8/28/16, 10:08 AMLower Retail Prices Threaten Profits of Middleman Li & Fung - WSJPage 1 of 5http://www.wsj.com/articles/online-shoppings-rise-threatens-to-cut-out-middleman-li-fung-1472105939?mod=djemlogisticsThe migration of shoppers online has been squeezing profitsthroughout the retail industry—including at Li & Fung Ltd., one of theworld’s largest factory middlemen.The more than 100-year-old company, based in Hong Kong, contractswith 15,000 factories globally to make apparel, toys and other goods.Its core business has been connecting Western retailers such asAbercrombie & Fitch Co. and Target Corp. with factories around theworld.But as consumers increasingly shop online for the best deals, retailershave been forced to offer lower prices, putting pressure on factoriesand intermediaries alike.Middlemen need to “either figure out ways to create value, or they willbe going out of business,” said Edwin Keh, chief executive of the HongKong Research Institute of Textiles and Apparel. “The bigger questionis whether middlemen can still exist in a globalized economy.”This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visithttp://www.djreprints.com.http://www.wsj.com/articles/online-shoppings-rise-threatens-to-cut-out-middleman-li-fung-1472105939BUSINESS ASIA ASIAN BUSINESS NEWSLower Retail Prices Threaten Profitsof Middleman Li & FungAs retailers try to stay competitive, factories and intermediaries feel pressure| |Li & Fung Chief Executive Spencer Fung said the company is working more closely with brands.PHOTO: BRENT LEWIN/BLOOMBERG NEWSUpdated Aug. 25, 2016 7:51 p.m. ETBy KATHY CHU8/28/16, 10:08 AMLower Retail Prices Threaten Profits of Middleman Li & Fung - WSJPage 2 of 5http://www.wsj.com/articles/online-shoppings-rise-threatens-to-cut-out-middleman-li-fung-1472105939?mod=djemlogisticsOn Thursday, Li & Fung reported that net income dropped more than50% to $72 million for the first half, while revenue dropped 6.4%.Li & Fung Chief Executive Spencer Fung said weakness in the globaleconomy and heavy discounting by retailers weighed on the earnings.“The environment is bad,” Mr. Fung said. “It’s probably the toughestwe’ve seen.”Li & Fung reported earnings after trading ended on the Hong Kongstock exchange, where its shares closed at $3.94 Hong Kong dollars(U.S. $0.51). Shares have slipped 23% this year.Mr. Fung said the company is working closely with brands to win moreof their business. Brands often work with multiple intermediaries,and, increasingly, some are sourcing directly from factories to cutcosts.Li & Fung is also encouraged by demand for the company’s expandedservices—including factory inspection as well as logistics anddistribution—aimed at helping brands navigate the growingcomplexity of the supply chain, according to Mr. Fung.As more shoppers go online, demand is growing for unique private-Online BurdenLi & Fung's business model is coming under pressure amid growthin online shopping.Growth in retail e-commerce markets, asof August 2016Li & Fung’s totalrevenue, !first half ofeach yearLi & Fung’s net income,!first half of each year*Excludes Hong Kong †Forecast from May 2016 Note: Includes products or services ordered usingthe internet via any device, regardless of the method of payment or fulfillment; excludes traveland event ticketsSources: eMarketer (growth); the company (revenue, net income); S&P Global MarketIntelligence (estimates)RELATED COVERAGERetail Slump Shows Amazon Effect (http://www.wsj.com/articles/kohls-shows-effects-of-retail-slump-as-some-ponder-the-amazon-factor-1463084218) (May 12)Retail Sherpa Li & Fung Grapples With Client Loss (http://www.wsj.com/articles/retail-sherpa-li-fung-grapples-with-client-loss-1432243801) (May 21, 2015)8/28/16, 10:08 AMLower Retail Prices Threaten Profits of Middleman Li & Fung - WSJPage 3 of 5http://www.wsj.com/articles/online-shoppings-rise-threatens-to-cut-out-middleman-li-fung-1472105939?mod=djemlogisticslabel products, creating opportunities for factories and middlemen,according to William Connor II, the chief executive of Connor Group,which sources $2 billion annually in products for companies such asTJX Cos. and Crate & Barrel.This move to private-label products is a “huge opportunity” for Li &Fung, Mr. Fung said.Founded in 1906 as a porcelain and jade trader, the company began totake its current shape in the 1970s when Mr. Fung’s father and uncle,both educated at Harvard, introduced Western-style managementpractices and expanded into design, marketing and transportation.When Mr. Fung took the reins in 2014, the company spun off somemoney-losing businesses, including ones that owned clothing brandsor managed licenses for brands such as Disney and Nintendo, and cutback on acquisitions.Two years ago, Li & Fung also set up a unit called Vendor SupportServices to provide factories with consulting services on safety,compliance and efficiency, as well as access to financing andinsurance.The moves came as brands demanded lower prices from factories andmiddlemen to manufacture goods, while requesting products be mademore quickly and closer to the delivery site as online shopping grew.Online sales are expected to nearly quadruple to $2.4 trillion in China,the world’s largest e-commerce market, between 2015 and 2020, andto nearly double in the U.S. to $684 billion, according to eMarketer.The growth of e-commerce means “prices are constantly underpressure as cost-conscious consumers compare prices and demandthe best value,” said Stephen Lamar, executive vice president of theAmerican Apparel & Footwear Association.Brands expect their supply chain partners to respond by “cutting costsor offering more value,” he said.As shoppers switch from brick-and-mortar to online stores, brandsare also placing smaller orders with factories and middlemen,‘The bigger question is whether middlemen can still exist in aglobalized economy. ’—Edwin Keh, chief executive of the Hong Kong Research Instituteof Textiles and Apparel8/28/16, 10:08 AMLower Retail Prices Threaten Profits of Middleman Li & Fung - WSJPage 4 of 5http://www.wsj.com/articles/online-shoppings-rise-threatens-to-cut-out-middleman-li-fung-1472105939?mod=djemlogisticsweighing on profits.Sourcing agents “don’t have a choice but to adapt” to the demands ofthe e-commerce world, said Mariana Kou, an analyst at CLSA. “This isa
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