San Diego Hat, an American firm which sells some of the nicest and most popular Chinese made hats on the US market, recently sold 90% of its business to a Chinese company, Mainland Headwear, for a reported $10 million. What does this mean for American hat makers? The Chinese have now in some sense cut out the middle man. San Diego has very wide national distribution into clothing stores and hat shops. San Diego has been marketing and in some cases designing the hats that it makes in China and sells in the US. They have a carefully curated collection.
Now Mainland hat is going to expand the selection. When they do, they will have much higher net margins, since US importers are usually at least doubling the price they pay to have hats made and shipped. San Diego, which makes its hats in China already, has been at least tripling. The manufacturer in China is also doubling when they produce. So now a hat that costs Mainland $2.50 to make (that they used to sell for $5.00) plus $1.00 to ship will be selling wholesale for $18.00 or more. Very nice! Of course they will still have to keep up the US trade shows, catalogs, sales people, and maybe – or maybe not – designers, so it is not all gravy.
While in the past it was a dream of American companies to establish their own manufacturing facilities, often overseas where it could be cheaper, now it is a dream come true for Chinese manufacturers to establish direct distribution in the US. A dream because in the very recent past – even 5 years ago – Chinese business people, including the heads of large firms, were prevented from coming to visit the US because of US visa issuance refusals. For instance I spoke to the head of an 500 person road building engineering firm in Shandong Province five years ago who said in spite of attempts by him and his staff, none could get US business or tourist visas.
What does this sale mean for the pricing structure? The price probably won’t drop. Mainland did pay a lot of money for San Diego that Mainland will need to earn back.
What does the company’s sale mean for competition? Mainland had sales of about $90 million dollars last year. So they are a mid sized company, but big for the hat industry. The cost of labor keeps going up in China and that is one reason Mainland is thinking about overseas markets (they recently acquired another manufacturer in Bangladesh).
Distribution of Chinese hats will be changing as Mainland and probably other manufacturers establish distribution in the US. Chinese Manufacturers don’t like to carry inventory, preferring to make only what they have already sold. But with distribution direct to stores, they will probably be willing to hold inventory. Therefore it will be easier for stores to buy a larger selection without needing to order a large quantity. Press claims that Mainland offers 5,000 different hat styles. They are well established: for instance, currently manufacturing most of Kangol’s hats and many of New Era’s hats. New Era has a stake in Mainland. This buyout will probably be a boon to stores and consumers, but tougher for competitors in the mass production / Chinese production markets.