While Wall Street wanted to know what levers L Brands Inc. is pulling to mitigate the impact from rising tariffs, a company executive emphasized that wasn’t the key question investors should be focusing on.
Charles McGuigan, L Brands’ chief operating officer and the chief executive officer of Mast Global, a wholly owned division of L Brands, said, “I couldn’t predict three to four years ago that we’d be in the middle of a China tariff war.” And while companies need to be aware of what is going on at the government level, what firms like L Brands need to pay attention to is less about government and more about what factories are doing.
The Mast CEO said L Brands’ sourcing arm has been focused on diversification of its supply chain over the past five years. Over the course of moving to other countries to set up new factories, McGuigan said Mast has in the past needed to run the factory until the owner can catch up. “We manage everything in the supply chain–we just don’t own the factory or the labor,” he said.
As for China specifically, and the topic of risk mitigation, McGuigan acknowledged that Mast has been in negotiations with its Chinese suppliers to take costs out of the production chain to offset the increases, but that also means leaving a little bit on the table so vendors don’t end up seeing their businesses fail. “Every company has to make money to survive,” he said.
Speaking Tuesday at L Brands’ Investor Day meeting with analysts, McGuigan said that by the end of 2019, China will represent less than 20 percent of total production, and that Mast is “on track to be half of that as we move into 2020.”
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The Mast CEO explained that the move to other locales was less about tariffs and more about good business practices, as well as the shift in what was happening in the lingerie category, which was already reducing its reliance on China. Mast had been moving production outside of China before tariffs, putting it in a diversified supply chain position ahead of the hikes.
“You can’t chase down cheap labor anymore. It’s important to have diversification geographically,” McGuigan said. “In the last four years, 83 to 84 percent of bra pads were made in China. [Most of that is now] in Vietnam and Sr Lanka instead.”
The lingerie group still works with Chinese vendors, but now less than 5 percent of bras are made in China. McGuigan was quick to note, however, that if L Brands is “successful with our retail footprint in China, it will be China as China for China.” That means factories in China will be producing for local distribution, and production could be extended to include “China for Asia,” he said.
Where China is concerned, it’s not just about factory location, McGuigan explained.
“Tariffs may go away. You can’t build a supply chain on what-if tariffs. You’re building a portfolio, so you look at your vendor base,” he said, explaining that discussions he has with fashion vendors are different from the talks those suppliers might have with Walmart. Mast is spending more time on innovation, and investing in places where the product can be made. That means strategizing with top-tier vendors on what’s next, whether from a technology standpoint or in fabrication.
The problem with China is not where the product is being made, but also where the raw materials come from. For L Brands’ beauty offerings, McGuigan said 90 percent of the beauty products are made in the U.S., but all the chemicals used are made in China. And there’s one more snag in the China equation. “If fabrics are coming from China, you’ve still got an issue,” he said.