Blog: A sea-change in sourcing?
Leonie Barrie | 5 March 2009
Is apparel retailer Liz Claiborne pinning too much on its new supply deal with Li & Fung?
Revealing a fourth quarter loss of $828.9m yesterday (nearly double last year’s loss), as revenue fell 22.2% to $911.2m and the company was forced to write down the value of its brands by $683m, CEO William McComb said he was “excited” to be broadening the “successful sourcing relationship” with Li & Fung.
“Li & Fung has unparalleled global reach and product expertise, making them the perfect partner to make our sourcing operation more efficient while allowing us to deliver high quality, more irresistible product to our retailers and consumers around the world, “ he said.
“We expect Li & Fung to play a critical role in collaborating with us to drive gross margin improvement across our brands, beginning in the Holiday 2009 season.”
Liz Claiborne’s global sourcing operations were once seen as a key to its competitive strength. But now, in an about turn that is partly driven by the end of quotas, a refocus of its business onto a few major labels, and the slowdown in consumer spending, it is handing its sourcing business to the Hong Kong-based exporter and supply-chain specialist.
The deal covers the Lucky Brand, Juicy Couture, Kate Spade, and Isaac Mizrahi designed Liz Claiborne New York lines, and adds to an existing sourcing agreement for Mexx.
“Our 'one size fits all' sourcing model does not align well with our brand-centric strategy," McComb said. Indeed, he hopes that tapping into Li & Fung’s global sourcing network will not only give the company more flexibility, but will also tackle the specific needs of each brand, improve speed to market and ultimately benefit margins and profitability.
Of course the $83m in cash paid by Li & Fung for the privilege is a financial shot in the arm for Liz Claiborne too, and will help pay down some of its $744m in debt.
The company’s latest effort to help extricate itself from the recession also hints that its existing sourcing model just wasn’t efficient any more. Back in the 70s and 80s, the move to set up its own direct sourcing business went hand in hand with the need to secure large-scale manufacturing capacity in Asian countries where there was available quota.
But managing these large, complex strategies from the US has ultimately proven to be expensive, and does not give the firm the flexibility it now needs to source the best designs at the best price.
“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,” Li & Fung president Bruce Rockowitz told just-style in January. He added: “We're in a cycle now where price is paramount.”
In China alone, Li & Fung can call on between 3,000 to 4,000 suppliers – so it’s not surprising retailers are unable to set up an equivalent supply chain or get the same prices. Furthermore it’s impossible to manage that kind of business from afar.
For Li & Fung, this latest deal is expected to bring $1bn in revenue in 2009, and will of course take it another step closer to its three-year plan for sales of US$20bn and operating profit of US$1bn in 2010.
Whether or not it marks the beginning of the end of the sourcing model pioneered by Liz Claiborne, however, remains to be seen. Rockowitz, for one, is confident that other outsourcing deals are in the pipeline, “the type of deals you would never get in good times”.
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