Closeout apparel chain stakes strategy on NAFTA - Factory 2-U stores, North American Free Trade Agreement

Discount Store News, Oct 4, 1993

NOGALES, Ariz. -- Harlan M. Capin, president and ceo of Factory 2-U, a chain of 31 mostly apparel closeout stores, takes sharp exception with Ross Perot on the North American Free Trade Agreement.

Whereas Perot sees lost jobs, Capin envisions new business opportunities that would vindicate his decision to build a $7 million distribution center on the Mexican border, far from most of his stores and vendors.

If NAFTas goes through, Factory 2-U is positioned to expand into Mexico, with a 50/50 Mexican partner--as well as to supply other Mexican retailers--from the new, 288, 000-sq.-ft. DC and corporate offices it opened in this border town last December.

Factory 2-U registered its name in Mexico last year. "We're ideally located to serve Mexico," Capin said.

Passage of NAFTA also would ratify in hindsight the decision of Capin and his 14 partners, all family members, to build their new DC in Nogales, even though consultants were advising them to reduce shipping costs by building in Phoenix, 160 miles closer to most of its stores and sources of supply.

"We decided to stay local," in building the new DC on a 50-acre parcel, Capin said, even though Nogales was unable to offer any financial incentives. "We were born here. Our roots are here."

The 15 family partners include Harlan, grandson of founder Hyman Capin, and board chairman Zellie Capin, son of the founder.

Factory 2-U, operated by Capin Mercantile, is talking with potential Mexican partners who would know Mexican law and labor policies.

Passage of NAFTA would allow Factory 2-U to reverse course toward Mexican customers. Devaluations of the peso in 1976 and 1982 that brought the currency down to $3,600 pesos to the dollar (compared to $12 pesos in 1955), made U.S. goods too costly for many low-income Mexican customers, so Factory 2-U began building stores in Phoenix and elsewhere for U.S. customers. It now derives about 80% of its $100 million a year sales in non-border markets.

The Norgales DC, which replaced three smaller facilities, is a monumnet to low tech--and low wages. Skylights throughout the DC provide pollution-free light from the sun and save electricity.

Even the pallet jacks are hand-powered, rather than battery. Workers push apparel on hangers on overhead racks around the processing stations by hand--although electricity takes over to raise apparel to a storage deck.

"Everything is hand labor," Capin pointed out. "Nothing is automated." POS scanning remains at least a year away.

Low wages lessen any need to automate and were a factor in the decision to locate here.

Even obviously damaged goods find an outlet at border stores in Nogales and Douglas. Mexican-American customers are willing, say, to pay $1.99 for a pair of jeans with a broken zipper, fix it themselves and have a pair of serviceable, inexpensive work pants, Capin said.

Examples of irregulars were Arrow dress shirts, $2.99, against $24 if perfect, and Hang Ten boys tank tops, $4.99, against $10.

Factory 2-U does a huge business in third quality bed sheet sfrom Wamsutta. Either stained, torn and mended or poorly dyed, the sheets fly out of the stores at $3.99, he said.

Domestics account for 19% of sales, hard good 5% and apparel the balance. Price points for men's apparel top out at about $18 and women's, $40.

Factory 2-U expands whenever ever it can afford to open a store and operate it profitably, said Capin. Last year, it opened new units in Bullhead, Ariz., Santa Fe. N.M., and El Paso, Texas. In addition to the Kingman relocation, Factory 2-U also is considering a store in Las Vegas by year-end.

Its prototype store runs 18,000 sq. ft., with 80% to 90% devoted to apparel. About 5% goes for a Home Store department that offers table top, a small selection of housewares, some toys and cosmetics.

The recession made 1992 a tough year, with same store sales down 10%, revenues flat and no prospects for a big increase for '93.