to do. The board next turned its attention to a sensitive but critical problem: trimming its hefty payroll.

Gomes had insisted that retrenched staff were treated well and fairly. A decision was made for sharing the profit and loss statement of each factory with all the workers. Everyone had to think about profits. Revenue was no longer the prime target.

Hela had a staff of 15,000 people, of which 600 were let go when it closed an unprofitable factory at Koggala and converted a double-shift facility in Kelaniya to a single shift. “Everything was done by the book. McVey and Gomes made sure the workers were compensated well,” a board member said. The company continues to provide free meals and other facilities for workers. In East Africa, its employees get free health check-ups and day-care centres for kids run by qualified childcare providers.

“We found that our workers in East Africa walk seven kilometres to collect their daily requirement of water. So we give them water, which means there’s one thing less to worry about when they go home,” a member of the board said.

HELA had invested heavily to attract top talent, and the most significant savings would naturally come from there. Under the restructuring, a large number of executives were let go, which saved millions of dollars annually. Three family-controlled firms dominate Sri Lanka’s export apparel industry: the Amaleans’ MAS Holdings, the Omars’ Brandix Group, and the eponymous Hirdaramani Group, named after the family. These companies command all the best talent in the apparel industry. Their top managers are favourite targets for poaching by apparel companies based in Africa and Asia. Hela had to offer better salaries and perks, and performance-based bonuses if it was to attract talent. The remuneration package offered by Hela had to offset the risk of leaving a large and successful company for a smaller one. Gomes had earlier convinced McVey to carve out a 10% stake in Hela to offer stock options to key senior managers.

A dual listing for Hela Clothing in Colombo and London was always on the cards for McVey, and these options would have been hard for most to resist. Assuming that, in 10 years, Hela Clothing’s valuation would be $100 million, a one percent stake will be worth $1 million, a huge windfall. Gomes, who had purchased a 17% stake for himself, was able to lure the industry’s top talent.

Gomes headed MAS group’s Intimate cluster, which reported $500 million revenue when he retired in 2015 after 25 years. He has a cult-like following, and many loyal to him joined Hela just for the opportunity to work with him.

McVey had plans to list the company when it reached the $300 million revenue mark. He wanted to buyout an international fashion label to solidify Hela as a significant player in the global apparel industry. The share options, mergers and the IPO would have diluted investors, a bet investors were willing to take so that the company grows fast. Under the restructured board, the focus is to stabilise the company. “We are still open to taking Hela public, if and when the opportunity arises,” a member of the board said. The new investors have agreed to make the same allocations under the same conditions. Those who left Hela continue to hold their options.

The infusion of $10 million by the new investors also meant that it was time for Gomes to take a bow. He sold his small stake at Hela to the new investors. “I felt this was the best option since I was way past retirement age,” Gomes said.

GOMES HAS HAD his success at MAS and took a shot at building a legacy at Hela. It was critical that he did it quickly, but his dare didn’t pay off. The $300 million revenue target for 2020 was pushed back to 2023. He had planned to retire after Hela reached $400 million in revenue. After initiating the restructure at Hela, he knew he didn’t have the time to build an industry giant.

“I’ve reached that stage in life where I want to be with my family and do all the things that make me happy. I want to enjoy life to the fullest.”

“But I won’t be tending roses. I also have other interests that will keep me occupied,” he says.

Gomes was recently appointed the Honorary Counsel of Georgia. He also serves on the board of listed Nestlé Lanka Plc and is chairman of the Colombo School of Business and Management. “I love teaching and mentoring young entrepreneurs and want to spend my time doing more of that,” he says. His pet passion boxing will continue to have his devotion. In April 2019, Gomes was appointed to the International Boxing Association’s Women’s Commission. He was also named to the Asian Boxing Federation to develop the sport in the region. Gomes is training pugilists aiming to win medals at the Commonwealth Games in 2022 and the 2024 Summer Olympics.

“I also want to travel. I’ve been to 85 countries and want to take that up to 100 before I get too old,” Gomes says. “That’s my future for the next couple of years.

“WE ARE STILL OPEN TO TAKING HELA PUBLIC, IF AND WHEN THE OPPORTUNITY ARISES,” A MEMBER OF THE BOARD SAID

THE TURNAROUND STRATEGY McVey and Gomes initiated quickly showed results. “Everyone is talking profit and overheads and thinking like entrepreneurs,” a board member said. Keeping employees across the group from the plush offices to the shop floor in the loop is paying off. Each employee feels she or he has ownership of the company’s success. They have access to the accounts, so feel responsible for their own P&L.

The company has halted expansion. The factory in Kenya employs 4,500 people turning out 3 million units a month and can employ 6,000 at full capacity. Its Ethiopia plant employs 1,500 people, which can go up to 3,000.

Hela was building a separate Innovations team, but this function was absorbed by its Technology division. Multiple human resources and finance divisions were also centralised, giving the board more clarity. Key management personnel took on second or third roles.

Mundane, routine work like raising purchase orders and managing supplies are now automated or outsourced.

“We need to achieve operational stability and get things right the first time, which will allow Hela to move towards the kind of operational excellence achieved by the big players,” a member of the board said.

The restructuring of the company and the trimming of the mid to top management cadre helped Hela reduce overheads by millions of dollars annually. The company now realises results from its decisions, having made its highest quarterly profit ever during the last quarter, a member of the board said, but did not give figures. The $10 million capital infusion from the new investors is not enough to retire all the debt. “Leverage is still relatively higher than we’d like, but the company is profitable enough to slowly start building reserves,” a member of the board said. “When the time is right, and we are stable, we can expand the business again.”