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Brazil Suppliers Stymied by Currency

Terry Makers Wait for Real to Flatten

Cecile Corral, Retail Editor 4 -- Home Textiles Today, June 25, 2007

Brazilian home textiles exports to the United States are taking a punch because of the currency's exchange rate.

But a group of patient hopefuls, among the major exporters of terry bath and beach towel products, are keeping an "investment," as one company called it, in the United States to remain competitive against the day that the currency pendulum swings back.

In currency trading last week, Brazil's real was 1.9175 to the dollar. It reached its highest level in almost seven years in mid-May, when it arrived at the two-to-the-dollar mark.

This is the second consecutive year the valuation has hampered business. Brazil's terry towel exports to the United States fell 6.8% over the first five months of 2007 vs. the same period last year. Through the first five months of 2006, towel exports to the United States dropped 16.9%.

The rate problem hit even Brazilian textiles giant Coteminas. Its merger with former Springs Industries tripled its sales, but the Sao Paolo-based company's profits plummeted by more than half last year. In presenting its results for 2006, Coteminas stated, "Operating earnings were strongly affected by the high production costs of plants located in the United States and by the appreciation of the Brazilian real compared to the U.S. dollar."

Karsten, a longtime bath and beach towel manufacturer and exporter to the United States, closed down its Karsten America division. Parent company Karsten in Brazil did not respond to queries from HTT, but extreme margin pressure exacerbated by the currency differential was believed to be a factor in the shutdown of U.S. operations.

In the present challenging environment, the "ideal" option would be for Brazilian exporters, like Buettner, to cease exporting wares to the United States, admitted Felipi Lorenzoni, the company's sales manager for the U.S. market. "But if the reverse happens, and the real falls to the dollar, it will be impossible for us to come back to this business."

Buettner is admittedly losing money, "like all Brazilian [home textiles] suppliers," he asserted, by keeping partnerships even with a limited group of American retailers.

But the company's attitude is to stick it out. In fact, Buettner recently renewed the New York showroom lease for its 17th floor space at 295 Fifth Ave.

"We see this as an investment for our future in the U.S.," Lorenzoni explained.

Dohler thinks it may take until late 2008 for the real's status to drop back to more historically tolerable levels against the dollar. By that time, not just a weaker Western currency but expected shifts in Asia's industry will favor Brazilian home textiles exporters.

Aldo Schnaidar, Dohler's export manager, told HTT that while the pricing gap between Brazilian exporters and their counterparts in Pakistan, India, China and elsewhere is wide, "the distance will change significantly in the next year or two when their currencies get stronger. It is true we are not competitive today, but we will be again next year, we think," he said. "So we are keeping some of our important retail relationships and keeping this train moving on the track in anticipation of that day."

To sustain even just a handful of retail programs, Brazilian exporters are tending to concentrate on mid- to high-end stores that garner the better price points.

Dohler, for example, is creating "high-class" heavy towel programs of 600 to 800 grams per square meter that beg a $13 to $20 retail ticket, Schnaidar said.

Teka is on that same page. The company was one of the first to shut down its U.S. offices, closing its New York and Florida operations in 2004.

It has streamlined its exports to the United States, explained Marcello Stewers, director of Teka, "in part because of the unfavorable real/dollar situation, in part because of the cost of doing business as a domestic vendor, and in part because of the cost of producing in Brazil versus in the Orient."

The importing side of the business is also showing similar declines. Kurt Hamburger, president and owner of New York-based Espalma/Cobra, in the past year has reduced his Brazilian bath and beach towel offerings to just 10% of its line where it once constituted 100%. Today, Espalma/Cobra's line is comprised 55% of India-made towels and 35% of Pakistan-made products.

"I've had to reorganize my imports, and I've been lucky because the Indians and Pakistanis are making magnificent towels," said Hamburger, who claims to be the first American home textiles supplier to have imported Brazilian towels to the U.S. market 40 years ago. "I feel very badly for my Brazil relations, so we still do business with them, but obviously to a much smaller extent. And they understand. They don't want me to commit suicide."

Hamburger's outlook for Brazilian towel manufacturers is bleak, he said, pointing out the advantages India and Pakistan have over some South American suppliers.

"India and Pakistan have more updated equipment that is maybe one or two years old, where the Brazilians are using 20-year-old machines," he said. "Add to that their technicians, who are trained in Europe. Every day new and sophisticated mills are popping up all over India."

To Brazil's advantage in this increasingly competitive global landscape is its proximity to the United States, which translates to "better and faster service and delivery and reliability," said Eric Vergucht, a New York-based sales representative to several major Brazilian towel manufacturers.

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