Trouble in store for sidelined supplier Li & Fung
Large retailers increasingly working directly with factories, cutting HK firm out of the loop
Li & Fung, a supplier to retailers such as Walmart and Target, faces mounting pressure on margins and head-to-head competition with its big customers.
The large retailers are increasingly working directly with factories and cutting out the Hong Kong-based supply chain manager.
Li & Fung said this week Walmart had ended its call option to buy Direct Sourcing Group, a unit set up in 2010 to serve the world's biggest retailer.
"The most alarming fact for Li & Fung is that the customers would like to source products on their own, and it has to secure business by adding more value-added services," said Gabriel Chan, an analyst with Credit Suisse.
"Margin erosion could be structural, rather than cyclical, meaning the pressure on margins could persist for a prolonged period."
But Chan said the impact of Walmart's latest move on Li & Fung's future earnings should be limited as the unit was still only marginally profitable.
Li & Fung declined to comment on the loss of business from Walmart, but chief executive Bruce Rockowitz said last month that while retailers could technically work directly with factories they would still need middlemen like Li & Fung to manage logistics, provide communication tools and carry out quality checks.