25 October 2016
Spencer Fung says retailers are doing more direct sourcing but they're also outsourcing to Li & Fung. Photo: WSJ
Spencer Fung says retailers are doing more direct sourcing but they're also outsourcing to Li & Fung. Photo: WSJ

How Li & Fung is dealing with client loss

For decades Li & Fung Ltd. has been helping western brands navigate the supply chain in China, Vietnam, Bangladesh and other low-cost countries.

By connecting Tommy Hilfiger, Abercrombie & Fitch, Aéropostale and other brands with manufacturers in emerging markets, the company greatly expanded between 2006 and 2011, with revenue more than doubling to US$20 billion and its head count tripling to almost 30,000 employees.

But since 2001, Li & Fung profit has fallen 21 percent since. Shares of the company have plunged 70 percent from their 2011 peak, according to the Wall Street Journal.

It has lost business from important clients including Wal-Mart Stores Inc. and Kate Spade & Co.

Last year, Spencer Fung, 41, became chief its executive, tasked with reversing the sliding fortunes of world’s biggest factory midleman co-founded by his great grandfather more than a century earlier.

When Fung took the reins, the company spun off some money-losing businesses including ones that owned clothing brands or managed licenses for brands like Disney and Nintendo, and cut back on acquisitions.

Li & Fung has also expanded client services like factory inspection, logistics and distribution, and outlined plans to enter low-cost markets such as Myanmar.

Yet, 10 months after Fung took over, Li & Fung’s decline has accelerated, with profits falling 12 percent to US$539 million and revenue largely flat at US$19.3 billion last year.

During a March conference call with analysts, the company said its profit target for 2016 was now unrealistic.

Fung, however, is confident Li & Fung’s prospects are bright.

“We’ve invested for the short, medium and long term to generate growth,” he told the analysts.

The struggles of Li & Fung reflect what industry insiders say is a sea change in how international brands manage their global supply chains as factors from technological advances to e-commerce threaten the role of middlemen.

The rise of online sites that connect Asian manufacturers with buyers overseas has made it easier for Li & Fung’s clients to contract with suppliers directly.

Founded in 1906 as a porcelain and jade trader, the Hong Kong-based company began to take its current shape in the 1970s when Spencer Fung’s father and uncle, Harvard graduates, introduced western management practices and expanded into design, marketing and transportation, catering to the West’s demand for cheap goods.

But now, some brands are increasingly dealing with suppliers themselves because they are under pressure to cut costs and take more control over their supply chains.

Wal-Mart Stores is taking back much of the business it outsourced to Li & Fung as the retailer moves to buy more of its products directly from factories, according to people familiar with the matter.

Some of this pullback is happening in the next few months and Wal-Mart says it will work with Li & Fung to ensure a “smooth transition”.

Wal-Mart continues to work with Li & Fung in other capacities, including connecting with factories and acquiring finished goods, according to one person.

Another major Li & Fung client, Kate Spade, said in May that it was taking in-house the sourcing of its accessories starting in spring 2016.

Kate Spade will continue to rely on Li & Fung to supply its clothing and to inspect its products.

Li & Fung says while it doesn’t typically comment on its customers, its relationship with Wal-Mart is strong.

The company says it doesn’t see a growing trend toward retailers working directly with factories and cutting out the middleman.

“We see it both ways, that retailers are doing more direct sourcing and retailers are outsourcing to us,” Fung said.

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