Li & Fung is in year one of its three-year growth strategy

Li & Fung is in year one of it's three-year growth strategy

Li & Fung has outlined a number of new frontiers the global sourcing giant is looking to explore as it works through its three-year roadmap, which it hopes will capture new customers in new categories and countries, and increase the group's cross-selling activities.

Hong Kong-based Li & Fung, which recently spun off its Global Brands business, is mid-way through the first year of its three-year growth strategy, which management has termed 'the investment year'.

CEO Spencer Fung told analysts at the firm's first-half earnings conference on Friday (22 August): "In terms of 2014, this is our investment year like the previous three-year plans. We're investing in expenses, in teams that service new customers, geographies and infrastructure, globally."

The company kicked off the investment with the establishment of its Vendor Support Services (VSS) unit in January. Since then, it has also invested in new offices, its logistics network and an IT system.

"From these investments, we hope to capture new customers in new categories and countries, increase our penetration in existing customers and increase our cross-selling activities," he explained.

"After the Global Brands spin-off the company is now more simplified and focused, back to our core business of sourcing and logistics, and this will allow us to grow faster. We are now even more asset-light than before and we have a strong recurring cash flow. All of our investment in 2014 is going to help us with our organic growth."

New frontiers
That growth includes geographic expansion, which Fung said will include new and existing markets.

Li & Fung is exploring setting up an office in Myanmar, in addition to Kenya and Ethiopia, where it has production but no office. Indeed, the entire sub-Saharan Africa area is a significant region of interest for the company, Fung suggested.

"In terms of geographic expansion, investments we aim to make in 2014 include opening up new offices in Myanmar, and despite already having 25 offices in China, continue to expand here because production is moving. We are beefing up our offices in Brazil and also looking at countries in South America because that is a huge growth area for us. We are also exploring Sub-Saharan Africa - Kenya and Ethiopia are the top of the list, but we are looking at others as well."

Aside from this expansion adding to its bottom line, the desire for Li & Fung to expand globally is also being borne out of a growing industry trend of production migration, one which the chief executive suggests is accelerating.

"Production has been migrating for the past 40 years from Hong Kong to Korea to Taiwan to Singapore etc, and the latest frontiers are Myanmar, Bangladesh, Cambodia, Laos, and so on.

"We see that, in terms of our production base, all the major production countries in China and South East Asia are experiencing double-digit inflation and this is impacting sourcing costs and sourcing strategies. Frequent disruptions in the countries we operate in also leads to more movement between countries, for example disruptions in Vietnam and in Bangladesh last year, disruption in Thailand, and in many other places."

Global uncertainty
Fung pointed to the economic and duo political uncertainties occurring globally, and the "softness" in the areas it operates in, such as the US and Europe, including the Ukraine and Russia.

"Looking at the whole industry we're operating in, especially in the US, in the first half, it was not good. In the first quarter everyone was affected by the weather, and the first and second quarter was very promotional.

"What we see in 'back to school' is going to be a continual promotional period. A lot of companies reported their results this week and everyone is guiding down for the second half. So we do see a lot of headwind in the major markets we're operating in."

On Friday, Li & Fung reported "solid" results in the first half, against a mixed economic landscape, with growth in both sales and earnings. However, it warned on the US, the group's key export market representing 60% of total turnover.

The outlook, the company said, continues to be "uncertain" and market conditions are expected to "remain challenging". 

Fung told analysts: "All this complexity in the world of sourcing, e-commerce, geopolitical, calls for a global and flexible supply chain. This is at the heart of our strategy."

Cross-selling and e-commerce ambitions
Despite the softness in the first half, and the outlook for the second, Fung said the company's customer base is continuing to expand, with the recent addition of Under Armour.

"The different networks like sourcing and fashion, they all have a full pipeline. What we know is that the bigger scale we get and the more global we get, the more big retailers come to us. What we see in the pipeline is bigger and bigger customers.

"In the pipeline right now are a couple of European, very large retailers who have never considered outsourcing."

Fung said the company is "working with" some large retailers in South America. He added: "Cross-selling is something we spoke about last year. The company started many years ago but it became more organised last year. This year cross-selling has become a culture of the company. Everybody is cross-selling. It has become a daily thing now.

"We are now systematically connecting these people horizontally across the silos. With this we are seeing a lot of bearing fruit. Part of our three-year plan goal is organic growth, getting new customers into cross-selling. This is the only conversation topic people are talking about. Organic growth and cross-selling."

E-commerce is another large area of investment for the firm, and one that featured in the group's previous three-year plan.

"We have been developing a lot of capability in this area, including supply chain and on the logistics side.

"Traditional bricks and mortar companies used to have a bricks and mortar channel and an e-commerce one, but now that is merging and this is happening all over the world. As a result of these shifts, lead times continue to shorten and our business continues to shift...because everyone is buying later and later for the holiday season, for example. Stock keeping units (SKUs) are increasing and the average size of orders is decreasing."

Investments made in e-commerce in the last few years mean Li & Fung is "well-positioned" to capture this business, the chief executive said.

"All of our investment in 2014 is going to help us with our organic growth and what gives me comfort is that I can see very clearly, step-by-step, how we are going to get to the three year plan by 2016. We have the roadmap and we're committed to our targets."