On the surface, the recent sale of Oxford Industries' women's wear division to Li & Fung appears another small deal that shifts yet more textile manufacturing from West to East. However, the sale is significant in that it concisely illustrates a number of trends currently affecting the clothing industry. David Robertson reports.

The recent sale of Oxford Industries' women's wear division to Li & Fung for about US$37m is hardly the sort of deal to set the pages of the Wall Street Journal alight.

Atlanta-based Oxford Industries designs and produces branded clothing for its Tommy Bahama, Oxford Golf, Indigo Palms and Ben Sherman lines. It also has contracts to supply various items to Tommy Hilfiger (golf gear and dress shirts), Dockers, Nautica and Oscar de la Renta.

But the company also had a low-cost women's wear division that primarily supplied Target and Wal-Mart. This division contributed $260m of the company's $1.3bn turnover but was low profitability and constantly under pressure from retailers renowned for their ability to squeeze costs out of suppliers.

The women's wear division was put up for sale last month, although determining the actual price paid is somewhat confusing. Hong Kong's Li & Fung says it paid $37m while Oxford says it sold for $67m in cash and the elimination of $50m in letters of credit.

Buy more branded clothing
While the accountants are left to figure out who paid what, analysts agree that the deal gives Oxford a borrowing capacity of about $120m, which will almost certainly be used to buy more branded clothing lines like Tommy Bahama.

The money will also be used to continue investment in the embryonic Tommy Bahama and Ben Sherman line of women's wear.

Analysts at Cowen & Co said the sale of Oxford women's wear operation "gives the company increased borrowing capacity to fund potential future acquisitions, should help improve operating margins and financial returns over the long-run, and demonstrates management's commitment to transition the business towards higher-margin, well-differentiated company-owned brands."

Oxford needed to dump its low-cost operation and move further towards branded clothing because, like many other suppliers, it is feeling the pressure from retailer consolidation and competition.

Battle to lower costs
Wal-Mart and Target are locked in a seemingly never-ending battle to lower costs, which inevitably drives down manufacturer margins. As these retailers dominate at the low-cost end of the market, manufacturers are highly vulnerable to cancelled contracts and have little choice but to comply with the retailers' wishes.

Low-cost clothing companies are also worried by moves towards factory-gate sourcing. Wal-Mart and Target are increasingly cutting out the middle man and buying clothes direct from the factory, using either factory designers or their own.

As Cowen & Co note, another reason for Oxford to dispose of the women's wear division was so it could invest in new branded lines. Branded clothes generate more consumer loyalty and are therefore harder for retailers to dump on whim.

Oxford senior vice president and treasurer Reese Lanier told just-style: "In the US market we are seeing consolidation among the retailers, and the increased competition to supply those that remain makes getting close to the consumer very attractive to us.

"We like to have a brand that appeals direct to the consumer. We will continue to be a wholesaler but branded products give us more control over our destiny. We are holding our own destiny and don't have to cater so much to the whimsy of a retailer."

Step up the value chain
For Li & Fung the acquisition was also an important step up in the value chain. The company is pursuing a strategy of buying higher value functions (like design, access to retailers, onshore servicing, and logistics support) to complement its core sourcing business.

Li & Fung, which is planning a series of similar raids to take its sales to $10bn in the next few years, is one of a number of Asian companies making the move away from being only a low-cost labour proposition.

The addition of the Oxford women's wear business, for example, will give Li & Fung additional capability in handling fully coordinated fashion lines.

For Oxford, the challenge going forward is to find the right acquisition targets and to keep its brands relevant. If it is to succeed it will have to manage its brands better than it has done recently with Ben Sherman.

The company announced at the start of this month that its fourth quarter results would be hit by higher than expected returns and markdowns.

Lanier said: "Ben Sherman has been challenging because I think we became a little bit too fashionable and we allowed the brand to expand too quickly and put too much product in the market."

Retailer pressure, factory-gate sourcing, the popularity of higher margin branded products, and changes to the Asian textile market all figure in this sale.

But to make it work, Oxford will have to be more careful with its fragile brands because consumers can be even more demanding buyers than Wal-Mart.

By David Robertson.