Though Li & Fung has been working on its new Three-Year Plan to digitize and speed up the supply chain and its evolution to agent 2.0, the business has still hit on hard times as retail wriggles out of its old skin and into a new life.
With bankruptcies so frequent they’re hardly sensational and store closings even more commonplace, it’s meant lost volume for many businesses—including Li & Fung.
“If you look at our results in the last few years, we lost some volume,” Li & Fung Group CEO Spencer Fung said in an interview with Sourcing Journal. “There’s a big component of that volume base that is due to deflation…there was mid-single digit deflation the last two years in the lower and back end, and that has closed some volume off. But there are also some bankruptcies that have caused volume loss as well.”
Li & Fung missed estimates with a 47 percent decline in profit to $223 million for 2016, making it the third straight year of losses. For the six months to June 30, 2017, net profits were $132.5 million, nearly 53 percent higher than its position at the same time in 2016. The company’s supply chain revamp seems to already be making headway for the business. Li & Fung’s core operating profit in the first half increased 11.9% to $170 million. The company beat analysts’ expectations for the first half, with net profit up 51.3% to $101 million, from $72 million a year earlier. Optimism for the stock saw it closing higher ahead of the August earnings announcement. Turnover stabilized in the period, decreasing just 2.1% to $7.26 billion.
The biggest thing is the top line and bottom line, according to Fung.
“Our top line has eroded somewhat in the past two years. Obviously some factors are within our control while others, such as price deflation, are not, but eventually we think that inflation will come back in,” he said. “What is not controllable are customer bankruptcies, mergers and acquisitions.”
Kohl’s has been a big client for Li & Fung, and as it too falls victim to some of retail’s ills, Li & Fung is looking to its new way forward to be a boon for businesses like Kohl’s and others.
“What we have seen with some customers is that when we speed up their supply chain, that does wonders for their sales because you reduce the amount of time it takes the goods to get from concept to store, so you can decide on the fashion later,” Fung said. “When you do that, you can get less markdowns because you have the right style and the right product. You can reduce your inventory and that also increases top line growth.”
He added, “We are basically using our strategy in a massive way to transform the supply chain. We really believe that if retailers can make a big shift of their supply chain to reduce inventory and markdowns, that’s already a huge game changer.”
While retail readjusts itself, paring down to what’s actually needed, Li & Fung has been working on the things it can control to improve top and bottom line growth, like cutting back on expenses.
“You can see that last year, on the trading side—which was the side that was not growing—we reduced expenses by $100 million. So we will continue that productivity drive internally to control the expense line. But we don’t just want to cut costs,” Fung said.
A lot of companies will look straight to cutting costs to curb expenses, but what often ends up happening is that people work harder because there are fewer people on deck, but little tends to change in terms of innovation and productivity, Fung explained.
“When you increase productivity, costs will go down automatically. We want to focus on what’s real with cost reduction,” Fung said, adding that the company hopes to increase its productivity by a high double-digit amount by the end of its Three-Year Plan in 2019.
With top line growth taking a hit and volume flagging, Li & Fung’s share price has fallen steadily for the last five years.
The company’s shares were trading at a high of 19.86 Hong Kong dollars ($2.56) in March 2012. In the last two years specifically, the company’s shares have fallen from 7.32 HKD ($0.94) on Feb. 13 2015 to a much lower 3.34 HKD ($0.43) this Feb. 13. As of publication time, Li & Fung shares have rebounded to 4.06 HKD ($0.52).
In February, Hong Kong’s Hang Seng Index (a benchmark tool used to describe the market), conducted a rebalancing exercise, pulling Li & Fung from the index and replacing it with Geely Automotive Holdings as a constituent stock. Analysts have surmised the move could have indicated the index compiler didn’t want the company’s too-low stock price weighing down the index’s average.
“Our share price has definitely been affected by all of these factors,” Fung said. “But our focus is on the long-term. We are a 111-year-old company, so we’ve seen and experienced a lot of change and disruption spanning many generations and our timeline horizon has always remained more long-term. I don’t look at stock prices every day. I’m not happy about our stock price, but we know that stock price follows performance and we’re trying to turn that around.”
For now, it’s about transformation and execution, and betting on both to regenerate lost volume to improve the share price. In recent months, Li & Fung created a new business development group to focus solely on sales.
“We actually tasked every division with their own sales effort in the past, so everybody was an operator and a salesperson at the same time,” Fung said. “Now we are carving out a specific sales function, a business development function, at the very top level to focus on nothing but our pipeline of new customers. And this is starting to show initial results.”
What’s next for LF?
Looking ahead, as Li & Fung reasserts its relevance, bringing new offerings to the table to meet the demands of today’s market, e-commerce and off-price may make up a bigger share of its business, especially when it comes to taking on retailers’ logistics.
[Read more about how LF is reshaping its business: Sourcing Scoop: Spencer Fung on Why the Role of the Agent Has Changed Beyond Recognition]
Fast fashion retailers that hadn’t before outsourced their logistics, have been turning to Li & Fung to help it handle some of that.
“Most of these retailers do a lot of the stuff in-house, including logistics. We were able to convince a major fast fashion retailer go with us for their Asia logistics, instead of doing it on their own. That was a great sort of win for us,” Fung said. “Our capabilities now suit them a little bit, so we have a little bit of business with fast fashion. But we need to up our game quite a bit in order to convince companies like that to switch to us. We are pretty realistic about that. These are always the customers that I like to target on the sourcing side. But at the moment, I think most of the growth is coming from the logistics side.”
When it comes to off-price, the sector has been a big area of focus for Li & Fung, too.
The company started working with one of the fastest growing value retailers in Europe several years ago, which has seen double-digit growth and hundreds of store openings every year since.
“We are actually targeting these types of retailers all around the world, mostly in the U.S. and Europe. We have quite a few that we are working with and are targeting a few more,” Fung said. “These are very targeted areas.”
In the last 15 to 20 years, the off-price and value sector hadn’t been a big focus for Li & Fung, but with the sector seeing positive growth in the face of so many negatives in retail, it’s been worth paying more attention to.
“Most of our growth came from department stores and specialty retailers,” Fung said. “This is also why, this very short-term period in the next few years, is a heightened part of the business because that is the bulk of our customer base, but we are trying to increase and change our customer base now to more groups.”
In that same vein, Li & Fung has new thoughts about how to grow its own business too. There was a period in the company’s history where acquisitions were all the rage and played a big part in growing the business. In the last few years, Li & Fung has only done one major acquisition, whereas in the years before that, it had taken in more than 30 businesses. Now, though the idea isn’t off the table, the approach to acquisitions will be a different one going forward.
“We used to acquire companies that were pretty much in the sourcing area and the importing area. Our focus now has shifted to more technology-related companies,” Fung said. “If we were to consider an acquisition, it would be a technology company—something that provides digital supply chain services or data services. But there are no plans for acquisitions at the moment.”
What’s next for sourcing and retail?
One thing certain amid all the uncertainty, is that the retail landscape will be completely different in five years’ time, just as it’s come far in the last five years.
“What I’ve seen in the last six to nine months is pretty scary. Just reading industry news about bankruptcies, looking at all the CEO appointments, changes in management, store closures and so on—I think the pace of disruption has really accelerated,” Fung said. “We have never seen anything like this before. The last time I saw this was in 2009, where 6,500 stores closed, but that was driven by the financial crisis. But this year, it was driven by regular, everyday closures.”
The question for Fung has been whether the brick-and-mortar guys acquiring more digital assets will be the ones to win, or the digital guys, like Amazon acquiring more brick-and-mortar resources will rule the day.
Taking the Amazon-Whole Foods deal as an example, Fung said the digital side may find ways to do the offline model more intelligently than the incumbents, and will give them a run for their money.
Either way, retail’s shakeup won’t soon abate.
“Disruption is accelerating and I think even by the end of 2019, the face of retail will be completely different. You may have a lot more bankruptcies, you may have a lot more online guys going offline, and we think that in the future, the model is omnichannel. So whoever does not have an omnichannel operation will lose out,” Fung said. “I don’t think anybody has a clue or hint what the future will be like, but it is going to keep morphing. You are not going to see an equilibrium anytime soon.”