FreeSpirit & What This Means For Us

The announcement this week from Coats (owners of FreeSpirit Fabrics) was shocking in its swiftness, but the writing has been on the wall for some time, had we chosen to look at it. Coats business is dominated by its ‘Industrial’ business (around 70%) – which sells clothing footwear, threads and materials to industry. A much smaller part of the business is the Global ‘Crafts’ business – which makes and sells things to crafters, just like us.

Last Summer Coats closed it’s UK Coats Crafts business. This restructuring was an early indication that their business model was not working.  In July last year Coats posted its Half Year Results and these showed how the Craft business was performing.  It shows the Craft business was surviving on margins of ~3% in 2016 and ~6% in 2017, whereas the rest of the business was running on margins double and triple this. Then late last year, in November,  Coats posted a Trading Update which shows a decline in Coats Craft sales by 10% year on year. So in summary, Coasts had a small part of its business which was underperforming the dominant part and which was now in decline. In this light, shutting the business down maybe wasn’t such a hard decision to make.

In the trading results, there is mention of a large customer of Coats who has now started its own brand of wool and the effect that this has had on the Coats Craft business. There is also mention of the poorly performing US market. These seem a little unbelievable as the key reasons for the business failure. However, when a business fails, you will often find that the reason for the failure is something to do with the external market and never how it was it was set up, the contractual terms it had previously agreed or the way it was run.

I feel qualified to talk about business failure, having worked in telecoms for 20 years. There was a business for which the writing was on the wall, but when the wall fell on us all it was shocking and painful. With the Coats Craft business, we maybe won’t know for a while why the business really failed. The contracts with the designers would not have been inexpensive. I understand that almost all fabric is printed in South Korea so were the base products, colours and dyes really significantly different from other manufacturers? I can’t see that they were. Maybe the contractual commitments made to designers and manufacturers were so out of whack with the market that the only option was to shut down the business.

Like in telecoms, it is sad for the Coats Crafts employees, designers and the manufacturers affected, but I wonder if there will be knock-on problems for some fabric stores here in the UK.  These stores will have created there business plans for this year and next on the basis of a number of drops of new fabric collections from Coats that we would intern buy. This will not happen now, as even if the designers sign quickly for other companies, there will be a delay in production and supply of at least 6 months. So actually, our indignation at not being able to buy a fabric collection when it was planned should really be a concern for our local market, as the more fabric shops there are, the more competitive the prices will be and the more frequent and lucrative the deals will be. Now is the time to support our stores and not rely on our stash if we want our piece of the market to flourish.

 

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