Athabasca University

APRJ-699

Hand Knitting Yarn Industry with Reference to Unique Sources of Supply from Canada.

Prepared By: Igor Pustylnick Coach: Lucien Cortis

Date: 04/08/2006 Word Count: 15520

Executive Summary ..............................................................................................4 Introduction ...........................................................................................................7 Goals of Research ................................................................................................8 Industry Composition ............................................................................................9

Sources of Fiber ..............................................................................................10 Industrial Fiber Growers...............................................................................10 Small Fiber Growers ....................................................................................12 Artificial Fiber Manufacturers .......................................................................12

Commodity Traders.........................................................................................13 Yarn Mills.........................................................................................................13

Cottage Mills ................................................................................................13 Yarn Designers................................................................................................14 Yarn Distributors..............................................................................................14 Knitting Pattern Designers...............................................................................14 Yarn Retail.......................................................................................................15

Knitting Pattern Retail ..................................................................................16 Trade Shows ...................................................................................................16 Individual Consumer........................................................................................16

Value Chain Analysis ..........................................................................................17 Yarn Mill Value Chain......................................................................................17

Inbound Logistics.........................................................................................18 Operations ...................................................................................................18 Outbound Logistics ......................................................................................18 Sales and Marketing ....................................................................................19 Service.........................................................................................................19 Secondary Operations .................................................................................19

Distributor Value Chain ...................................................................................19 Inbound Logistics.........................................................................................20 Operations ...................................................................................................20 Outbound Logistics ......................................................................................20 Sales and Marketing ....................................................................................20 Service.........................................................................................................21 Secondary Activities ....................................................................................21

Relationship between Chains..........................................................................21 Five Forces Analysis...........................................................................................22

Internal Rivalry ................................................................................................22 Threat of Entry.................................................................................................25 Presence of Substitutes ..................................................................................27 Power of Suppliers ..........................................................................................29 Power of Buyers ..............................................................................................30 Conclusion.......................................................................................................32

Industry Issues....................................................................................................33 Child Labor......................................................................................................33 Knowledge Gap...............................................................................................34 Vertical Integration ..........................................................................................34

Gender Conflict ...............................................................................................34 Conclusion.......................................................................................................35

Organizational Concepts.....................................................................................35 Descriptive Elements.......................................................................................35

Competitive Strategies.................................................................................36 Types of Stategies .......................................................................................36 Environmental Uncertainties........................................................................36 Population Ecology ......................................................................................37 Internal Framework......................................................................................38 Internal structure..........................................................................................39

Organizational Lifecycle ..................................................................................39 Organizational Culture.....................................................................................39

Conclusion ..........................................................................................................41 Industry Outlook Predictions............................................................................42

Executive Summary Yarn craft is one of the very old crafts. First use of flax yarns was dated sometimes around 3000 B.C. Other natural fibers are also in use for at least 4000 years for the yarn creation. During the industrial revolution yarn industry has obtain its first mechanical spinning tools, making creation of wool and cotton yarns into another successful industry. In the second part of the 20th century yarns from the artificial fibers have become very popular. Their use in hand and machine knitting reshaped the outlook of the industry and involved different participants, such as artificial fiber manufactures. The ease of the machine knitting and inexpensiveness of the finished garments have turned people away from hand knitting. The craft has become stagnant with no new advancements and models. Beginning of the 21st century constitutes the latest surge in knitting. Being preceded with the decades of non-development this surge has shown the areas where North American knitting craft has voids, such as new model creation, teaching of knitting and even the image of knitter itself. Yarn industry, described in the research consists of several major building blocks:

• Sources of fiber include industrial growers, who grow natural fiber sources animals or plants for profit, artificial filament manufacturers and small hobby fiber growers

• Yarn mills, which produce yarns from all types of fibers • Yarn distributors and agents, who work with the mills to produce and

resell yarns • Creative forces, including yarn and pattern creators • Yarn retail, including specialized and non-specialized yarn retailers • Trade shows, which act as retail complement and alternative, creating

convenience for retailers and consumers alike. Examination of the industry value chain shows that it is presently broken into two disjointed chains, one for the yarn mill and one for the distributor. The main reason for this is time and financial separation between a mill and a distributor, forcing distributor to become a customer of the mill rather than a part of the outbound logistics. Five forces analysis of the industry shows that this is at the present time a buyer industry. It is driven solely by consumer demand and power of buyer is the strongest. Analysis of distribution component of the industry also showed that distribution in the present shape is very ineffective for both retail and manufacture components. It is predicted that larger number of the smaller

dedicated distributors will soon appear. These distributors will be tied to specific manufacturers and will become part of their value chain. The industry will also become a two-tier one. Seller analysis shows that value driven sellers will move their operations into the area of cheap labor in order to achieve internal economies. Driven by the economic approach larger non-specialized retailers will be forced to purchase yarn from a lower cost manufactures. At the same time established European and North American yarn mills will switch towards production of high-end exquisite yarns. Yarn industry also has several issues it has to overcome:

• Child labor is very widespread in the cotton production especially in the African countries. Unlike cocoa industry, cotton industry falls out of control by UNESCO and other organizations, created to protect children

• Vertical integration in the industry has been both a curse and a blessing for it. Integration between the mills and the retailers is beneficial for the industry because it clarifies a value chain and provides savings to consumers. Vertical integration between distributors and mills causes raise in price of the yarns with limited added value

• Knowledge gap, created in the 80s and 90s broke continuity in the knowledge passing between different industry participants. As a result, people have been setting different goals for knitting other than the ones accepted for centuries. It may on the long run cause severe deterioration of the craft values

• Gender conflict is very prominent in the industry. While majority of knitters and retail outlet owners are women, distribution and agency is practically 100% controlled by men. Two gender groups and subsequently business units they operate pursue different goals. On the long run it can also lead industry away from the values it has been cultivating.

Observation of the knitting industry shows that retail component of it has created a population ecosphere, very similar to the one we can observe in nature. Large and small retailers can coexist in the same ecological space, but retailers of the same size tend to protect their habitat and create localized monopolies. Yarn industry is a routine industry. Both yarn mills and distributors use plenty of low skilled labor for their monotonous operations both in spinning and warehousing. At the same time specialized retail is still a craft industry, where participants must be both salespeople and craftsmen. The research concludes that industry is still very immature. Recent surge of interest to knitting will help to speed up maturity of the industry components and force integration of two disjointed value chains into one. Research also predicts forming of two-tier industry with the cheap artificial fiber segment moving towards the areas of cheap labor and natural fiber segment staying in Europe and North America. This separation will also separate retailers to quality and value driven

groups. Smaller retailers will force to close if they do not switch towards value driven segment.

Introduction Textile industry and textile related crafts are as old as the civilization itself. There exists scientific evidence that the first fabrics were used by Egyptian nobles prior to 5000 B.C. The first fabrics were woven out of flax fiber and used as draping. Knitting was introduced also in Egypt around 3000 B.C. Majority of the fabrics historians are convinced that knitting techniques were mere emulating of the ones used to create fishnets. Natural fibers other than flax were introduced in the interval between 2600 and 3000 B.C. Wool, silk and cotton are the most widespread natural fibers. Use of cotton and wool surpassed flax very soon after knitting was introduced because both wool and cotton are more suitable for fabric creation by way of knitting. Creation of the mechanical and later automatic weaving and knitting machines removed the necessity for hand knitting and weaving as a trade. Vast majority of garments produced in the 20th century were made using machines. These machines became so sophisticated that they can easily emulate complicated knitting patterns such as cable or lace. Invention of the man-made threads in the 40s and 50s of the last century diverted the efforts of the yarn manufacturers towards creating acrylic and nylon fibers. Widespread use of these fibers in the clothing industry of the 50s and 60s have prompted subsequent introduction of hand-knitting yarns made of acrylic, polyester and nylon. Creators of these yarns advocated their use based on the higher durability, longer service and cheaper prices. As the use of these yarns became more widespread, proponents of these yarns have found another argument towards the use of man-made fibers – their hypoallergenic nature as compared to woolen yarns which were used for heavy outdoor knitted garment production. Use of the low quality cheap wool, shorn mainly from the meat breeds, has indeed lead to creation of coarse scratchy yarns, which were very unfavorably compared to their man-made counterparts. As a result of heavy campaign against the natural wool yarns, majority of baby and children yarns are produced out of acryl and polyester fibers. During the last quarter of the 20th century the craft was out of the mainstream fashion trends. While it had never been completely abandoned, the image of a knitter was reduced to “yarn twisting granny”, which knits out of habit and rarely cares about the quality of the outcome. Although young girls of the described generation still learned how to knit, they haven’t used their skills for garment creation. “Knitting exodus” coincided with the surge in globalization of economy. Garment creation and textile industries were generally moved to the areas with cheap

labor, which in turned cause reduction in prices of finished goods. Ability to buy a trendy garment for an affordable price constituted the end of necessity to knit for majority of the middle and lower class consumers. During the last 5 years the industry has seen the surge in demand of the hand knitting yarns and crafts. With the increase in demand, yarn mills and spinneries increased production of the threads, which can be used for hand-knitting and hand-crochet. Knitting has become an element of high fashion. Knitted garments are now produced for exclusive use in the TV shows and magazine ads. Lack of interest to knitting in the 80s and 90s of the 20th century created even larger gap in knitting fashion. Continuity largely existing in the textile haute couture is not seen in knitting. The industry still thrives on the models created 35-50 years ago. Outdated and generally cumbersome, these models are not appealing to the younger generation of knitters. Continuity in any community, whether it is social or industrial, creates prominent figures, who earned respect by the community members. These communal celebrities usually have schools of followers, to which they transfer their knowledge thus creating a basis for the contiguous industry development. Lack of need for those leaders created a certain “prominence void” in the described industry. Present surge in demand for the yarns and appearance of new knitters is somewhat unexpected. It appears that both yarn and satellite industries were unprepared for this raise in demand. The fragile state of the industry poses questions about its stability, viability and status. Present elements of the industry are not accustomed to this demand. This research will observe the industry and attempt to make conclusions over potential sustainability of the industry in general and some of its elements.

Goals of Research The main goal of this project is to analyze the state of the industry, which caters to knitters and crocheters. It is important for this project to establish the existence of the industry trends and shortcomings. Analysis of the general trends of the mentioned industry must be accompanied by the so-called micro-trends, which exist in its segments. On the macro level the main subject of the research is yarn manufacture industry and yarn retail industry/community. On the micro level the research will observe trends at the various stages of yarn manufacture and retail as well as such supplementary activities as pattern design. Completed research must answer the following questions, which are important to this particular industry, such as:

• Do opportunities in this industry exist? • What are the main building blocks of the industry?

• Is it viable and can sustain itself beyond the existing knitting frenzy? • What are the main issues in the industry? • What are main organizational and community trends on macro and micro

level? This research is a rare comprehensive glance into the yarn industry. Main segments of this industry were for the long period of time considering themselves as completely independent from each other. Creation of the comprehensive picture will join these segments together and show the existence of one complete industrial entity, where all segments is dependent on each other. Connections between the segments, cultural and economic differences must be explored in order to create one all-inclusive picture of the industry. This picture can be a first step towards eliminating these differences and creation of the cohesive industry outlook, which will benefit all participants. Another important goal of this research is to apply several existing industry wide organizational and value models to the elements of the industry described before. Application of these models will help to separate common elements and create recommendations based on the proven organizational and operational concepts. Few participants of the industry, such as large yarn manufacturers, distributors and large retailers may be applying these models already. Application of the models throughout the industry will help leveling the competition field and aid smaller organizations in their competition efforts. A sad sidebar of this research is discovery of the ineffective elements in the industry and provision of recommendations for their fix and/or elimination. It is important to keep in mind that proposed measures will be consistent with the ones presently accepted in the other industries.

Industry Composition The following chart represents the full outlook of the yarn industry from the source of the goods to the consumers. The research is limited to the participants, which are operating within the boundaries of the industry. Omitted elements include factories, creating raw materials for creation of the artificial filaments and their suppliers, for example. Product creation goes from top to bottom. Raw materials or product ingredients are shown at the top, whereas individual consumers are presented at the bottom. Several entities in this diagram are acting in multiple capacities, for example, pattern creators and yarn distributors may appear to the retailers and individual consumers as yarn manufacturers because they make an effort to conceal the origin of the yarn.

Fiber Growers (Wool, Cotton,

Flax, Silk)

Commodity Traders

Yarn MillsYarn Designers

Artificial FilamentManufacture

Dye Manufacturers

Yarn Distributors Knitting Model/Pattern Designers

Yarn Retail

Cottage Mills

Trade Shows/Marketplaces

Small Fiber growers

Individual Consumer

Sources of Fiber Yarn industry utilizes multiple fiber sources. There are two main sources for the natural fiber: industrial growers, shown as fiber growers on the flowchart and small fiber growers, shown in the top right corner of the flowchart.

Industrial Fiber Growers Industrial fiber growers are large operations, growing animals or plants for fiber production. They are active at the commodity markets and practically inactive in

the other stages of the process, such as yarn production, patterns etc. farmers, producing natural fibers in the industrial quantities are usually located in the areas, mostly suitable for this kind of production. Growers of cotton are located in warm climate countries with the abundance of cheap labor. Among the large producers of cotton are African countries of Mali, Zimbabwe, Egypt, as well countries of Southern Asia and former Soviet republic of Uzbekistan. Growers of wool are located traditionally in dry and warm areas. Majority of wool production is concentrated in Australia and New Zealand. South American countries started to play larger role in the fine wool markets, especially countries with dryer climate, such as Argentina, Uruguay and Chile. Globalization forced industrial countries to shrink or eliminate wool growing industries. Countries such as Germany, Great Britain and Italy have very limited wool production, mainly by the smaller growers. The reason for the decrease of production in the mentioned countries can be attributed mainly to the globalization of economy and increased labor costs in these countries. Growers of silk and flax are presently localized to very small areas of the planet. Both of these materials are considered exotic when the yarn industry is concerned. Silk production is local to China and Southern Asia due to the conditions in which silk worms must grow. Flax production is dependent on the climate conditions of the area. Majority of silk growers are located in cool and moist areas, where summer temperatures do not exceed 20-25C. Russia, Ireland and Scandinavian countries are large producers of flax fabric and flax threads. Because of the relative scarcity these two products are expensive and are rarely used to produce a knitting thread containing 100% of them. With the resurgence of knitting and increased demand for knitting yarns industrial fiber growers have turned to the other sources of animal fiber. Alpacas and llamas are very popular among wool growing farmers today because of the following reasons:

• Lanoline, found on the sheep fleece, is one of the strong allergens. Alpacas have no lanoline glands therefore the yarn, spun of their hair can be used by those allergic to wool

• Alpacas yield 8-10lb per animal per shear whereas average sheep yields close to 5lb.

• Fine fleece sheep breeds such as Merino, Cormo or Leicester have shown increased coarseness of fleece when bred and kept in the areas of high humidity. Merino sheep brought up in Ontario increased coarseness from 20mi to 29-31mi. Alpacas produce fleece, compared by quality to a very fine sheep fleece (20-22mi) in the areas of relatively high humidity, such as Southern Ontario. Using these animals means expansion of industrial fleece growing into these areas.

These factors made alpacas very popular fleece source. Population of alpacas in Canada has doubled in the last 5 years and is close to 200,000 heads

Small Fiber Growers Small fiber growers are usually enthusiasts of the certain animal breed and/or crop, who work to better the source of fiber. Main difference between industrial and small growers is that small growers are usually involved in various stages of making yarns and have at least partial control over the process. In Canada majority of the small fiber growers are growing animals, which are a source of fine animal hair, such as unique breeds of sheep, alpacas, angora goats and rabbits, and so on. Canadian small growers have been producing of several new and very innovative sources of fiber. Maritime Provinces and Nova Scotia in particular was a producer of Hemp yarns since 1997. Hemp is known particularly to sailors as a source of strong durable fiber, used for twining ship ropes. Yarn industry has discovered hemp as an alternative to flax. Hemp is easier to grow, then flax. It can grow in the regions with cheaper labor sources, thus the cost of the yarns produced from hemp are generally lower, then the ones for the flax. Musk Ox yarns are popular at the high north. The connoisseurs of fiber say that Qiviut or Musk Ox undercoat is about 12mi in diameter, which makes is the finest source of yarn on the Planet. This yarn is generally used in the garments, which are in direct contact with the skin, such as mittens, scarves, hats and even underwear. Musk Oxen are very difficult to grow and they yield only 5-7lb of Qiviut per animal. When compared to the animals, producing the same quality of yarns, such as alpaca, musk oxen are harder to keep and to maintain. Majority of these farmers produce their own yarns, based on the fleece they collect or shear from their animals. The dotted line on the flowchart shows that yarn is returned from the spinneries to the small growers for dyeing and reselling.

Artificial Fiber Manufacturers Artificial or man-made fibers are used in knitting threads from the beginning of the 20th century first man-made fiber is rayon (viscose), which is produced our of paper pulp. Return of knitting to the mainstream has opened door to the rayon manufacturers to enter into the yarn making process. Majority of cotton manufacturers today make rayon containing blends. Rayon yarn is often used by those knitters who are allergic to wool as an alternative to cotton. Global availability of the source has pushed manufacturing of Rayon to Southern Asia and China because of the cheaper labor costs in the regions. Acrylic and polyester threads are two other alternatives to natural fibers. They are produced since the 60s. Acrylic yarns and garments are very popular among North American consumers because they require less care and are generally less expensive than the ones made out of natural fibers. Large chemical and pharmaceutical plants, such as German Bauer now produce acrylic threads. British company Courtelle specializes on acrylic fibers for all uses

and industries. Large British yarn mills, such as Sirdair or Stylecraft use Courtelle acrylic in many of their yarn brands.

Commodity Traders Natural fibers sources such as wool or cotton are considered commodities. They are traded in the commodity stock exchanges. Wool and cotton traders perform dual role. They shield the sources from the consumers of raw fibers as well as control fiber adherence to the local regulations. European wool traders serve as suppliers to the factories and mills. They guarantee that wool they supply has passed EU sanitary control successfully. These traders also channel wool from less expensive sources to Europe. Italian mills now started to use Uruguayan wool instead the one from New Zealand due to lower transportation and labor costs.

Yarn Mills Yarn mills are a cornerstone of the yarn industry. They are a manufacturing element of the yarn industry chain. Yarn mills can operate in two different modes:

• Process only mills operate with the yarn supplied by an agent or a distributor. They process yarn and receive payment for the service. These mills are disconnected from the other elements of the product flow. Italian yarn industry has several no-name process mills in the northern provinces of the country. Smaller agents make orders to these mills and act as yarn manufacturers for the rest of the industry. Very often consumer does not know which mill produced a certain yarn and treats agents as manufacturers

• Process and Sell mills are more common in North America and Great Britain. They purchase the sources of yarn, produce yarns and perform their own distribution. Already mentioned Sirdair as well as Canadian Spinrite Ltd are examples of this approach. By bypassing the agencies these yarns create direct link with the buyers. The tradeoff for this approach is the necessity to have own distribution centers and deal with the smaller buyers.

Cottage Mills Cottage mills are small versions of the yarn mills. They service small fleece growers and/or produce their own fleece. Cottage mills are very popular in North America because they give opportunity to artisans to create their own unique brand of yarns. These mills are often family operated. Small alpaca and sheep farmers in Canada very often have their own mills (spinneries) and own the whole process from fleece to consumer. Unique yarns, such as qiviut and alpaca yarns are processed mostly at the small cottage mills. The main reason for this is that smaller mills have higher yields of yarn per pound of fiber (80-85% of original weight), whereas larger mills are often satisfied with 65-75% yield.

Yarn Designers The growing demand for the novelty yarns has been attributed to the success of yarn designers. Many of the European and North American yarn designers produce multiple yarns each fashion season. European designers try to operate with natural fibers and blends. Designers such as Katia, Gedifra, BBB and others are known by their colorful merino wool yarns. North American designers work more with the artificial fibers. Canadian Estelle and American Berocco specialize on polyester and acrylic novelty yarns. The difference in fiber sources is attributed to different requirements to garment care in Europe and North America. There is also a difference in perception between the designers in two continents about the use of the yarn. North American consumers use knitted garments mainly as fashion elements, often comparing knitted scarf to jewelry. For European knitters elegance is as important as the pleasure of wearing the garment is also very important therefore they use yarns with medium to high content of wool or cotton. Overall yarn designers dictate the trends in the yarn industry. They always work in cooperation with the mills. Yarn designers are also influential in what colors will be used in a certain season. They make their recommendations to the mills on which dye colors will be used and in which quantities. Canadian Spinrite has yarn designers on staff and it helps factory to facilitate new yarn creation and be abreast with the new trends.

Yarn Distributors This group of industry participants is more common in North America. The members of this group did not produce any yarns until recently. They import the yarns and sell them to the retail stores. Canadian yarn market has several major distributors such as SR Kertzer, Diamond Yarns, Coats and Clarke etc. Canadian distributors work directly with North American and foreign manufacturers. The main condition for the distribution is exclusivity of distribution rights. Canadian yarn retailers associate yarn brands with the certain distributor, for example Stylecraft is distributed exclusively by SR Kertzer, Lana Grossa by Diamond Yarns, TLC by Coats and Clarke etc. Quite recently distributors of the yarns started to distribute yarns under their own labels. This trend is very new and it is unclear whether distributors are benefiting from it or just exploring the new market opportunities.

Knitting Pattern Designers Resurgence of knitting industry and influx of new inexperienced knitters into the craft has increased necessity in new patterns. Knitting patterns or models are detail descriptions (recipes) of how to produce a certain knitted garment. Designers are not a uniform group. There are fashion knitted garment designers such as Kaffe Fasset, Debbie Bliss etc. The other side of the specter represents

simple garment designers, some independent and some affiliated with the yarn producers. Lately pattern designers started producing their own yarn labels. Very often these yarns are just re-labeling of the existing yarns from the large European yarn mills. Re-labeling allows these designers to concentrate their effort on their own yarns and act the yarn manufacturers/distributors. The dotted line on the flow chart, directed from the mills to the pattern designers reflects a production/distribution option.

Yarn Retail This is the most volatile and diverse element of the yarn industry. We can roughly separate several subgroups in this large group:

• Large specialized retailers are a group of yarn stores, which carry 100 or more yarn articles. This group has a lot of influence on the yarn import and distribution. The members of this group are largely passive and do not expand their operation. Majority of these retailers were in business for over 20 years and have established clientele, which is relatively loyal to them.

• Middle size specialized retailers, who carry 50-70 articles of different yarn brands. This group of retailers is active in retail and trade shows. Members of this group have enough financial resources to look for the new opportunities and expand. Members of this group are active participants in the trade shows and various knitting guilds.

• Small size specialized retailers are usually startups attracted to the business by the recent growth in the yarn demand. Retail outlets of this group usually carry 10-40 different yarn articles. These retailers specialize in the exclusive articles and brands which are too exclusive or expensive to be sold anywhere else. Members of this group participate in the local specialized shows but have no capacity to expand their participation.

• Large non-specialized retailers such as Wal-Mart, Zellers, Michael’s etc. now carry a variety of yarns. Because of the large scale of operation these retailers can only work with the large mills, such as Spinrite or TLC. Their assortment of yarns is uniform throughout the chain with very few differences between the chains. These chains benefit from opportunities to achieve significant economies of scale and pass it to the consumer. Resulting low prices become a benchmark for the rest of the retailers which very often leads to discontinuing the sale of these brands by the smaller retailers.

• Increase of the knitter customer base opened the opportunity for the retailers of the “adjacent” products to enter yarn retail business. Fabric and embroidery stores have recently become retailers of yarns. These stores usually dedicate small amount of the store space to yarns and treat yarns as a supplementary product offered to their customers, who knit as well sew and/or cross-stitch.

Knitting Pattern Retail Every knitting retail outlet carries a variety of patterns. North-American knitting pattern market is as big as the market of yarns. Many knitters require patterns describing garment from start to finish, similar to a cooking recipe. Other smaller group of knitters can be satisfied with just a vague description. Knitting yarn retailers require distributors to supply yarns and patterns as a package. As a result both distributors of yarn and yarn agents employ a staff of designers, producing knitting models and descriptions for every yarn article agent or distributor sells. Computerization of the yarn industry has resulted in creation of specialized software, used to design knitting models. This software is in demand especially among the younger inexperienced knitters.

Trade Shows Trade shows is a significant element of the yarn/knitting industry. They create opportunity for the smaller remote retailers to offer their products outside of their immediate area of operation. Small fiber growers and cottage mills offer their product at the specialized trade shows such as spinning and knitting festivals. Larger companies tend to participate in more established shows, such as “Stitches” in the US and “Creative Sewing and Needlework Festival” in Canada. For many retailers these shows are also an opportunity to find new suppliers, establish business contacts and act in agent/distributor capacity with respect to the other retailers. Large trade shows such as CSNF tend to attract customers from the other towns and provinces. Scarcity of these shows guarantees their success in the chosen region. Small growers prefer to sell yarns at the trade shows. Producers of the unique yarns, such as quivit, hemp or Canadian alpaca do not produce enough yarn to be affiliated with the large distribution chains. Majority of the growers attend 8-10 shows a year, which lets them sell about 70% of their yarns to the general public. The rest of the yarns are usually sold through their own stores or on-line if the farms are located in the really remote areas Unique yarn designers and fiber growers tend to attend non-specialized shows as well. Companies, like Philosopher’s Wool from Inverhuron, ON participate in ‘One of a Kind’ shows, where designers can offer unique finished products. Many products are also offered at the Outdoor Shows, where customers come in search of products, suitable fro trekking, kayaking and other outdoor activities.

Individual Consumer Individual consumer is the most important element of the industry chain. Apart from purchasing yarns and knitting patterns, industry consumers provide a very

important feedback about the quality of the yarn and other supplies. Cultural differences existing from region to region dictate retail to offer consumers different yarn color palettes, yarns of different composition (North American consumers prefer acrylic to wool whereas European consumers prefer natural fibers) and different knitting patterns. North American knitters prefer automatic laundry and require the yarns, which can withstand this process. As a result, majority of woolen yarns sold in North America today are treated with super wash agent to prevent shrinking during wash and dry cycles.

Value Chain Analysis Michael Porter introduced value chain model in the early 80s in order to show dynamics of the value flows though various parts of the organization. Value Chain distinguishes two different types of activities in the organization, namely primary activities and secondary activities. Primary activities are activities, which has direct input into the value flow and/or directly benefit from it. These activities are:

• Inbound Logistics • Operations • Outbound Logistics • Marketing and Sales • Services

Secondary activities of the organization do not have a value-add component. They mostly support primary activities in different forms. These activities are:

• Infrastructure activities, including accounting, finance, management, etc. • Human Resources management • Technology, Research and Development • Procurement

In the total scope of the industry we can distinguish two separate value chains, such as Yarn Mill value chain and Distributor Value chain. Third major component, retail, can come in many different variations from a single owner ‘corner store’ to large non-specialized retailer. This makes it very difficult to construct a uniform value chain for a retailer. Construction of this value chain is out of scope of the research.

Yarn Mill Value Chain Yarn mill generates value by transforming sources of yarn, both artificial and natural, into the final products. Major sources of income for yarn mills are sales of finished products in the form of yarns and/or fleece rovings (product mode) as well as processing of raw materials, purchased by agents (service mode).

Difference between two modes will be discussed during the description of the primary activities.

Inbound Logistics Yarn mills get input through several sources, such as:

• Commodity agents and traders are main source of input for the natural fibers, such as cotton, wool and so on. Traders make sure that the products adhere to sanitary and industrial specification of a country or a region, such as EU. European traders concentrate inflow of fleeces from different sources and sort them by the quality of the fleece. Sheep fleeces, for example, are graded based on the length of the hair and thickness of the hair in microns. 28mi fleece with the length of 3” will be priced equally throughout the market. Optimization of the inbound delivery process is often reduced to choice of transportation and date of availability of a certain grade fleece because all other components are relatively equal.

• Large artificial fiber factories are major suppliers of the artificial filaments. Inbound logistics must take into consideration price of the fiber, availability of necessary supply as well as required qualities of the artificial fiber such as softness, elasticity etc.

• Fleece and artificial fiber purchased by yarn agents and delivered to the mills for processing. In this case mills inbound logistics must take into consideration the condition of the natural fiber (presence of hay and burs, pollution etc.). Different conditions may require longer/shorter processing time and may be beneficial or detrimental for the mill operations.

Operations Yarn mill operations are the major component of value creation. Transformation of raw material into yarn requires multiple steps, which may differ from mill to mill. It must be noted that although the process of yarn creation is well established every mill has its own know-how elements it applies throughout the process. Different equipment creates yarns of different thickness. Several older mills in the US and Canada are not able to produce thinner yarns. Using different bleaching agents and dyes also yields different results. Very often dyeing process is one of the most carefully guarded processes at the mill because it becomes a main differentiator on which colors and shades of yarn the mill can produce.

Outbound Logistics Yarn mills try to reduce the importance of the outbound logistics by entering into the exclusive distribution agreements with distribution firms. These agreements are very popular in the operations spread across the ocean, such as Australia-North America or Europe-North America. North American mills, such as Spinrite and Red Heart have their own distribution centers. They forgo distribution while dealing with the large retailers such as Wal-Mart or Zellers and serve these retailers directly. In this case effectiveness of the outbound logistics becomes an important component of the overall value chain.

Surge in knitting craft and lack of high quality yarns forced few of the knitting pattern creators to create their own yarn brands to supply with the patterns. White label branding has become a part of the outbound activities of the yarn mills.

Sales and Marketing Sales and marketing of the large yarn mills work in several ways. Mills always search for the new channels of yarn distribution. At the same time marketing of yarns is often done at the large trade shows, where any distributor or retailer can get acquainted with the latest yarn trends from all major yarn mills. These shows often serve as a marketplace for wholesale contracts. Major European yarn producing countries, such as Italy and Germany have several of these shows a year Processing component of any mill business also requires sales and marketing of yarn making services. Smaller mills and cottage operations have 70-80% of their operation dedicated to services.

Service As it was mentioned in the previous paragraph, mills offer variety of services. Depending of the desired outcome mills can perform custom spinning, carding, dyeing of the yarn and just washing of the raw fleeces. Value added component of the services is tightly connected to the one of the operations and often shares the same production lines. Very often mills do not distinguish between own production and spinning yarn for hire.

Secondary Operations For yarn mills R&D is the most important secondary operation. R&D develops new yarns in cooperation with the yarn designers, creates and maintains new more effective processes for all stages of yarn production. Washing of animal fleeces for a long time was done manually. New advancements in washing machine technology made possible to create an apparatus, which did not loose large percentage of fleece thus making machine-washing the fleeces possible. Another area of advancement is creation of new yarn dyes and enhancement of dyeing techniques. Yarns, dyed in the old mills with the outdated equipment are often hard because they must be extensively bleached. Bleaching used to be required so that different shades of animal fiber could be dyed in the uniformed manner. New yarn dyes cover yarn better than older ones, so that it appears to have a solid uniformed color.

Distributor Value Chain Distributors are often seen as an extension of the outbound logistics for the manufacturer, in our case yarn mill. In the yarn industry distributors must be viewed as a separate entity because they very often distribute products from several mills. At the same time distributors get into agreement with yarn agents,

who produce their own yarns. In North America it is also common that distributors are involved in distribution of so called re-branded yarns, which carry brand names of a famous pattern designer or other non-manufacturing entity.

Inbound Logistics In the yarn industry distributors can both purchase the products and serve as a sales channel between the yarn mill and the manufacturer. European yarn mills and agents prefer to sell the yarn on the spot. ‘Due on receipt’ terms require from distributors significant initial investments. At the same time these terms allow distributors to purchase products at much more favorable prices. Because of the necessity to purchase yarns upfront, distributors often strive to optimize inbound logistic component. Different modes of transportation (water, air, highway, etc.) have different transportation costs and levies. At the same time distributors must take into consideration such parameters as time-to-market, demand for a delivered products etc. Consideration for these parameters often dictates the choices made by the inbound logistics component.

Operations Operations of the distributor are not as complicated as the ones of the yarn mill. Distribution companies are often warehouse oriented. Majority of the operations are directed towards more efficient distribution of yarns to the clients (retail stores). Recently distributors started to design and manufacture their own yarns and knitting patterns. Purchasing of yarn components, production and labeling are activities, which are relatively new for yarn distributors.

Outbound Logistics From all aspects of distributors’ business, outbound logistics is the most sophisticated and at the same time the most important component. Large distributors deliver yarns to hundreds of stores in their immediate area of operations. Large Ontario distributors, SR Kertzer and Diamond Yarns work with 90+ percent of specialized knitting stores in the province. Outbound logistics for each distributor includes warehouse operations and delivery. On-time delivery is important especially during peak knitting season. Failure to distribute products on time as well as logistics errors usually force customers away from a distributor and have negative effect on distributor’s business.

Sales and Marketing Distributors have very large commissioned sales force. Distributor’s profit margin is very small (20-30% as opposed to 80-100% for a retailer) thus majority of distributor’s sales force is usually commissioned. In order to maximize value of sales distributors make effort to sign retailers to long term contracts. In this case they do not require contiguous sales efforts, which helps them to reduce sales related expenses.

Marketing division of a distributor creates and maintains distributor’s presence in the market place. Successful branding is often a key to success. New distributors, using a model, which is similar to the existing ones, cannot penetrate market quickly because they are unknown to the majority of retailers. In order to increase visibility distributor’s marketing personnel participates in wholesale tradeshows for the purpose of obtaining new sales leads. At the same time marketing representatives of the distributors frequently attend retail trade shows as observers. Large distributors often advertise in the yarn and knitting magazines, such as Easy Knitting, Vogue Knitting etc. These ads feature retail stores, which work with the advertising distributor. Although these ads incur a lot of extra costs they pay off because end consumer can trace distributor-retailer-product chain and shop for distributed yarn at the featured retailer.

Service Nature of distributor’s business does not leave place for services. There is no service related value add in the distributor operations

Secondary Activities Successful yarn distribution business places a lot of emphasis on infrastructure. Variety of choices at the yarn market and immediate availability of substitutes make relationships between distributor and retailer very fragile. In this situation distributor must keep its infrastructure, such as accounting, IT, etc in good shape and make no operation related mistakes. Close-knit character of knitting retail, where majority of smaller retailers know each other, maintains or destroys reputation of any distributor very fast. Procurement is another important component business for any distributor. Yarn warehouses must have specific shelving and ventilation in order to maintain yarns in sellable shape. Distributors often invest into the gadgets, which help maintaining mentioned conditions in the warehouse. Taking into consideration limited financial resources of a distributor, procurement must pay a very important role.

Relationship between Chains In many other industries these two chains would have been one single value chain, starting from procurement and delivery of raw sources and ending at delivery to retail. The main reason for separation of these parts is the character of their relationship with each other. More often than not distributors purchase yarns from the mills acting as customers. When branding their own yarns distributors sometimes purchase their own raw sources and give it to the mills for processing. Mills and distributors make effort to create long term relationship. At the same time distribution failures do not affect mills as much as they affect distributors.

Failure to sell specific yarn at the certain market does not put a strain at overall relationship. From the other hand distributors have very little input in the process of the yarn creation especially if yarns and distribution are at the different continents. Although both value chains are heavily intertwined they cannot be considered one chain because of supplier-consumer relationship. This means that industry does not have a conventional distribution mechanism.

Five Forces Analysis ‘Five Forces Analysis’ is often used to analyze internal and external trends in the industry as well as entry and exit barriers. All relevant principles, used in the analysis are drawn from the microeconomics. The forces to be reviewed are:

• Internal Rivalry between the firms of the industry • Buyer Power • Supplier Power • Entry barriers • Substitutes and complements to the main product

This analysis will be performed for the ‘lower’ portion of the flowchart, from the yarn mill to the consumer because this portion constitutes the industry segment of its own with the sellers and buyers clearly defined.

Internal Rivalry Factor Characterization Future Trend

Degree of seller concentration

Yarn mills are large enterprises with high degree of specialization. European yarn mills attempt to specialize in high quality high end natural fiber products. The mills in the developing countries, including India and China are producing lower quality natural fiber yarns and artificial fiber yarns. Main differentiator is the price of the finished goods, which differs significantly between two described groups of mills.

The price gap will continue to widen. Majority of the acrylic and polyester yarns will be produced in the countries of Southeastern Asia, where labor costs are much less than in Europe and North America. Mills, producing artificial fiber yarns in Europe and North America will have to close or re-profile to produce exclusive high quality yarns

Rate of industry growth

Growing demand in yarns did not warrant the growth of the yarn producing sectors. At the same time we see large number of new yarn distributors, importing yarns to North America from previously untapped sources.

Competition between distributors will increase. It will not be feasible to sustain retail growth on the long run. If and when the knitting frenzy subsides the shrinking of the market will cause disappearance of few

distributors and mergers among others

Excess capacity

Presently the mills do not operate at full capacity. It is possible to place an order in the mill in Italy and get the yarn spun and dyed within a month, which is a normal timeframe for yarn creation

Yarn mills of Eastern Europe and the former USSR are practically not used yet. The abundance of cheap labor force and access to the new dyeing technologies can make these mills very competitive and create extra capacities.

Cost structure and sensitivity to capacity utilization

Majority of the large mills must operate on the large production scale. Minimum orders in the European mills exceed the needs of any individual retailer. Many small distributors cannot afford to order full production batches in multiple yarn colors.

Dyeing process in the large mills requires large order quantities. In order to keep economies of scale mills need to forgo small orders. Two trends are equally possible: appearance of the new smaller/leaner players on the market or substitution of the highly priced product, i.e. spinning and dyeing will be done in the different places.

Product differentiation

At the moment there is a variety of products on the market. Any reasonable size retail outlet carries 50-80 articles of yarn in different colors. Terms by which individual customers sometimes differentiate products differ from the intensions of the industry. This trend is more visible in North America than in Europe, where consumers are more knowledgeable and have more sources to educate themselves.

It is an unfortunate trend but for any quality product, produced in Europe or North America there exists a lower cost East Asian counterpart. The number of so-called knock-offs grows in number and in quantity per article. Cheap labor and materials make these products viable inexpensive substitutes. For example, high quality yarns, such as Eros and Mexico are priced at $10-15CAD, their low cost analog Matrix made in China is retailed at $4.99CAD and even more discounted in the larger retail chains.

Buyers costs of switching

Buyers usually have limited additional costs of switching from one product to another. Substitutes or equal quality products are available. Distributors as buyers invest

The number of products is limited and when all new products are brought to market, the market itself will stall. Distributors will be pressed to stay with the

into promotion of the new products. Switch may cause them to forfeit potential benefits of selling a product longer.

product because they will not be able to find an alternative.

Can firms adjust prices quickly?

At the moment price of the yarn consists of labor costs, price of materials and supplementary costs, such as shipping etc. Any producer can control labor and supplementary costs. Adjustment of the raw material component is problematic because it is based on the prices in the commodity markets. Yarn prices are relatively stable within the industry and cannot be easily brought up or down

The situation on the market will not change in the future because of the commodity component. If the market becomes more global then it might be possible to adjust the costs by placing order with the equal quality, lower cost seller.

Large and/or infrequent sales orders

Orders from distributors to manufacturers are often large and seasonal. The goal of the large order is to offset shipment and importing charges. Orders from consumers to stores are also infrequent. They are based on the ability of the individual to accomplish the project for which yarn and patterns were ordered.

The trend will remain the same in the future because it is based on the seasonal character of knitting in general.

History of Cooperative Pricing

There are no defined cooperative prices. Stores keep prices at MSRP level for the different reasons. Distributors do not sell same products and similar products are usually priced based on the common benchmarks.

The trend will remain the same. There is no evidence that distributors will settle for a share of the same product.

Strength of Exit Barriers

At present exit price is very high among the yarn manufacturers and distributors alike. The former have invested in the equipment and continue to invest in upgrades, computerization etc. The latter usually invest heavily in the large quantities of yarn to

Today’s trend shows that the number of the distributors is likely to increase whereas the number of manufacturers will remain relatively stable. Smaller distributors will have lower exit barriers and will make distribution segment of the market more volatile.

achieve economies of scale. Exiting business will mean big losses for this group.

Internal rivalry appears fairly strong today although it may weaken in the future if more competitors exit the market or move their operations to the markets with the cheaper labor. At the same time internal competition appears to be two-tiered where high and low quality products coexist at the same market and appeal to different consumer groups.

Threat of Entry Factor Characterization Future Trend

Significant economies of scale

Yarn manufacturers, distributors and large retailers all achieve significant economies of scale on manufacture, distribution and consumer prices respectively.

This trend will increase when manufacture shifts towards remote areas with cheaper labor force. Delivery costs will increase, which will force distributors to order the products in larger batches. From the other hand cost of materials/labor ratio will increase which will force manufacturers to seek economies of scale by purchasing larger material batches.

Reputation and brand loyalty

At the moment brand loyalty is very strong and sometimes inexplicable. Consumers being offered a better quality product still choose to stay with the known brands.

This trend will remain in the future unless distributors and sellers of the new brand invest in consumer education.

Access to distribution channels

Industry distributors are forced to work in the resale rather than distribution mode. This separates manufacturers from the consumers and keeps number of distribution channels limited.

The number of distributors will increase in the future. Manufacturers, who seek alternative distributors will be able to find them easier

Access to technology

Presently incumbents in the industry have advantage over new entrants because most of the knowledge is cumulative by nature and cannot be easily transferred.

This trend will remain and access to know-how will be even more restricted than it is today. Lack of the access to the established techniques will push new entrants towards creation of low quality knock-offs

Access to favorable locations

Knitting industry is very discriminate and personalized. On a factory or distribution level is very hard to penetrate the market if relatively similar substitute is already produced / distributed in the market in question. For retailers it is even harder to penetrate existing spheres of other retailer’s influence because knitting retail is very communal and built upon personal relationships between the seller and buyer. Larger retailers can penetrate into the existing market easier because they can offer significant discounts on the same or similar products based primarily on the economies of scale.

We see new smaller distributors slowly penetrating existing markets. This trend will continue in the future. One of the most common conditions for market penetration today is celebrity status of the distributor brand. Such brands as Lily Chin, Debbie Bliss etc., are built on the name of their founder, which is a marketing brand in itself. Low price markup and slow speed of penetration for the regular distributors will be seen as a big deterrence in the future.

Experience based advantages of incumbents

Large European mills with centennial experience have advantage over newly created cheap labor mills in South and South Eastern Asia. Quality of production, established ring of supply and distribution makes these mills superior to any potential incumbents. There is a potential for the new agents and distributors to appear on the scene more frequently because the incumbents in this area are bound by previous commitments. Loyalty of the customers in North American yarn retail is very strong. Incumbent sell about 60-80% of the ordered products whereas newcomers sell close to 40% in the first three years of operation.

In the future the difference between the new and established mills will more likely lessen. Suppliers of the established mills will be interested in the new markets and will offer technological elements of the same quality established mills enjoy today. Knowledge of the tastes of customer base will give incumbents an advantage over the newcomers both in retail and in distribution. There is no significant advantage for the incumbents now or in the future.

Retaliation of incumbents towards

Incumbents are well separated from each other and do not pose the retaliatory threat to

It will be hard to unite the incumbents in any segment of the industry therefore entrants

newcomers the newcomers. will not fear any retaliatory action in the future.

There are two overall trends in the yarn industries: • Incumbents have their share of the market space, which they practically

monopolized. Attrition of retailers and distributors from their suppliers is minimal. Newcomers must offer significant price or other financial advantages to retailers, distributors or individual customers to facilitate the switch

• Industry in whole is newcomer-neutral. Newcomers can offer products of any quality in any price range without significant retaliation from the incumbents. From the other hand the incumbents deem their market share fairly safe because of the perceived brand loyalty on all buyer levels.

Due to a very recent surge in demand for the yarns in Europe and North America, we can see that industry became very amorphous and can accommodate a fair number of newcomers. This trend will continue for a while but must subside due to either lack of demand or saturation of yarn markets.

Presence of Substitutes Factor Characterization Future Trend

Availability of close substitutes

In the context of the whole industry the word substitute can have multiple meanings. With the establishment of yarn mills in the areas with cheap labor, production of low quality inexpensive substitute yarns will grow. Patons™ Cha-Cha and On-Line™ Smash are very similar yarns. The former is produced in China and has a retail price of $4.00-$4.99 CAD per 50g. The latter is produced in Turkey and has a retail price of $6.00 - $7.00 CAD per 50g. While Smash is better in quality and durability, Cha-Cha is very popular among the consumer groups, members of which do not seek any of the mentioned qualities.

The present day example is based on the yarns made of the artificial filaments. There is a growing supply of these filaments throughout the world. As the price of these filament goes down so does the price of the cheap substitute yarns, made out of cheaper materials. From the other hand, the price of the natural fibers will likely to fluctuate around the present values, which will make price of the yarns made out of them relatively high and stable. There will be no possibility to produce a cheaper substitute for the present natural yarns, made out of natural fibers.

Price-value characteristics of substitutes

Presently high end yarns made out of natural fibers carry a status equivalent to the status of natural fine furs. The substitution is possible but it will be undesirable for the

There will be more substitutes appearing in the future and their price will drop drastically. It will mean that market will become two-tiered where lower income consumer

mentioned consumer group. It is possible to substitute natural fiber yarns by their lower quality equivalents. This substitution does not lead to a decrease in value but will diminish consumer satisfaction (ex. scratchy wool)

groups will use low quality/price products whereas high end consumers will continue using original brands. This will cause even deeper drop of value of substitutes.

Price elasticity of demand

At the moment price of yarn has very limited elasticity. There is a set price for certain brands of yarn. If prices increase at the mill/agent end of the product chain distributors will not be able to match the increase and will likely look for substitutes. Relationship between retail and independent distributors is even more fragile. Availability of substitutes of the same quality and different brand can cause retailers to switch from one distributor to another.

Establishment of a two tier markets will increase price elasticity. Suppliers of the high end products will keep prices high. At the same time the number of suppliers of the high end product may decrease with the decrease in numbers of their potential clientele. At the same time price elasticity of demand at the low end market will decrease because cheaper substitutes.

Price-value characteristics of complements

Knitting techniques and tools have been virtually unchanged through many centuries. Latest boom in knitting has been accompanied with a large number of products which are complementary to the knitting. Majority of these products are relatively inexpensive but their price/value is still questionable. Such items as needles with interchangeable tips, special wool shampoos can be attractive for novices but not for experienced knitters and designers.

The number of complements will probably remain the same but they will be geared more towards the experienced knitters.

As in any other industry with the large and diverse consumer base, substitutes are readily available. These substitutes have often very poor quality and price, attractive to the low income consumers. “Original” natural fiber products, especially made out of wool and other exotic animal fibers will be reserved more and more for the upper tier consumers. Two-tier market existing today will have stronger division between lucrative and affordable yarns.

Power of Suppliers Factor Characterization Future Trend

Concentration of supplier industry

At the present state the industry dynamics resembles an hourglass. There are many different yarn growers and many yarn mills. In Europe and North America there are very few commodity traders, which deal with delivery of fleece from the growers to the mills. The other point of concentration is distribution. From the retail perspective there are very few yarn distributors if compared to the yarn retail outlets.

It was mentioned previously that there are trends to move yarn mills to the areas with cheaper labor. These areas produce a lot of natural fibers, especially cottons. This trend will eliminate the need to have traders/concentrators of the natural fibers. From the other hand, it was mentioned that the number of distributors is likely to grow in the future. This trend will somewhat increase distributor/retail ratio.

Purchase volume of the individual unit in comparison with the overall supplier volume

Individual retailers purchase very limited quantities of yarn as compared to the overall volume of a single distributor. SR Kertzer in Ontario works with more that 100 stores, each of which purchase from $100 to $10,000 CAD worth of yarns during a high knitting season (November – March).

With the increase in the number of distributors each one of them will be selling less per store.

Relationship specific investments

These investments are non-existent in the yarn industry. Majority of retail outlets are courted by the suppliers rather then opposite. Yarn mills are more inclined to deal with the specific traders because they have access to a specific fiber source.

In the future, the growing number of suppliers will lead to a higher specialization of products sold by a single yarn distributor. Mentioned exclusivity of brand supply may lead to a situation when yarns from one supplier will be more desirable by retailers and they will be willing to invest into more exclusive relationship with this supplier.

Do suppliers pose a credible threat of forward integration into the markets

Yarn mills and agents are presently seeking direct relationships with the retailers. Retailers can drop prices significantly by forgoing distribution markups.

Excess and specialization of distributors in the future will draw few of them towards the retail markets. There is a number of differences in business approach between retail and distribution, which will make this transition very

rocky. Are suppliers able to price-discriminate between different customers

There is evidence of price discrimination especially in the low-tier artificial filament yarn market. Because of the low profit yield on these yarns, manufacturers and agents are willing to accept lower profit margins in exchange for the higher volumes. It is very common among the manufacturers, who work directly with large retailers, such as Wal-Mart

Reduction in costs of artificial fiber yarns will bring prices lower and make price discrimination impossible. From the other hand, lucrative yarn markets may see larger fluctuations in price because of the exclusivity of product.

Suppliers have very limited ability to dictate prices on the markets. Move towards forward integration between manufacturers/agents and retailers may move distributors out of the market chain. Although this move appears to be beneficial for the suppliers on the short run, it may also hurt them on the long run because they will have to create their own distribution units, thus increasing their own costs and subsequently yarn prices. Benefits, which backward integrated retailers will enjoy on the short run, will be offset with the price increase on the long run.

Power of Buyers Factor Characterization Future Trend

Concentration of the buyers industry

Distributors as buyers are more concentrated than the yarn mills they are buying from. The opposite can be said about the relationship between retailers and distributors.

It was predicted that the number of distributors will increase. This will reduce the concentration of distributors and diminish influence of distributors as buyers.

Volume of buyer purchase with respect to the overall supplier volume

Distributors often seek rights for exclusive distribution over a certain territory. This makes them buy yarns of specific brands and makes in very large volumes.

Increased number of distributors will lock each one of them with the specific supplier or a group of suppliers. Distributors will be more specialized, which will bring more competition on distribution/retail level.

Do firm invest into relationship with buyers

Manufacturers and agents invest heavily into building special relationship with the buyers: distributors and retailers alike. Distributors also invest into relationship with the retailers especially new

Increased number of distributors will increase competition between brands of yarn. With the limited buyer capacity, distributors will have to make more effort to entice retailers to buy products they

distributors, who don’t have established customer base.

distribute. Increased investment in buyers may strain capabilities of certain suppliers and force them out of business.

Buyers price elasticity of demand

Presently price elasticity of demand for the buyers is relatively low. Increase in price of the product will move both distributors and retailers away from the product. They will be searching for substitutes, which will allow both distributors and retailers to keep profit margin at the present level. It is practically impossible to pass any of the price increases to the consumers of the product because they will move to the available substitutes or stop using the products altogether.

With the increasing number of suppliers and exclusivity of distribution, described above, the price elasticity will increase. Exclusive distribution of expensive yarns will create a group of products with practically no equal substitutes, which will certainly allow for more price elasticity before consumers make decision to abandon overpriced products.

Threat of vertical integration by buyers

Latest developments in the industry have shown that buyers actively seek vertical integration with the makers of the product (yarn mills) in order to reduce product costs. US company KnitPicks openly advertises products as coming directly from the mills, which would explain very low prices this company offers to the consumers of yarns. Distributors also seek integration with the mills in order to create so-called white label products they intend to distribute under their own brand name. Mentioned above SR Kertzer and Diamond yarns both have branded products they offer to retailers.

Current trend of locking suppliers with the exclusive distribution agreements will continue into the future. More distributors of fine expensive yarns will be in the direct relationship with the manufacturers. This integration trend will also create a number of equal quality substitutes, which in contradiction to the previous trends will dilute the market and may lead to price decrease. This prediction is based on the fact that several newer distributors, such as Lily Chin, Debbie Bliss etc. are selling practically the same product under different brand names.

Does product represent significant fraction of

Purchasing of yarns is the largest expense for both distributors and retailers alike. Average distributor incurs

Inexpensive substitutes to the current products may help retailers to increase profit margins especially if these

cost of buyer business.

about 60-70% of their operation costs through the acquisition of new products. Average retailer spends 40-50% of all expensed funds on the yarns. The ratio is different for the large non-specialized retailers because yarns represent very small (fewer than 5%) fraction of their retail expenses.

substitutes are of comparable quality to the original product. From the other hand, large retailers are and will be able to negotiate good prices with the makers of the substitutes thus negating any extra profits specialized retailers may generate. At the end supply/demand equilibrium will be established and fraction of cost will become the same.

Are prices negotiated individually or sellers post “take-it-or-leave-it” price

Many distributors work with the smaller retailers on the post prices. Price list are transparent and available for all retailers on demand. Large specialized retailers and non-specialized retailers have individually set prices with their suppliers. Spinrite Inc. from Listowel, ON notifies all large buyers about potentially discontinued items and lets them buy off the remainder of these items at prices, which are 50-70% below the list price. At the same time smaller retailers are forced to buy at list prices until the discontinuation notice.

Increases in number of distributors will open doors to individualized pricing because average distributor will have fewer clients than now. At the same time, larger retailers will start forgoing distribution element and negotiate desired prices directly with the manufacturer.

Today large buyers have a lot of power at the yarn distribution and yarn retail markets. Threat of vertical integration and fragile relationships between the mills and the distributors will force distributors to reduce their margins in order to get more clients. This market is definitely looking like a buyer market today.

Conclusion Although yarn industry is very old it in many cases still exists in the ‘craft state’. Industry does not have defined distribution channels and threat of backward integration remains very high. Large specialized and non-specialized retailers dictate prices and outlook of the market. At the same time these retailers have the least domain knowledge as compared with the smaller participants. They often move towards higher profit margins on the specific products completely forgoing the quality. Although prices in these retail outlets are usually lower than in smaller specialized ones, they cannot offer the same quality of product and service.

Vertical integration in the different stages of the market poses threat for the market intermediaries. At the same time this integration leads to creation of the same intermediaries at upper (retail) or lower (manufacture) boundaries of the remaining market participants. For the manufacturers it will result in the extra costs and for the retailers it will result in the lower profits (if they will be forced to distribute the product in order to maintain distribution volumes set by manufacturer). Present industry volatility will lead to both vertical and horizontal rearrangement of forces. We will see more low cost products coming out of the areas with cheap labor. At the same time manufacturers of the exclusive high cost products will explore the gap between low and high cost and will come out with the group of products of relatively low price.

Industry Issues

Child Labor Child labor is one of the most pressing issues in the world today. Any industry, moving its production to the areas of cheap labor, such as Africa or Southern and Southeastern Asia will definitely experience this issue sooner or later. While animal farming tends to be safe from child labor, farming of cotton is not. There are multiple reports coming out of African countries of Mali, Zimbabwe and others, which indicate that child labor is commonly used at the cotton plantations. It is more unfortunate because Africa tends to produce higher quality cotton than the rest of the world. More so, the brand of cotton, commonly called ‘Egyptian Cotton’ yields the most expensive high quality threads. Researchers point out that tradition of using child labor in the cotton industry comes from British Empire. In 18th century Great Britain majority of workers at the cotton factories were women and children. At the Soviet era Soviet republic of Uzbekistan openly used child labor in gathering of cotton under the façade of compulsory communist labor. After separation from Russia situation has worsened. 2005 report with the title “White Gold. The True Cost of Cotton”, issued by Environmental Justice Foundation shows that “blatant human rights violations characterize cotton production. In order to bolster the workforce, the Karimov regime conscripts tens of thousands of Uzbek children, as young as seven, to serve as manual cotton harvesters. An estimated 200,000 children are conscripted in the Ferghana region each year. The work is arduous and there are minimal financial rewards.” Although the situation is well known to the consumers of Europe and North America, the protests are less severe as compared to the protests against the use of child labor in Cocoa/Chocolate industry. The main reason for this difference is higher degree of dependency of modern civilization on cotton than on chocolate, which is considered more of a luxury.

Knowledge Gap Knitting industry from yarn mill to retailers has an outlook of the craft industry. Yarn production, especially production from natural animal fibers remains practically unchanged for the last 200+ years. Maturity of the industry has been both its curse and salvation at the last decade of the 20th century. Maturity of the industry and loyalty of knitters to their pastime helped whole industry to survive through the times, when influx of new knitters was minimal. At the same time experienced knitters remained very conservative and kept reusing knitting models, developed during the previous knitting boom of the 70s. Influx of new people into the craft at the beginning of the 21st century has underscored the void, which was caused by industry stagnation. Lack of the industry figures, raised to prominence in the 90s opened door for the new generation of teachers and trainers, who had to learn the craft by themselves. The craft that was for centuries yet another way of creating fabrics and garments has been turned into a mathematical puzzle. High speed knitting and crochet competitions may have brought ‘Olympic glamour’ but turned people away from the craft essence. Loss of basic concepts of craft due to the knowledge gap has changed the demand for the yarns from natural fiber to the artificial fiber novelty yarns. Lack of knowledge on garment creation has moved many knitters towards creating small simple items, such as hats and scarves. As a result, pattern designers concentrate on the simpler items and some of the elements of craft are close to being forgotten.

Vertical Integration This research means by vertical integration creation of direct ties between designers and distributors and the manufacturers. Designers, creating their own labels, invest more times and resources into promotion of the labels than in the design. On the long run, designs produced for specific yarns are not as successful as the ones produced for the mainstream yarns because they cannot be used by the knitting community at large. At the same time, the yarns branded by designers are usually derivatives of the larger mainstream brands. Knitters use designs with the brands of the similar color and gauge thus decreasing profits designers intended to obtain by introducing their brands. This situation is detrimental for the industry in whole because designers, invested in the unpopular brands, tend to close the business altogether instead of producing high quality designs.

Gender Conflict Majority of knitters are female. Males constitute 10-15% of the knitting population at most. At the same time male salesman comprise 90-95% of the sales force in

Europe and over 70% of sales and marketing executives in the US and Canada. This obvious disproportion leads to the situation where very few salesmen and marketing executives know how to knit. While this may not be considered important from the business perspective, from the craft perspective the industry values differ greatly from the values of the individual knitters. Yarn brands produced in North America are devised to increase profit margins while reducing the costs. From the finance and economics perspectives this approach is correct. At the same time it causes many knitters to drop the craft because they cannot find suitable yarns for their projects. Large number of synthetic yarns produced under Phentex, Red Heart and other brands are 100% acrylic and cannot be used for cold Canadian climate. 100% wool yarns, produced in Canada by Briggs and Little and smaller mills are made out of fleece shorn of the meat sheep, which is short, coarse and generally itchy to touch. Knitters, who are unable to find suitable materials to continue with the craft, generally switch to the other hobbies. This reduction in knitter population will have an adverse effect on the industry when the current hype subsides. It only shows that decisions made by the non-knitters will hurt the industry on the long run.

Conclusion All of the issues, described in this chapter are very industry specific. Although none of these issues can destroy the industry on the short or long run, they may cause serious damage. Decisions, made by non-knitters on behalf of the knitters may have the largest impact on the industry in general. Mentioned before tendency to create a two-tier market based on the cheap/exclusive division can be magnified by the decisions, which put profit before the craft. Reduction in demand would have corrected this situation for any other industry. For the industry based on ‘optional’ craft this correction may be too late for consumers (knitters) to wait. Cotton yarns were darlings of this industry for a long time. People use cotton yarn brands to create summer garments and as natural substitute to acrylic yarns. Education of the consumers and introduction of the labels ‘Free of Child Labor’ on the cotton yarns, similar to cocoa/chocolate must be a priority for EU and North American yarn trade organizations.

Organizational Concepts

Descriptive Elements Multiple organizations within the same yarn industry supply chain pursue same goals of producing and delivering yarn products to the end consumer. Failure to achieve this ultimate goal will be detrimental to the whole industry sector and not only the retail portion of it.

Competitive Strategies Michael Porter defined several competitive strategies based on scope and character of the competition. All elements of the competitive framework in the yarn industry base their competitive strategies on the uniqueness of operation in general and uniqueness of product in particular. Although it might be logical to assume that all yarn mills produce ‘yarns’, each one of the yarn mills is very different. In the scope of the industry yarn mills are at the narrow end of differentiation spectrum. This conclusion is made based on the fact that average mills produce 20-30 articles of yarns in different dyes. In Michael Porter’s view yarns will use ‘Focused Differentiation’ as their competitive strategies. Distributors, from the other hand operate with the broader spectrum of yarns, sometimes in hundreds of articles in different dyes. In order to maintain their reputation of being distributors of exclusive (high end) or ‘run-of-the-mill’ (low end) yarns, these distributors still differentiate products they attempt to distribute. In Porter’s view distributors use competitive strategy of ‘Differentiation’. Recent attempts by retailers to integrate backward through bypassing distributors are in fact attempts to implement ‘Low-cost leadership’ strategy. Web retailers, such as KnitPicks directly claim that low cost of their products derive from the fact that products are bought at the mills without any middle-tier distribution.

Types of Strategies Using Miles and Snow’s typology of strategies we can see that smaller retailers usually act as prospectors, trying to maximize profits through increased volumes and cost reduction. Larger, usually more passive retailers, which do not rely solely on the yarns in their business act in Analyzer capacity. Having opportunity to obtain better deals based on their purchase volumes, these retailers do not see a need for strategic innovations. Distributors usually employ ‘defender’ strategies. Mentioned before tendency of increase in the number of distributors, forces existing established distributors to protect their customer base. At the same time these distributors have to protect their volume of sales, which is reduced through attrition of retailers and through integration between retailers and yarn mills. Quinn and Rohrbaugh model, emphasizing approaches to the effectiveness values, places majority of industry participants in the segment, members of which state primary goals of their strategy as productivity and profit. Due to Quinn and Rohrbaugh this approach does not put a lot of emphasis on morale and cohesion. As a result both distributors and mills have very high attrition numbers. It is especially common among the distributor group where majority of the workforce has low to minimal skills.

Environmental Uncertainties Robert Duncan proposed a framework of assessing environmental uncertainties of the organizations. Both distributors and mills operate in a very typical

environment. Natural fibers, used in yarn creation have not changed since they were first used. Certain development was made in the area of dyes and artificial filaments. Nonetheless, changes in these ingredients are infrequent. New types of artificial fiber appear once a decade and dyes are changed with approximately the same pace. External elements, which can somehow influence the industry, are also fairly scarce. European Union has issues several regulations regarding the import of the natural fibers onto its territory and they are upheld equally in all EU countries. Realignment of yarn production and certain shift to the areas with cheap labor and easy regulatory practices does not affect established yarn mills and distributors. All these conditions place yarn industry participants into Duncan’s ‘Low Uncertainty’ segment. This low uncertainty element allows distributors and large retailers to benefit from economies of scale and stock on the yarns with the highest profit margin. Pattern designers and yarn creators also benefit from the stability of the industry. Unlike video chip manufacturers, they can produce new patterns and yarns on a very slow pace without any fear of designing obsolete products.

Population Ecology Established companies in the yarn industry tend to form a population ecology group. Majority of the participants in the yarn industry have very similar structure and goals. It can be explained by the fact that yarn industry itself hasn’t changed its goals during the last 200+ years since the beginning of the industrial revolution. At the same time both distributors and mills communities rarely cooperate. Products of the different mills are very dissimilar. It was also noted before that distributors try to make an exclusive distribution agreement with the certain mill and/or agent. Therefore products of different distributors rarely overlap. Smaller retailers tend to form their own ecological system. This system is based on location and regional allegiance of the customers. Retail ecology is very similar to a biological ecosystem where every participant occupies a certain spatial dimension. Larger retailers such as Wal-Mart and Zellers are also part of the retailer ecosystem. Smaller retailers tend to co-exist together with the giants by reducing the number of overlapping products on which they cannot compete due to price difference. At the same time larger retailers tend to occupy larger space. They have a tendency to locate their stores in such way that their customer base does not overlap. All elements of the yarn business ecosystems developed their own survival mechanisms. One of the mentioned mechanisms is differentiation of products,

another is differentiation of service. Smaller retailers tend to provide better more personalized service, including knitting lessons, help in project completion and general knowledge transfer. Many smaller retailers have created knitting clubs ad guilds, which are usually regional and cover the territory, where customer base of a mentioned retailer resides. Names of the clubs, such as ‘Georgetown knitters’ guild’ are a good indication of location and representation in the guild. Trade shows are another element of the ecosystem. Local trade shows, such as Downtown Knit Collective Frolic or Kitchener-Waterloo Knitters Fair help to connect knitters and retailers under the same roof. Larger shows, such as Creative Sewing and Needlework Festival provide marketplace for medium and large size retailers. Difference in entry fees serves as a natural barrier separating retailers by size. Present trends show that smaller, less glamorous shows are popular among more experienced and discriminate knitters, who come to these shows in search of unique materials and trends. Larger shows attract more novices, who can also attend seminars and lectures at the show grounds. This separation is indicative for the industry in general as much as for the mentioned shows.

Internal Framework Yarn Mills can be easily classify as production companies. Following Woodward’s categorization of production yarn mills are ‘Large batch and mass production’ companies. Process of yarn creation has a long time span. Even with the new advancements in spinning and dyeing equipment typical production batch can take from a week to a month depending on how the process is set up at the mill. Appearance of yarn agents, who consolidate orders and ‘shield’ manufacturers, was caused by the inflexibility of the industry processes. Agents act partially as yarn designers, partially as distributors. Because they are not bound by large distribution agreements they can sell identical yarns from large batches to different distributors or retailers. Daft and Macintosh proposed different division of the organizations based on their internal capabilities. Yarn mills and distributors tend to have extremely high level of analyzability of their processes and generally low variety of tasks performed. This places both mills and distributors in the ‘Routine’ segment of the framework Independent retailers work in the different realm. Because of the craft character of the industry, they tend to be in the craft segment. Majority of retail store owners and sales personnel are avid and qualified knitters. They create their own knitting designs or modify existing designs to better suit yarn sales. These retailers are in the ‘Craft’ segment of the framework.

Internal structure Both yarn mills and distributors tend to have highly mechanistic organization structure. This conclusion is based on the fact that they both have very routine internal processes. As it was mentioned before majority of the distributor personnel is low paid-low skilled workforce, working at the basic warehouse jobs. Majority of processes at the distribution level are extremely well defined and never change. Basic processes include acceptance of shipments from manufacturers and agents, processing of shipments and distribution of yarn to the customers. Taking away new yarn creation, yarn mills processes are also very well described and generally uniform. When contents of yarn are established and dyes are created workers must apply existing processes to the large batches of yarn.

Organizational Lifecycle Larry Greiner defined organizational lifecycle as a sequence of stages, through which the company must pass in order to mature. Majority of the yarn mills are mature organizations. European yarn mills have 100+ years of history at the same location and often under the same name. North American mills tend to stay stable although they were affected by ‘knitting crisis’ of 80s and 90s and had to retrench in order to sustain their operations. From the other hand, distributors are relatively young organizations. Their size prompts that they have not passed through all stages, described by Greiner. Judging by the fact that internal systems of the distributors are usually not up to par or plainly do not exist, we can say that distributor organizations are in the area described by Greiner as ‘Formalization Stage’. It is very hard to classify retailers based on the Greiner system. In order not to harm the ecosystem majority of the established retailers tend to adopt ‘Small Company Thinking’. This approach results in the inability of growth beyond the immediate sales area, lack of information technology systems and outdated ways of communications. Very few retailers have adopted EDI or any other interactive ways of communication with manufacturers and distributors. Newly created retailers tend to emulate the ways of their established colleagues.

Organizational Culture Being a craft related business, yarn industry has many different cultural elements. Mentioned before knitting clubs and guilds are direct manifestations of fraternal culture, accepted by the retailers. Knitting industry has very well defined symbolic elements. Many yarn mills have sheep on their logos. Yarn stores tend to use yarn balls and needles as part of

their symbolic statement. Many specialized retail stores tend to use words ‘Wool’ or ‘Yarn’ in their names and same often true for the names of the mills. Many yarn mills are very proud of their heritage. European mills often have antique equipment, used by the mill, on display in the customer lobby. Others have stories about mill owners and first workers and the difficulties they had to overcome at the beginning of the mill operation. As many other industries, yarn industry has very specific jargon, which may differ from country to country. North American and British mills accepted yarn weight system, where yarn of every thickness has its own weight attribute. Many European knitters are puzzled by the names ‘Worsted’, ‘Fingering’ in relation with the yarn thickness. Different ways of knitting in Europe (Continental) and England lead to creation of different vocabularies with respect to knitting tension. English knitters tend to pay attention to knitting tension or ‘gauge’, showing it at every yarn label. European knitters regulate gauge within their knitting technique and do not pay much attention to it. One of the main jargon differences between yarn industry in Europe and North America is the use of the word ‘wool’. It is very common to hear this word as a substitution to the word ‘yarn’. Older knitters in North America tend to call every yarn – ‘wool’, which causes a lot of confusion in the intercontinental communications. Many Canadian knitters learned to knit in schools, where they were given distinct instructions (patterns) to accomplish their tasks. As they grew in their skills they still require patterns sometimes describing every stitch in every row. In contrast European knitters are in general more independent. They do not require row-by-row or stitch-by-stitch instruction. This difference results in different approach to the creation of the knitting models (patterns). Very often European designed garments are admired in North America. Designs in the form of patterns are not accepted as commonly because North American knitters cannot deduce the gaps it the vague description of the garments. This difference in trade or craft culture created similar differences in the organizational culture and approach with respect to the knitting patterns. North American yarn mills and distributors have many pattern designers on staff. They promote yarns through depiction of models. Revenue stream from sell of the patterns is very well established and pattern division is highly recognized in the organizations. Pattern creators (modelers) are relatively high paid and respectable group within the mentioned organizations. In the contrast with this, European yarn mills do not pay attention to pattern designs. In Italy pattern designers are a small group, which works with multiple mills and agents at the same time. The major drawback of this approach is that there is no long tern commitment between designers and organizations, which

hire them (predominantly yarn agents). Because of this models (patterns) have shorter lifespan, sometimes no more than one season. There are no expectations about revenue stream from patters. Culturally it turns model designers into industry outsiders. Their input into Italian yarn industry is minimal and so is the recognition of their efforts.

Conclusion This chapter of the project must answer one last question: can industry sustain itself on the long run. This question is more important in North America than in Europe because Europeans have never stopped knitting. In order to answer this question, it is very important to understand why the craft of knitting has been created and promoted during the last 5000+ years. One major reason for knitting is to create garments made of natural fibers, which could not in the past be created by any machinery. Even modern automatic and computerized knitting machines can only take yarns of a certain thickness. Thick and heavy chunky yarns, made out of wool and other animal hair must be knitted by hand. It makes knitting as a craft indispensable in northern and mountainous areas, where warm clothes are necessity and not the requirement. Irish sailors from the Island of Aran have created another very distinct type of sweaters with intricate design. The goal of this design was to make sweaters completely waterproof. The legends say that Aran knitting was the favorite fisherman pastime during the long winter months. Cowichan Indians from the west coast of Canada and Islandic sheep herders had very similar approaches to creating waterproof sweaters although designs were completely different. Although our civilization has created other waterproof jackets and anoraks, woolen sweaters in Aran or Cowichan designs are coveted among fishermen and yachtsmen. Crochet garments, such as lacy blouses and shawls were always popular among the European nobles. Warm and cool at the same time these garments could be worn all years long. These statements can lead to one conclusion: knitting garments have been a part of the human culture for many generations. Garments made out of natural fibers, such as animal hair and cotton are irreplaceable. Mankind will continue to create garments out of natural fibers as long as they can be produced on earth. Recent development in the natural fiber yarns have shown that many obstacles to the wider use of the fibers can be successfully overcome. People, who are allergic to lanoline, contained in the sheep hair can use fiber shorn of alpacas or other camelids. Fragile character of short staple cotton can be overcome by using stronger plant fibers, such as hemp or flax.

Popularity of man-made fibers as substitutes the natural hair is explainable. Extensive use of man-made fibers, such as acrylic was heavily promoted by the chemical industries. Major ‘advantage’ of these fibers over natural ones is that they are not shrunk in hot water and could be washed and dried in the machines. The other advantage was the lack of potential allergens. This made acrylic and polyester yarns very popular in North America. These yarns are also significantly less expensive to produce. Experienced knitters can distinguish between acrylic and wool yarns just by touching them. Natural qualities of sheep hair to spring and curl makes yarns more elastic. Elasticity is the quality of the yarn the most coveted by knitters. Garments, knitted of the elastic yarns keep shape better. Aran cables and lace are equally more attractive when produced out of woolen yarns as it was intended in the past. In the future there will be less and less need to knit with acrylic and other synthetic fibers. Predicted polarization of the market into high-end natural fiber segment and low-end artificial fiber segment will make knitting with the artificial yarns more marginal. Cheap machine produced garments of the artificial fiber yarns will look very similar to the ones knitted by hand, which will make hobby of knitting from the artificial fiber yarns obsolete. We will still see artificial fibers in the blends with the natural fibers, such as wool or cotton. Addition of 20-30% of nylon to the wool makes garments more durable and practically non-shrinkable during laundry. Addition of 10-20% of dolan or elaston to the cotton will make it more elastic and similar in knitting properties to sheep wool. These two uses will be predominant for the artificial filaments, used in knitting. In the view of this, production of the artificial fiber yarns will shift towards the yarns used in the machine knitting, which are usually thinner and have stronger twist than their hand knitting counterparts. Production of the natural fiber yarns will increase. The point of equilibrium between supply and demand will be affected by the limitation in supply of the fiber. Although there is no shortage of greased wool in the world today, commodity prices are rising.

Industry Outlook Predictions Rise in demand for the natural yarns will make yarn mills an important element of the yarn industry. Today mills have no problem to fulfill the orders in the accepted timeframe. With more demand to the natural fiber yarns industry will have to re-profile machinery for processing of the natural fibers. This process will incur significant extra costs. It will also put pressure on the satellite industries, such as spinning equipment producers. Raise in cost of the yarn production cannot be automatically passed onto the other elements of the industry. Being a supplemental (craft) industry, yarn

production must be sensitive to the fact that raising cost may push people towards other crafts while dropping knitting hobby at all. Market may move towards high-price low-demand quadrant where people will start looking for substitutes to knitting. Established mills can avoid moving into this direction by looking into cheaper sources of natural yarns and enhancing technology to adapt to them. Advanced modern mills have new ways of working with the thicker and less expensive fibers, provided that they are of the sufficient length. Modern exclusive yarns are often produced of the 28mi fiber as opposed to 20-22mi in the past. Another way to reduce consumer costs of the yarns is to promote integration between retailers and yarn mills. Elimination of the distribution component or passing it to the mill will bring temporary reduction in yarn prices and keep number of knitters higher. It is a temporary measure because mills will incur additional costs of distribution. There is a different trend, which can be more successful in the future, such as appearance of larger number of smaller distributors working with the smaller number of yarns. These distributors will be more mobile and lean and will be able to serve same number of retailers for less. The next logical step will be creation of one value chain including all elements of the industry. Distribution will be specific to a mill or an agent. It will be done by the source of the yarn (mill or agent) or outsourced to an independent organization. Spinrite practices this distribution successfully in North America. For European mills it will mean creation of international distribution channels as well as creation of their own brand presence in the places, where their yarns are sold. This move will eliminate yarns with ‘white labels’ and re-branded yarns. It will mean that exclusivity of the yarns, which were labeled by pattern designers or just celebrities will disappear. Described moves will streamline the industry and make it more value oriented. The fiscal validity of these moves will create temporary disarray especially in the retail segment of it. It may also change the monetary relationships in the industry. North American industry is accustomed to the credit payment system, whereas European are accustomed to ‘due on receipt’ payments. Move towards the European system may cause some of the retailers, which are presently delinquent with their suppliers to go out of business. New distribution system and integration of the value chain may spawn price wars between retailers, integrated directly with the mills. It will also lead to appearance of retailers, integrated with the low quality cheap labor mills. Non-specialized retailers, such as Wal-Mart will benefit from this integration and will try to drive the price of the low quality yarns even lower than they are today.

Major differentiation between the tiers of yarn creation and retail will be service and education of the consumers. Smaller specialized retailers, who are presently monopolists in their immediate areas of operation, will be forced to educate their clientele in the quality of their products or loose them to wal-marts. As a result smaller retailers will not be able to keep their business ‘out-of-habit’ and will be required to reshape or close their businesses. Recent closures of the stores in the small towns (ex. Owen Sound, ON), where new Wal-Mart was opened confirms the viability of the overall prediction. Craft stores, carrying knitting yarns and gadgets, belong to another segment of the industry, which will change in the nearest future. Recent closure of Lewiscraft™ chain in Ontario due to insolvency shows that non-specialized craft retailers will not be able to survive the competition with the their larger non-specialized counterparts, for which yarn is neither primary nor significant portion of their revenues. These retailers cannot achieve same economies of scale as Wal-Mart. At the same time they cannot afford the same quality of service and personnel smaller prospectors can offer. While survival of the industry is hardly in doubt, its reshaping is imminent. Current knitting frenzy will certainly make retailers rethink their inventory selection, store practices and business connections. Retailers, which cannot adapt to the new business requirements, will be forced to close the business or reduce it in size. Alternatively retailers, who will be able to adapt to the new conditions will grow and take place of the closing businesses. Distributors will not be able to sustain their own value chain and will be forced to integrate into the value chain of the manufacture in the form of outbound logistic element. Distribution business will become smaller and more specialized towards the needs of the manufacturers they distribute for. Present state of the industry and number of disjointed elements and value chains shows that this industry is very far from maturity. This fact definitely makes it more difficult to provide perfect and concise industry description. At the same time, it makes industry less rigid and more adaptable as a whole. It has a chance to mature during the current surge in demand and adapt to the predicted conditions.

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