Li & Fung’s Licensing Lasso
As Hong Kong-based sourcing giant Li & Fung nears the completion of its second licensing deal with Levi Strauss & Co., company executives said they plan to make brand management a much bigger part of their business in the coming years.
The company last year brought in $5.47 billion in revenue through its traditional business model — handling sourcing for major U.S. brands and retailers.
In January, the company signed its first licensing agreement with Levi’s for tops bearing the mass-market Levi Strauss Signature brand. In addition to making the product, which is Li & Fung’s classic approach, the deal called for the company to handle design, sales and marketing. That represented a major move up the food chain for the firm.
Now, the company is close to inking a licensing agreement for men’s and boys’ tops under Levi’s core Red Tab brand, a deal that Rick Darling, president of Li & Fung USA, said he expects to close “shortly.”
“We see it as a wonderful opportunity to strengthen the relationship with what we see as still being the world’s leading apparel brand,” he said in an interview this week at the company’s Manhattan showroom.
Levi’s Red Tab women’s knit tops are already licensed to Van Nuys, Calif.-based Jerry Leigh, said a spokeswoman. She confirmed that talks with Li & Fung for the men’s product were ongoing.
The extension, which follows Li & Fung’s licensing deal to produce Royal Velvet home textiles, marks part of a strategic shift for the company. Li & Fung group managing director William Fung has set the goal of earning more of “the other $3,” referring to the general rule that merchandise that sells for $1 on an f.o.b. basis, which covers manufacturing and duty costs,?brings in $4 at retail.
Prior to the licensing deals, Li & Fung did all its sales on an f.o.b. basis. With the licensed products, it puts itself in the position of a wholesaler — effectively raising the $1 to $2.
Darling said the company aims to make licensing a bigger part of its business, bringing in at least 15 percent of revenue by 2007. He added that talks were “well under way” for a deal with a children’s apparel brand, which he expected to be finalized within a few weeks.
“We are actively pursuing other brands within the apparel sector,” he said, adding that the company isn’t looking solely at licensing. “The other opportunities will be to pursue acquisitions as a long-term strategy.”
Darling said the company has five criteria it looks for in brands it considers licensing or acquiring:
The main attraction in brand management, Darling said, is that it’s a more profitable business than contract sourcing, with margins running about double to what Li & Fung is accustomed.
In the case of the Levi Strauss Signature tops, which the company is currently shipping to Wal-Mart, Target and Meijer, and expects to begin shipping to Shopko with fall deliveries, Li & Fung officials said controlling sourcing and design allows them to offer more fashionable products at attractive prices.
“We have to be above their private label,” said Maryellen Bernard, vice president of product development at Li & Fung USA.
The mass-market styles have wholesale prices that average from $7 to $10 for misses’ and $4.50 to $750 for girls’. They feature details like patterned ribbon inside the plackets and collars of knit shirts.
“The critical thing to this whole process is that we can use our sourcing expertise to manage the margins to a degree that a traditional licensee couldn’t,” Darling said.
Moving into brand management raises the risk that Li & Fung’s customers could begin to perceive the company as a competitor.
“There is a natural tendency to evaluate things that way,” said Darling, though he added that so far the brands the company has licensed are targeted at mass merchants, an area in which Li & Fung hadn’t previously sold goods.
Still, he added, after entering the mass channel, the company’s next goal “is to penetrate deeper into our existing channels.”
The company is seeking real estate to build a New York showroom, where the company plans to build spaces dedicated to each licensed or owned brand. Darling said the plan is for those spaces to look like little boutiques for the product, which is an approach the company has taken at its Hong Kong headquarters. — Scott Malone
VF Cuts Exec Bonuses
Greensboro, N.C.-based VF Corp. last year trimmed the bonuses it paid to its top five executives, with chairman and chief executive officer Mackey J. McDonald seeing his compensation slip 16.9 percent to a little more than $2 million.
According to a recent filing with the Securities & Exchange Commission, in 2002, McDonald’s combined salary, bonus and other compensation came to almost $2.5 million. The company trimmed his bonus last year to $1 million from $1.5 million. His salary remained unchanged at $990,000.
Last year, VF reported net income of $397 million, compared with a net loss of $154.5 million. The 2002 loss included a $572.3 million charge related to an accounting change. Sales were up 2.4 percent to $5.21 billion.
In the filing, the board’s compensation committee reported that executives had received 98 percent of what they had been eligible for the year, based on performance targets set in February 2003.
The filing noted that McDonald was evaluated for “growth, marketing effectiveness, supply-chain improvements, common systems implementation and leadership development.”
The jeansmaker, which owns brands including Wrangler, Lee, Nautica and Earl, also cut the bonuses of Terry Lay, now vice president and chairman of the jeanswear coalition; John Schamberger, now vice president and chairman of cross-coalition management; Robert Shearer, vice president of finance and global processes and chief financial officer, and Eric Wiseman, now vice president and chairman of the outdoor and sportswear coalitions.
Lay, Schamberger and Wiseman’s duties changed in February. Lay had overseen the outdoor and international jeanswear coalition, Schamberger had been responsible for North and South American jeanswear and playwear, and Wiseman had overseen sportswear and intimates.
Each corporate vice president’s reported bonus was reduced by about 25 percent.
The filing also noted that a number of shareholder proposals will be presented at VF’s annual meeting, to be held in Greensboro on April 27. In addition to three proposals backed by the board, which call for the reelection of directors, an amendment to the company’s stock compensation plan and the ratification of PricewaterhouseCoopers LLP as auditor, there are two proposals submitted by shareholders.
One, put forth by the Trowel Trades S&P 500 Index fund, called for the company to drop its classification of board members, in which one-third of the directors are up for election every year. The company asserted that its staggered terms allow for better management continuity.
The second, submitted by several New York City municipal employees’ retirement funds, called on the company to adopt a labor policy based on the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work. The board recommended that shareholders vote against it, asserting that VF’s existing codes of conduct are adequate. — S.M.
Casual Male Taps Frain
Casual Male Retail Group Inc., which operates 58 Levi’s and Dockers by Designs outlet stores, last week named Jim Frain, senior vice president of marketing at Chico’s FAS Inc., to its board.
“As we are 22 months into the turnaround of Casual Male, marketing is the component that we are now strategically addressing,” president and chief executive officer David Levin said in a statement. “Jim’s advice will add the right mix of industry knowledge and expertise to help drive the program’s success.”
In addition to the Levi’s outlets, Canton, Mass.-based Casual Male operates a 484-store eponymous chain, as well as Ecko Unlimited outlets. — S.M.