As retailers across Europe and the US brace for more months of falling sales and thousands of factories in the east are forced to close, one company director is eyeing opportunities from the global recession fallout. Bruce Rockowitz, president of Li & Fung Trading, tells just-style how the world's largest sourcing group is tapping into demand for lower prices. 

Bruce Rockowitz, president of Li & Fung Trading, the world's largest sourcing group, says he much prefers a booming market.

But tough times are shaking up the apparel trade, handing new business to the Hong Kong company and putting attractive takeover targets up for sale.

"When things are good, there's no need to change and there's inertia. People are very comfortable with their supply. But when things are bad, people look for alternative ways of doing things," says Rockowitz.

Times have rarely been so bad, believes the garment trade veteran of 30 years, who previously headed Colby International before its takeover by Li & Fung in 2000. "Nobody has seen it this bad in their career," he says.

Even before the slowdown hit last year, Li & Fung had been growing rapidly, cutting out US-based importers and offering large retailers a more direct route to thousands of carefully managed suppliers.

"As people get more sophisticated they tend to want to buy more direct." 

Business with Kohl's, Li & Fung's biggest customer in volume terms, has increased by 16 times in the last 11 years, says Rockowitz. It will grow again this year as the sourcing group handles new product categories for the American department store, taking yet more market share from the importers. 

Other retailers facing slower sales will also turn to Li & Fung, says Rockowitz.

"We have large coverage of the world for sourcing. We're able to deliver good prices...that people need in bad times. We're in a cycle now where price is paramount."

Operating scale
Li & Fung's huge scale, with sourcing in 40 different countries, gives it an edge in a price-sensitive climate.

In China alone, it has between 3,000 to 4,000 suppliers, estimates Rockowitz, servicing customers in around 100 countries. Retailers are unable to set up an equivalent supply chain or get the same prices.

"Typically a retailer needs 4-5,000 factories in the supply chain. You can't manage that kind of business from afar."

Current pressure on retailers is such that even those with their own sourcing offices are now offloading these operations to boost efficiency.

That means further openings for Li & Fung, says Rockowitz. He points to the November deal with Liz Claiborne in which Li & Fung will take over the group's global buying offices for the Mexx brand.

"It probably never would have happened in a good market. Liz Claiborne was looking to improve the brand and we're part of their turnaround strategy."

He says we will "definitely see more of that in the months to come", with Li & Fung already working on "a number" of other outsourcing deals, "the type of deals you would never get in good times". 

European growth
The acquisition of Germany's Miles Fashion at the end of November was another such deal, a "timely" opportunity born out of the global financial crisis, Rockowitz said at the time.

It should prove useful to growth. Miles' biggest customer is Aldi, one of the discounters doing well as consumers tighten their belts. 

It also allows Li & Fung to expand in Europe where it is trying to set up an 'onshore' business following a similar appraoch in the US.

With the Miles deal, its first apparel acquisition in the region, it can start to build a presence close to European customers.

"It's one of the few with scale in Germany and has a sound management team. We get a team that can be leveraged to create a much larger on-shore business." Li & Fung plans to add other products to the Miles range such as hardlines like soft furnishings.

On-shore expansion
The 'on-shore' business - where offices in Europe or the US import products and give customers a local point of contact for design and sourcing - though still much smaller than the 'offshore' or export business in Asia , is important for growth.

Opening offices closer to customers in New York or Hamburg should make winning new business easier.

Though Rockowitz predicts growth in the high teens for 2008, though that's still lower than the previous year's 36%. "Individual customers aren't growing and…retailers have lowered their inventory a lot, on average by 15-20%."

Prices are going down too, which makes it tougher for a middle man that takes a percentage from every sourcing deal.

Rockowitz argues that "lower prices are not bad for us. Our reason for being is to get lower prices for customers". But he acknowledges that "we have to do more business to stay even, that's the challenge."

The group is still aiming for turnover of US$20bn and operating profit of US$1bn by 2010. It has started cutting costs, though Rockowitz claims this began long before the market changed.

"Our focus was on doing things better, putting people closer to where factories are. In China we probably have 4,000 people now, compared with seven or eight years ago when we had less than 1,000."

Support jobs that go with design, such as fitting and colour approval, have moved from London and New York to China.

"It's creating a 24-hour clock. In London they do styles and give direction, and then when they're sleeping the information gets to Hong Kong and China where more of the dogwork is done."

Li & Fung is also reviewing all types of expenses, including travel, people and sample making, says Rockowitz, without giving details. But he says margins are "holding up. I think it will be similar in 08-09."

Adding market share
Growth will come from adding market share. The company still only has 6% of the US apparel market. "Even in the US we will grow in 08, not because the market is growing, but because of market share. We see lots of opportunities." 

In 2009, there will be more acquisitions. "There may not be as many. We want to save our cash for the right acquisition. But you will see some major outsourcing deals," says Rockowitz. 

Li & Fung is looking at new areas too, like the high tier. "Some virtual manufacturers we bought have brands like Theory, BCBG and Herve Leger. In the long run we see that as a solid business though it's tough now." 

With roughly 500 designers and a growing onshore business, the group is also in a position to benefit from strong demand for proprietary brands from retailers.

"They need a point of differentiation. We can do the design and sometimes come up with the concept as well. They get a private label and good margins."

One proprietary brand seeing fast growth is Van Zeeland handbags, acquired by Li & Fung last August. The New York importer targets the mid-tier and department stores, both areas facing tough trading in the current climate.

But handbags and accessories are one of the few areas still growing in the US, says Rockowitz. Van Zeeland had growth of 40-50% between 2007 and 2008 and will grow again in 2009, he says.

"This company has fantastic design at relatively good prices and it's gaining market share."

With a large handbag business at the discount end, the Van Zeeland deal gave Li & Fung access to the mid-tier, he explains.

"We like that area of accessories. We're looking at other companies in the US and UK. We will grow this business."

By Dominique Patton.