Pillow fight: how a domestic rival knocked the stuffing out of Pillowtex.

When Pillowtex Corp. shut down last summer, triggering the biggest job loss in state history, most North Carolinians thought of the company as only the towel, bedding and rug mills it acquired in the 1990s before moving its head quarters from Dallas to Kannapolis and blamed its demise on the foreign competition bedeviling the U.S. textile industry. In his book Pillow Fight: Pacific Coast Feather's Rise to the Top, scheduled for publication next year by Documentary Media LLC, UNC journalism professor Chris Roush notes that Pillowtex also was pummeled by a domestic rival. A former reporter for Business Week, The Atlanta Journal-Constitution and Bloomberg News, Roush is the author of a book about Home Depot.

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On July 30, 2003, the pillow and down-comforter industry experienced a change unlike any other in its history. The longtime leader had succumbed to competitive pressure, among other forces, and closed shop. The shutdown led to the ascension of a new industry pacesetter--also with North Carolina ties--that had overhauled the business during the past 20 years.

On that day, Pillowtex Corp., the largest pillow manufacturer in the country, shuttered 16 manufacturing and distribution facilities. The Kannapolis-based business began as a pillow company but expanded into other operations, including towels, sheets and rugs. It purchased other companies at high prices and piled on debt. Pillowtex, which entered bankruptcy court in 2000 and emerged a year later, had crumpled under its own weight.

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The closing plunged the industry into chaos, sending pillow and comforter makers scrambling to grab the business left behind. Rarely, if ever, does an industry's market leader go out of business. The move would be comparable to Coca-Cola shutting down its soft-drink business or to General Electric leaving the light-bulb industry. But it wasn't just the weight of Pillowtex's holdings and debts that crushed it. Another less evident, but equally important, factor contributed to its demise. For decades, Seattle-based Pacific Coast Feather Co. had slowly inched its way closer to Pillowtex, gaining business from retailers while the industry leader--its main rival--grew but failed to innovate. Pacific Coast Feather boosted its marketing and improved its products' quality.

For years, the company avoided the spotlight. It gradually added market share and expanded across the country, branching away from its Pacific Northwest roots. As it did, it made Pillowtex weaker in the businesses upon which it was founded in 1954. "Pillowtex was exactly in the same business that we're in," says Joe Crawford, Pacific Coast Feather's senior vice president of finance and procurement. "Six years ago, they were at about $300 million in sales, and at that point, you felt that they were doing everything right. They were good at what they did. We were chomping away at some of their placements simply because they were big and we were willing to accommodate customers more than they were."

Pillowtex grew five times larger than it was before its acquisition spree. The strategy proved fatal. The biggest beneficiary of Pillowtex's poor management since the late 1990s was Pacific Coast Feather, a company largely unknown outside the bedding industry. But with Pillowtex's collapse, it became the largest pillow manufacturer in the United States and strengthened its position as the nation's largest down-comforter maker.

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"They were one of the things that drove us," says Jerry Hanauer, owner of Pacific Coast Feather. "In the late 1980s, we had these series of strategy meetings. We decided that we were going to do what we were good at, which was pillows and down comforters. Focus, focus, focus was our thing. The idea was to become No. 2 or No. 1. Pillowtex gradually became a little easier to attack, so we focused on attacking Pillowtex. But for many years, that didn't have any effect."

Eventually, it did. When Pillowtex made a decision, Pacific Coast Feather did the opposite. Pillowtex sold shares to the public in 1993 to gain access to capital markets. Pacific Coast Feather remained a private company controlled by the Hanauer family, despite overtures to sell--including offers from Pillowtex. Pillowtex expanded into related products, broadening its offerings to retailers but distracting its management. Pacific Coast Feather had narrowed its product base, shutting an upholstery business in the late '60s. Pillowtex struggled to maintain business by undercutting competitors and selling at a loss. Pacific Coast Feather walked away from business when it felt the opportunity wasn't profitable.

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Pacific Coast Feather forced the industry to change its business practices, focusing on quality instead of quantity. It became the first pillow maker to advertise heavily and the first to automate and to computerize much of the manufacturing process. Today, Pacific Coast Feather is expanding and is profitable, while the factories of Pillowtex--including five in North Carolina--remain closed. Pacific Coast Feather made mistakes, too. But unlike Pillowtex, it never strayed from its core strategy of providing its customers with the best pillows and comforters it could produce.

Pillowtex and Pacific Coast Feather had often crossed paths throughout the past half-century. The Hanauer family started its feather and pillow business in Germany in 1884. The following generation of Hanauers moved to the United States shortly before World War II, Jews driven from their homeland before the Holocaust. In 1940, cousins Fritz and Sigmund Hanauer acquired Pacific Coast Feather, which had started operation in 1924, and began building its pillow and feather business, focusing on the Pacific Northwest.

Significant changes were occurring in the pillow industry. DuPont invented Dacron in 1941. The company opened a Kinston plant in 1953 to produce the polyester product for clothing and pillows. Pacific Coast Feather was making Dacron pillows as early as 1955. In a letter that year, Sigmund Hanauer called them a "hot item." The invention of the polyester pillow led to increased competition. John Silverthorne founded Pillowtex in 1954 and began with factories in Dallas and Atlanta. In the late '60s, a young executive named Charles M. Hansen Jr.--known as Chuck to his friends and competitors--aggressively expanded the company.

He had joined Pillowtex in 1965, the same year Jerry Hanauer came to Pacific Coast Feather. Hanauer, the third generation of the family to be involved with the business, took over when his father died in 1974. He had been stationed at Fort Bragg shortly after World War II, which was the first time he had been to North Carolina. By 1970, when Pillowtex acquired Perl Pillow, Chuck Hansen was on the board of directors. Named president in 1973, Hansen became CEO in 1990 and, with the death of Pillowtex founder John Silverthorne in 1992, chairman. "Hansen built that business big time," Hanauer says. "He was a very ingenious marketer. He was the first one to transform the American pillow business," creating uniform lines of pillows and identical packaging.

Pillowtex leased a factory in Los Angeles in 1968, enabling it to sell pillows on both coasts. In 1974, it opened a Chicago plant and pushed the company into the Midwest. Pillowtex's growth threatened Pacific Coast Feather's future. "Competitors like Purofied and Pillowtex were national," Hanauer says. "They could have just killed us. They could offer merchandise to a broader network. If I had been them, I would have been inclined to do that, to drive out a competitor quite easily. I needed a business to compete with them."

Hanauer found that business with Scandia Down, which opened stores in the late '70s and the '80s, selling down comforters. As the supplier to Scandia Down, Pacific Coast Feather grew its business across the nation and competed for the first time against Pillowtex. Sales reached $22 million in 1985 and $55 million in 1988. It began to attract attention. Hansen saw the company's growth and, in the early '80s, offered to buy it for $16 million. Hanauer declined. "I told them what I wanted, and they told me I was too expensive," he says. If Hanauer had sold to Pillowtex, Pacific Coast Feather likely would have ceased to exist.

The companies' other competitors struggled. Purofied Down Products filed for Chapter 11 protection in early 1984 and shut its operations in Brooklyn, N.Y. Pillowtex, however, kept growing, acquiring five other companies in the 1980s and expanding its line to include items such as mattress pads.

Hanauer's two sons joined Pacific Coast Feather in the 1980s, and, together, Nick and Joff Hanauer overhauled the company's marketing strategies and manufacturing procedures. The marketing of the Pacific Coast Feather brand of pillows and down comforters was new to the industry because companies such as Pillowtex primarily supplied products under a retailer's brand name. But Pillowtex was also becoming more competitive. In 1987, Pacific Coast Feather estimated that its chief rival had approximately 50% of the pillow market and more than 40% of the down-comforter market. Pillowtex and Pacific Coast Feather both benefited from Purofied's 1984 bankruptcy filing. The company filed again in 1990 and went out of business.

In the late '80s, Pillowtex employed a strategy that Pacific Coast Feather called the "virus" approach. It would sell one type of product to a retailer and then focus on replacing all of its competitor's products with its own at that retailer's stores. With the increased competition, the pillow industry evolved from a dozen strong regional companies into four strong national players and a handful of weaker regional businesses. Because of its expansion earlier in the decade spurred by its partnership with Scandia Down, Pacific Coast Feather was one of those national players.

It began conducting tests on its competitors' pillows and comforters to determine if they met the specifications on the packaging and discovered that many were shipping inferior products to stores. Nick Hanauer wanted to use this research in letters to retailers to help Pacific Coast Feather increase sales. But President Roy Clothier persuaded him to abandon the idea. The quality issue, however, foreshadowed the future problems at Pillowtex. If it skimped on the quality of its products, what else was it doing to gain business and to increase profits?

Pacific Coast Feather designed new pillows and comforters to compete with Pillowtex. One, the ComfortLock comforter, sealed the down with a U-shaped stitch that followed the edge of the bed. The stitch had been patented in 1994. Pillowtex complained that a stitch was not patentable, but the U.S. Patent Office reaffirmed its decision in 1997. Pacific Coast Feather's sales exploded. They reached $70 million 1993, hit $106 million in 1996, rose to $127 million in 1997 and grew to $186.5 million in 1999. The company nearly tripled in six years. One reason was the marketing of its brand. While other competitors expanded into products such as bath towels, Pacific Coast Feather focused on pillows and comforters--its core products.

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In 1995, Pillowtex was the market leader in both pillows and comforters. It had $62 million in down comforter sales, compared with No. 2 Pacific Coast Feather's $28 million. In pillows, it had $141 million in sales, while Pacific Coast Feather was No. 3 with $55 million in sales. Those rankings changed as Pacific Coast Feather's marketing strategy succeeded. In 1999, it passed competitor Hollander Home Fashions in pillows to rise to No. 2 with $106 million in sales. Pillowtex was still No. 1 with $165 million in sales. In down comforters, Pacific Coast Feather narrowed the gap between itself and Pillowtex to just $2 million, with Pillowtex posting $76 million in sales.

Pillowtex was beginning to have problems. With Hansen as president and CEO, the company went public in 1993. That same year, Pillowtex made two acquisitions to expand into blankets. The following year, it expanded into Canada, plus added another blanket manufacturer--Swannanoa-based Beacon Manufacturing Co. Six years later, it would lay off more than 135 workers there. In 2001, after attempting to sell Beacon, Pillowtex shut it, closing a 97-year-old business it had spent $108 million to acquire in hopes of expanding into institutional markets. In late 1996, it had bought the blanket operations of Fieldcrest Cannon. Hansen clearly had an appetite for expansion.

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But the next acquisition would show cracks in Pillowtex's dominance. In 1997, it agreed to buy the rest of Fieldcrest Cannon for $400 million in cash and stock and to assume nearly $300 million in debt. The deal made Pillowtex an industry giant but saddled it with too much debt. Management's attention was too divided. It had to integrate the new operations into the existing Pillowtex business. The Fieldcrest Cannon plants needed new machinery, and the company needed a new computer system.

Pacific Coast Feather lurked in the background. It did not make acquisitions outside its core business. It did, however, begin to spend more on marketing when it noticed that Pillowtex might be ignoring its pillow and comforter business. Pillowtex's arrogance toward its fast-growing rival was evident. When Tim Keegan, senior vice president of sales, ran into two Pillowtex sales people at a conference in the 1990s, they confessed that they didn't even know the location of Pacific Coast Feather's headquarters. The incident pushed him to drive his sales force into taking business away from Pillowtex.

In 1999, Hansen resumed an active role in day-to-day operations after Pillowtex lost credibility on Wall Street when it missed analysts' earnings expectations three times and when its president resigned. Hansen claimed that the company was on sound footing, but it wasn't. In November 2000, Pillowtex filed Chapter 11, though Hansen had said four months earlier that a bankruptcy filing was not in the company's future. It lost more than $300 million in 1999 and 2000, and Hansen was forced out of the company.

That same year, Pacific Coast Feather became the leading seller of down comforters and increased its market share in pillows. It also made inroads in North Carolina manufacturing, which had been considered Pillowtex's home turf. In late 1999, it acquired Henderson-based Southern Quilters, expanding its manufacturing capabilities by 250,000 square feet.

"We needed productive capabilities that they had," says Eric Moen, the company's current president. "We originally started working with them as a subcontractor, had additional comforter scrolling done, and [owner] Buddy Aldrich said, 'You know, I would like to sell this thing, and here is the structure I would like to put together.' We talked about it a little, and it made sense to us. We have a pretty good reputation on deals. We don't come in and slash out all of the management and administration. We are there to grow, so we need people. In general, we have brought better benefits packages than the former entity and are in general very well received. We do end up changing the operations significantly for a couple of years, however."

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The success hadn't shielded Pacific Coast Feather from pain along the way. Joff Hanauer was killed in a car accident in 1998, leaving a succession void because his brother had left the company. Clothier died of liver disease in May 2003 at 64. He did not live to see one of the company's crowning moments: On the next-to-last day of July, Pillowtex announced it was going out of business. It laid off more than 7,000 workers nationwide. Pacific Coast Feather had tried to acquire part of Pillowtex in 2002--an ironic twist since Pillowtex had tried to buy it several times. But the new management at Pillowtex wanted to sell the entire company. At one point, privately held Fort Mill, S.C.-based Springs Industries also negotiated to buy it, then backed off.

Pillowtex's demise allowed Pacific Coast Feather to strengthen its grip on the top spot in the down-comforter business and, more important, to become the No. 1 pillow manufacturer in the country. Although the company cannot be given complete credit for its rival's downfall, it did make inroads in the main business lines of Pillowtex, weakening the Kannapolis company's position.

The hunter has become the hunted. "The worst thing we can do is to become complacent," Keegan says. "That will be the worst mistake that we can make." Pacific Coast Feather evaluated its operations to make sure that it would not follow in Pillowtex's footsteps. "It is a radical difference to be No. 1 than to be No. 4 and want to be No. 1," says Moen, who became president after Clothier's death. "You approach the market differently, you manage your retail relationships differently, and we are just now in the past year in the process of dealing with being No. 1.

"We're not through that yet. All of our retail placement becomes more susceptible to challenge. In '95, you had Pillowtex and other biggies out there, huge players who didn't even think about us. This forces us to be more disciplined. We have to become even more innovative."