As the Chinese proverb warns: “No banquet in the world goes on forever”. The longstanding relationship between Walmart and its biggest sourcing partner Li & Fung was scaled back in May. The US retailer will now (mostly) bypass the middleman to buy its products directly from factories.
Shortly before, another client of the Hong Kong firm, Kate Spade, also said it will take the sourcing of its accessories in-house starting next spring. The handbag designer will continue to rely on Li & Fung to supply its clothing – albeit a much smaller segment of its business.
With its market capitalisation now a fraction of what it was at its peak – $6.6 billion this week compared with $22 billion in 2011 – Li & Fung desperately needs to find a new revenue source. To that end, the company announced late last month that it plans to open as many as 300 stores in China in a joint venture with two of the country’s oldest state-owned retailers.
The sourcing company will take a 20% stake in the joint venture with Shanghai Bailian and Beijing Wangfujing Department Store each taking 40%. The partnership, called BaiFuLi, has set a target to reach Rmb1 billion ($161 million) in sales in three years. Shanghai-based Bailian operates 5,000 stores in China, while Wangfujing, based in Beijing, operates 45 department stores.
Analysts say the move leverages the strengths of all three parties. Under the agreement, Li & Fung will help design and develop three private labels for Bailian and Wangfujing, focusing on menswear, childrenswear and home products. The sourcing firm will also scout for other brands in Europe and the US that it can acquire or licence so that BaiFuli can sell them exclusively at physical as well as online stores. The new business model could help the two retailers to differentiate their offering from competing chains and online shops by selling labels that others don’t have.
“We’ve always said that as the economic centre of gravity moves towards Asia we will be putting more emphasis on developing the Asian market as not just a place to source from, but to sell to,” William Fung, company chairman, told the South China Morning Post.
Founded in 1906 in Guangzhou, Li & Fung is now betting that its future lies with Chinese consumers. In addition to losing much of Walmart’s business, the company has disposed of some weaker units and cut back on acquisitions. Still, revenue remained largely flat at $19.3 billion while profits slipped 12% to $539 million last year.
Bailian and Wangfujing also urgently need to revamp their business model as more Chinese consumers go shopping online. Take Wangfujing. In the first quarter of this year, operating profit at the chain fell almost 5% to Rmb4.9 billion, says Shanghai Morning Post. Its rival Dalian Wanda also shut down about 10 underperforming Wanda department stores to improve profitability earlier this year.
Most analysts appear to be optimistic about the tie-up. Jason Yu, general manager of research company Kantar Worldpanel, told the China Daily that the move makes strategic sense since the two mainland companies have strong brand names and Li & Fung has an extensive global sourcing network. “This will help them edge ahead of other bricks-and-mortar retailers,” says Yu.
But others are more sceptical. China Economic Times calls the partnership “the union of three losers”. The Hong Kong Economic Journal also reckons that the move is “too little too late” and that the joint venture is not revolutionary enough to help resuscitate three companies that find themselves in “sunset industries”. Hong Kong’s Apple Daily, too, thinks that the move isn’t likely to reverse the fortune of the sourcing giant. “Li & Fung entering the market now is too late. That’s because with all the group-buying and e-commerce sites, private labels are no longer as lucrative as they once were,” says the newspaper.
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