By  on March 24, 2011

HONG KONG — Hong Kong-based sourcing giant Li & Fung said Thursday it remains in full acquisition mode as the company moves to reshape its business over the next three years.

“We’ve made it very clear that there will be acquisitions every year. That is for sure,” said William Fung, group managing director of the Hong Kong-based sourcing giant.

As the company reported a 27 percent increase in net profits last year, it also unveiled its new three-year plan to achieve a “core” operating profit of $1.5 billion by 2013. President Bruce Rockowitz said the company has transitioned from one “global network” to three: trading, onshore and logistics. Each network is expected to grow significantly over the next three years.

Currently, Li & Fung’s business breakdown is about 60 percent trading and 40 percent onshore (which includes licensing and distribution), with newly added logistics accounting for about 1 percent. That is set to change, according to Rockowitz. “In 2013, trading and onshore are going to be equal, with about 47 percent each,” he said. “In the future, you’re going to have to think differently about Li & Fung.”

Trading and onshore are each targeting a core operating profit of $700 million by 2013.

The goal was unveiled as the company said net profit rose to 4.28 billion Hong Kong dollars, or $548 million, for the year ended Dec. 31. Sales advanced 19 percent to 124.1 billion Hong Kong dollars, or $15.91 billion.

Operating profit increased 42 percent to 5.66 billion Hong Kong dollars, or $725 million.

At a press conference here, Rockowitz described 2010 as “an eventful year” for the company, citing Li & Fung’s numerous acquisitions and deals over the past 12 months. These included a major sourcing deal with Wal-Mart Stores Inc. and the acquisition of Integrated Distribution Services, as well as significant licensing agreements with brands such as Sean John, Jennifer Lopez and Marc Anthony, Rachel Zoe and French Connection.

Such acquisitions had an effect on Li & Fung’s overall sourcing as China increased its share to 57 percent, a rise of 3 percent over last year despite rapidly rising costs there. “China’s prices went up a lot, but most of the companies we acquired are one-country sourcing in China,” explained Rockowitz. “It takes one to two years to start to move them to a multicountry model,” he said, adding that Vietnam, Bangladesh and Indonesia were rapidly growing sourcing markets for Li & Fung.

But spreading sourcing to more countries won’t counter the pricing issues seen across the industry, as Rockowitz acknowledged. “The biggest topic by far in our business, from every point of view, is higher prices. [Last year] was the year the deflationary trend for goods ended. We’re in a new era,” said Rockowitz. He added, however, that higher prices were not necessarily bad for Li & Fung’s business. “I see it as pretty positive. For 20 years, we have had to work so much harder to break even each year because prices were going down and we had to sell more pieces.…Mild inflation is pretty good for Li & Fung,” he said.

Rockowitz said retailers are struggling more with cost increases than Li & Fung. “Retailers are testing the waters to see what customers can handle. Prices are [forcing them] to adjust their business models,” he said, adding, “Higher prices are here to stay and we don’t know all of the ramifications yet.”

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