What’s Up with Li & Fung?
Just over three years ago, Supply Chain Matters declared outsourcing services provider Li & Fung Ltd. a supply chain competency success story. This company was on a roll exercising a successful supply chain outsourcing strategy for firms in need of supplier sourcing of apparel and toys. Its customer base included many well-known retailer labels with customer value built on providing clients a one-stop presence for supplier sourcing and moving finished goods to retailers. Their detailed knowledge of the particular supply segment, coupled with amassing economies of scale in production and distribution needs, all integrated into a holistic fulfillment model, set this firm apart.
During the major 2008-2009 economic crisis, when global economies started to tank, it was the apparel and toys segment in China and other regions that experienced the most severe blows in terms of supplier bankruptcies. Li & Fung managed to sustain earnings growth during this difficult period on the basis of cost-cutting and greater efficiencies. To no surprise, many supply chain thought leaders often mentioned Li & Fung as a supply chain competency success story.
In our commentary three years ago, we noted that Li & Fung communicated that its growth strategy would be driven by acquisitions, in essence expanding its one-stop supply chain services capability to other supply segments. We stated our Supply Chain Matters hope that the same knowledge and supply chain competency traits that led to prior success would be carried forward.
Earlier this month, Li & Fung stock drew a string of downgrades on news of a 22 percent drop in profits. Stockholders punished the stock with a 19 percent pricing drop, where the stock essentially sits as we pen this latest commentary. According to a published report in the Financial Times, market analysts are now questioning the company’s growth by acquisition strategy which has been primarily built on a strategy that pays the acquired company in three years of payments, typically 30 percent in the first year of the acquisition. FT quotes Li & Fung’s CEO as indicating that 42 of its 59 acquisitions since 2004 were based on this delayed payment strategy. The problem, however, is that Li & Fung’s recent operating earnings have been offset by accounting changes related to previous acquisitions not meeting designated performance targets. In the latest case, a $198 million write-down. Company leaders on the other hand insist that the ongoing growth by acquisition strategy is sound, and that once again, as in 2008-2009, the declining global economy may well provide more attractive acquisition targets for the company.
We are not stock analysts and will not comment on the stock prospects of Li & Fung. That is not our place. We do, however, serve as an independent observer of global supply business process and technology capabilities. There comes a time when any firm can encounter a situation where growth by acquisition can compromise previous supply chain fulfillment capabilities. On the one hand, the ability to offer its retailer customers sourcing of an entire product line is extraordinary. On the other hand, added processes, complexities, supply chain software applications and people needs can each provide additional challenges. Today’s rather dynamic and shifting global sourcing landscape adds far more additional challenges. As an example, apparel and toys sourcing has already experienced sourcing shifts to other countries, away from the mature supply chain infrastructure capabilities within China. As Li & Fung expands its supply chain presence beyond apparel, toys, leather and beauty product supply, the need for a keen sense of seamless execution gets more difficult.
We suppose that August 2012 is an important checkpoint for Li & Fung, and the open question is whether growth by acquisition vs. growth in additional services are now in conflict. No doubt, the coming months will reveal the real answer.
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