Li & Fung: 'Look to the source'

By Brent Felgner -- Home Textiles Today, 4/19/2004 12:00:00 AM

NEW YORK —

As it launches an insurgent grab for additional market share in home, Hong Kong-based supply chain manager Li & Fung said last week that there's nothing wrong with the U.S. home textiles industry that couldn't have been fixed if it began adjusting its sourcing structure 10 years ago.

"Everyone who grew up in the industry grew up in an environment of fixed assets," said Rick Darling, president of Li & Fung USA. "They grew up in an environment of having to produce product rather than market product because that's what the fixed assets needed in order to be rationalized."

Now, after nearly a century in business, the $5.5 billion (U.S.) company has recently begun showcasing its still-developing and rapidly growing business. It has unveiled an expanding acquisition-oriented business model that calls for greater involvement with branding, even as it seeks to enhance its supply-chain expertise, forecast trends and design new products, along with its basic role as overseas procurement agent.

There's nothing wrong with this picture, according to the firm's structure and strategy.

"Keep in mind, we have no assets. We have no debt. We own no equipment. We own no machines," Darling stated during a wide-ranging interview last week, which included a discussion of the plans to move Royal Velvet back into consumer markets.

"We have a built-in ability to take brands to existing clients, which lowers our selling expense," he said. "We have an ability to source right on top of our existing sourcing base, which lowers our sourcing costs. So, everything about what we are trying to do is (focused on) our ability not just to make a better product, but for us to be able to operate at a lower margin level."

In the process, Li &Fung has also crept in as a major home textiles player with roughly $360 million (U.S.) f.o.b., translating perhaps to as much as $1.1 billion in retail sales. But, more significant, and unusual, it's profitable — an often difficult achievement for some U.S. manufacturers.

While apparel dominates the company's overall business, with about two-thirds of annual sales volume, non-apparel categories, including home, have shown the fastest growth.

"The non-apparel side of the business is probably the best kept secret in the market. Eight years ago, I don't think we shipped $50 million in that category," Darling noted. And the company has set its sights on home to propel that growth even further.

"We are thinking that the branded business could represent as much as 12 to 15 percent of the company's business by 2007," he stated.

Moreover, the branded side of the business — already pumped up by licensing arrangements with Levi Strauss, Royal Velvet and Disney — should produce similar core margins yielding at least 6 percent, he indicated.

The brand strategy is designed to lead Li & Fung in either of two directions. First, it should allow a deeper penetration of its existing client base, since in this area it does not compete against its own sourcing abilities, but rather with other importers already supplying the stores.

Second, it should provide entrée into new retail doors. For example, when Li & Fung acquired the license for Levis Signature brand, it promised to open the doors to Wal-Mart, Kmart, and Target, which it was not doing business with.

Darling also hinted that other deals might be in the works in hard home categories, including housewares, home décor, furniture and outdoor furniture. Any branded home opportunities would have to be carefully balanced against the contractual requirements and needs of Royal Velvet, he said. None are contemplated for the moment.

To be sure, Darling said he believes there are lessons the home textiles industry can still learn from the apparel industry's march off-shore.

"If there's a big lesson on the front end, it's don't get caught up in the idea that this is about private label. It's not about private label. It's about proprietary branding and mixing that with great brands."