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Li & Fung targets digital explosion, working with 3,000 e-commerce firms on private label

Expect major changes for Li & Fung as the global sourcing giant’s H1 net profits were hit hard – falling 50% – in what it described as the toughest trading period since the crash of 2008.

But earnings still beat analysts’ expectations Thursday and the Hong Kong-based company said it wants to meet the e-commerce threat head on within its new three-year plan that will focus on “speed, innovation and digitalisation of the entire supply chain”.

E-commerce players are pursuing private labels to enhance their fast-growing platforms, Li & Fung noted Thursday. “We’re actually working with at least 3,000 e-commerce companies. They’re all going to private labels,” chief executive Spencer Fung said.

Fung said private labels, generally sold at much lower prices, are where bigger margins can be found. Most importantly, this strategy works seamlessly with online channels powered by big data.

“They’re so sophisticated in data analytics, they know who is going to buy what the next minute,” the CEO said, suggesting such information helps e-commerce companies offer private labels tailored to consumer tastes.

And the ability to promote private labels next to the big brands allows e-tailers to bolster their own brands at much lower costs. “By selling other people’s brands, they are not taking a huge margin,” he said. “They are taking a percentage of the sales at a cut.”

Market weakness

Of its current trading woes, Li & Fung blamed price deflation and competition in its core US market, while the weak Chinese currency continued to hit its local trading business. Around 62% of Li & Fung’s 2015 sales were in the US, with another 16.5% from European countries.

It described the global retail environment as almost “permanently promotional” with many market players focusing on clearing excess inventory from previous seasons. These retailers have turned cautious in placing new orders, undercutting Li & Fung’s top line. The company’s plight was exacerbated by lower global freight rates and volatile exchange rates.

The company said January-June net profit plummeted to $72m from $149m a year ago, its lowest six-month profit since 2004. Analysts had forecast of net profit of $68m for the period. Basic earnings per share fell to 6.7 HK cents.

Li & Fung, which supplies retail giants including Wal-Mart and Kohl’s Corp, said core operating profit also fell 14.2% to $156m. Its trading business operating profit fell 19% to $129m despite a 20.8% rise in its logistics business.

Revenue fell over 6% to $8.07bn from $8.63bn a year ago. Analysts had expected revenues of $8.45bn.

“The first six months of the year was the toughest retail and trading period we have operated in since the global financial crisis in 2008,” chief executive Spencer Fung said. “We expect the trend to continue in the second half and the amount of orders will remain at the level in the first half … we will focus on our core customers.”

Li & Fung has refocused on its core supply-chain business following the sale of its lossmaking brand licensing and distribution business in 2014, helping it to boost cash flow and control operating costs.

The company, which has a $4.3bn market valuation, had said in March that it expected deflationary pressure to worsen this year and expected to see a declining order book volume.

However, Fung said its 2014/16 plan is still on track. Its next three-year plan will be announced in early 2017.

* Spencer Fung also said Thursday the UK’s vote to leave the European Union would have little impact on its business given that many British clients do business globally, adding that he saw opportunities in Germany, Italy and Spain.

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