Li & Fung achieves new limited sourcing agreement with US Wal-Mart Stores
With the Li & Fung Boar’s consent the wholly owned subsidiary, Direct Sourcing Group Pte. Ltd. (DSP) has concluded a new agency agreement with US Wal-Mart Stores, Inc., superseding the previous buying agent agreements signed on January 28, 2010. In turn the Option Agreement allowing Wal-Mart Stores. Inc to purchase all of the shares of Direct Sourcing Group Pte.Ltd., has been terminated
There are seemingly some alterations to the agreement concluded in 2010. Under the new agency agreement and related agreements, DSP will continue as the primary direct resource for Sam’s Club in the USA and will continue to provide buying agency services to Wal-Mart U.S. and certain Wal-Mart international markets on a category-specific basis on terms similar to those under the previous buying agency agreements. The new agency agreement will continue for a period of five years with an option to extend for an additional two years upon written mutual consent. Additional the Li & Fong group will trade with Wal-Mart International markets in Latin America on a principal to principal basis. This move to a supplier relationship will allow the Group to provide Wal-Mart International markets with design, replenishment and other services usually not provided as a buying agent.
In other words, this new agreement somehow affects the up to now unique Li & Fung Group relationship with Wal-Mart, but allows at the same time new opportunities to the Hong Kong firm. Other customers of Li & Fung such as Carter’s Inc and Gymboree Corp have plans to buy more products directly from factories. According to the Wall Street Journal, Bill Simon, President of Wal-Mart U.S. declared at a recent financial analyst meeting in New York that Wal-Mart uses Li & Fung to “ do things that are complicated for us but less complicated for Li & Fung”.
Li & Fung CEO Bruce Rockowitz stated in August that even when retailers work directly with factories, they need an intermediary to manage factory logistics, communications and quality checks, such services that Li & Fung is eager to provide beyond supplying goods. U.S. analyst Spencer Leung wrote last year that under the former 2010 agreement between the two companies, Li & Fung likely was sourcing goods for stores in Wal-Mart’s international operations, in places such as South America and Japan. Wal-Mart, meanwhile was using its own staff to procure more than 70 % of the company’s product volume in countries such as the U.S., Canada and Great Britain.
The Wal-Mart former deal with Li & Fong is considered by some analysts as a catalyst for the Hong Kong firm’s growth. At the time of concluding the former deal Goldman Sachs called it a transformational agreement that could double Li & Fung’s business. Other analysts questioned the profitability for Li & Fung, given Wal-Marts reputation for cutting costs in its supply chain. To handle the Wal-Mart’s agreement, Li & Fung set up DCG employing hundreds of people. The development was seen as part of Wal-Mart’s move toward direct sourcing, since the company had an option to acquire DSP and take over its supplier relationships in 2016. Wal-Mart commented at that time that it hoped eventually to use its own staff to source 80 % of private-label goods, such as Faded Glory clothing, cutting costs 5 % to 15 % within five years.
Li & Fung had initially estimated that the former deal would generate USD 2 billion in revenue in the first 12 months, but DSP generated only USD 1.7 billion in revenue and was recording an operating loss in 2011.
It has to be added that Wal-Mart stores made recently a business decision not to carry Amazon tablets and e-readers beyond existing inventory and purchase commitments. This includes all Amazon Kindle models current and recently announced. Wal-Mart stated that the decision was consistent with its overall merchandising strategy. Wal-Mart’s decision comes months after Target Corp stopped also selling these items. Wal-Mart dwarfs other retailers in overall sales, but it trails Amazon and others in online sales and has just been trying to beef up its internet business. The move shows the importance of Wal-Mart as a powerful market and purchasing force worldwide and this fact was also decisive to curtail the sourcing agreement with Li & Fung.