Wal-Mart Taking Back Some Sourcing Business From Li & Fung
Wal-Mart says it will ensure a ‘smooth transition’ from Hong Kong-based Li & Fung
ENLARGE
Victor Fung, chairman of Li & Fung, in Hong Kong on Dec. 5, 2013. Photo: Bloomberg News
Some of this pullback already has happened, people familiar with the matter said, and more is set to come over the next few months, according to Wal-Mart, the world’s largest retailer by revenue.
“We have made a business decision to transfer certain sourcing functions in-house and as such will work collaboratively with (Li & Fung) to ensure a smooth transition over the next few months,” Wal-Mart said in a statement.
A Li & Fung spokeswoman said the agent, which connects retailers with factories, remains a key supplier to Wal-Mart and their relationship is “strong.”
Wal-Mart’s move to do more business directly with factories deals a blow to Li & Fung as the more than a century old buying agent struggles to adapt its business model to a weak retail environment in the West and the growth of e-commerce.
The fashion brand had been one of Li & Fung’s leading brands, generating about $300 million in annual sales for the agent, estimated Spencer Leung, a UBS analyst with a sell rating on Li & Fung, in a May report.
Li & Fung said it doesn’t see a growing trend toward retailers working directly with factories and cutting out the middleman.
“We see it both ways, that retailers are doing more direct sourcing and retailers are outsourcing to us,” said Spencer Fung, Li & Fung’s chief executive, at a company shareholder meeting Thursday.
Li & Fung’s deal with Wal-Mart, when it was struck in 2010, was seen as a catalyst for the middleman’s growth. But the partnership hasn’t been as lucrative as Li & Fung expected, analysts say.
Li & Fung had projected that its business with Wal-Mart would generate $2 billion in volume the first year, but the dedicated unit that Li & Fung set up for it fell short of that goal, posting an operating loss instead.
This unit, called Direct Sourcing Group, is in the midst of being phased out because it hasn’t gotten the volume of business expected from Wal-Mart, according to people familiar with the matter.
In 2012, Wal-Mart canceled much of a deal in which Li & Fung supplied goods for the retailer’s overseas stores. Two years later, the U.S. retailer took back much of the apparel business that it had outsourced to Li & Fung, according to these people.
Wal-Mart continues to work with Li & Fung in other capacities, including connecting with factories and acquiring finished goods, according to one of these people.
Li & Fung has said it can work with brands no matter how they want to buy their goods. The company also audits factories and provides product-inspection services.
