Demand slowing but no fall off cliff
August 11, 2011 by Jules
Market vibes in a hot and sticky summer
We're hearing the following, that we thought to share with you:
- regularly deepening discounts on shipping to US and EU indicate a combination of announced additional shipping capacity and falling demand
- overall retail is not in excellent shape, prospects for this year's holiday season are not great, but nothing like the fall off a cliff experienced in 2008-2009 according to Li&Fung, quoted below in the Financial Times:
Li & Fung, the Hong Kong-headquartered sourcing company for retailers such as Walmart and Debenhams, sounded an upbeat note on Thursday, asserting that business conditions were “not at all” like those in 2008”, despite the current uncertainty over prospects for the global economy.
Bruce Rockowitz, the company’s chief executive, said that demand was “not falling off like it did in 2008” and that retailers in Europe and the US were in better shape than they had been three years ago.
The company, which sources clothing and furniture and beauty products from factories in the developing world for western retailers, nonetheless suffered a drop in net profit of 16 per cent in the first half of 2011 to US$236m, compared with US$278m a year ago. Revenues increased by 33 per cent to US$8.8bn in the first half.
The company has made four acquisitions in 2011, including US children’s clothes maker Fishman & Tobin, which it said together would contribute about US$900m in revenues.
Mr Rockowitz said that the average cost of inputs such as cotton and oil were “trending down” and that the company expected better profitability in the second half of the year as a result.
Operating costs jumped from US$559m to US$973m, which it attributed to acquisitions made last year. Mr Rockowitz said the company was in the process of streamlining operations to bring those costs down.
Li & Fung reported that the value of the products it sources from China, the production base for more than half its products, had jumped 30 per cent in the first half of 2011. The company, whose supply chain integrates production from factories in China, Bangladesh and Turkey, serves as a bellwether of production trends.
Mr Rockowitz said that China was successfully “reinventing itself” and suppliers there were making higher value added goods for luxury brands such as Coach.
Last year, William Fung, the company’s deputy chairman, predicted that the era of cheap goods from China was coming to an end. Mr Fung said that suppliers in China would have to pass on higher wage costs, which have risen by 20 per cent in the past year or so, and higher commodity costs.
On Thursday, the company said that margins in its trading division had edged up from 8.2 per cent a year ago to 8.5 per cent.
“In the first half, our margins went up a little bit. We are able to pass it [higher costs] on through thick and thin,” Mr Rockowitz said.
In: Market News