Li & Fung’s Rick Darling Frames Licensing’s Future during LIMA Keynote

Posted by Carol Spieckerman on June 22, 2011

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How do you add value to a retailer who is already designing, developing, and building a supply chain on an almost direct basis? As a member of last June’s Licensing Expo keynote panel, Rick Darling, president of LF USA, identified this conundrum as one of his organization’s significant challenges. At that time, designing and developing brands had already gone from being a departure for retailers to being a core competency and direct-to -retail licensing was emerging as the latest game-changer.

Based on his LIMA-sponsored keynote address, Licensing Today: A Global Challenge, at this year’s International Licensing Expo, licensors and licensees must gird for a new set of global pressures in the form of rising raw materials costs, escalating wages in China and emerging supply chain and branding models.

Li & Fung is on the front line of these inescapable realities, which will impact every link in the supply chain and every point on the retailer/licensor/licensee triangle, and not just in the short term. According to Mr. Darling, prices will typically go up by 15-20% this year, and in some cases as high as 30%. Over the next five to 10 years, inflation will continue at 3-5% per annum.

In a recent interview with CNBC, Li & Fung’s group managing director, William Fung, predicted that the minimum wage in China will increase by 13% over the next five years and alternative sourcing destinations provide no panacea, as Bangladesh, Vietnam, Indonesia and other developing economies monitor and adjust to the “China price”. China is quickly transitioning from an export-driven economy to a consumer-driven market; it already leads world demand for luxury goods and automobiles and the country ranks as the number two consumer of home appliances and consumer electronics. Given these new realities and Li & Fung’s unique position as a top global licensee and sourcing agent to both major retailers and brands, the insights that Mr. Darling provided during his keynote speech at this year’s Expo constitute the right message, in the right place, and in the nick of time.

I encourage anyone who works in retail or licensing to learn more about Li & Fung’s history and business model by listening to Mr. Darling’s presentation in full. Here, I’ll distill my take on key themes and takeaways from his presentation.

Don’t Overrate Organic
When Li & Fung saw that its aggressive growth plans could not be achieved organically in a recessionary environment, it set about promoting growth through acquisitions.

Calling Li & Fung a “really committed licensee,” Mr. Darling noted that the company chose brand licensing rather than brand ownership as its core model and to that end, Li & Fung has gone on to make a dizzying array of acquisitions and agreements. These include its acquisition of Jimlar Corporation, a leading footwear designer, distributor, and supplier, and Visage, a private label supplier to UK retailers. In 2010 alone, Li & Fung snatched up Jackel Group, which specializes in packaging, perfume and personal care, HTP, a jeans wear provider, and Cipriani Accessories, Inc., a designer, distributor and importer of accessories in the US, Canada and Mexico. The company also struck up a partnership with fashion stylist, Rachel Zoe, to create a line of women’s clothing, shoes, bags, jewelry and accessories that will debut later this year.

Although Li & Fung’s initial acquisition targets focused on “best of breed” importers and private label companies, they have moved into investments in fashion and entertainment licenses through the dedicated Music Entertainment Sports Holdings (MESH) division and have continued to focus on proprietary brand relationships, such as the just-signed, multi-year licensing agreement with Skechers to produce active and performance wear. Mr. Darling indicated that they are also “about to do something” in the growing-hotter-by-the-minute health and beauty area that will also tie into entertainment licensing.

Dance with the Ones that Brought You
Rather than giving up on retailers that had “verticalized” their businesses, Li & Fung looked for white space opportunities and specific examples of retailers that weren’t taking advantage of those opportunities or categories that were still in play. At the same time, Li & Fung continued to invest heavily in its existing retail relationships. As Mr. Darling noted, as the retail landscape has contracted and consolidated, retail and branding has become a “market share game” and the best shot at grabbing market share will come from expanding business with existing retail customers, even if it means partnering up and exploring non-core categories.

Make Your (Business) Case
Speaking of market share, it’s awfully expensive to manage licensing programs with hundreds, or even thousands, of licensees. Licensors will continue to rationalize their licensee bases while deepening relationships with their best partners. At the same time, escalating royalty rates, particularly for hot entertainment properties, won’t necessarily adjust to accommodate price increases and other pressures. Mr. Darling said that royalty rate discussions should not be viewed as a negotiation; rather, licensees should make solid business cases for how royalty rate adjustments will result in increased market share for all brand stakeholders.

Don’t Get Lost in Translation
Mr. Darling encouraged licensors and licensees to establish overseas platforms, just as Li & Fung has done, rather than operating out of the US and expecting to run global businesses “from afar”. Instead of letting its unquestioned status as a global sourcing powerhouse go to its head, Li & Fung has made a concerted effort to establish localized design teams and to adjust fabric, sizing, and other elements to local tastes and standards, while maintaining each brand’s “DNA”. Mr. Darling defined striking this delicate balance as one of the biggest challenges facing the licensing industry; however, nothing less will do in a global marketplace. The company also keeps a close watch on which global markets are maturing (Europe, for example) and which are under-addressed (South America was cited) or emerging (what he called the “BRI” countries: Brazil, Russia and India. China has become a separate conversation), then the company formulates corresponding regional strategies.

On the domestic front, he encouraged strategic collaboration between licensors and licensees, not only to troubleshoot on price increases, as passing on increases to consumers won’t be an option for most brands, but to look at ways to customize products by retailer, as only 10-12 retailers drive the majority of the business and each will expect some level of differentiation.

Get Comfortable with Discomfort
Describing the ongoing cost pressures as a “wake-up call,” Mr. Darling encouraged the audience fundamentally to change how they look at the business from a variety of perspectives. Those who will win the game in the coming years will find ways to wring even more efficiencies out of the supply chain by taking advantage of relationships oversees and supplying products closer to the factories that produce them. According to Mr. Darling, the days of bringing products into one country, then shipping them back out to another, are “over,” and successful companies will figure out how to lower margins while continuing to make money.

Mind the Details
At last June’s Expo, Mr. Darling spoke of a coming era of “truth and transparency”; he sees it as Li & Fung’s responsibility to protect the brands that it serves through rigorous quality control. Now, fully one-third of Li & Fung’s workforce is dedicated to full-time, on-the-ground factory monitoring and quality assurance and the company places particular emphasis on pre-screening and pre-production phases since these efforts mitigate problems down the road. Li & Fung also looks at sustainability as a holistic proposition that has evolved from being a business issue to a social issue that encompasses fair wages, worker treatment and environmental responsibility.

Mr. Darling’s authoritative and frank portrayal of licensing’s new challenges and opportunities begs for the industry to reassess old assumptions, embrace new realities and drive global value as never before. LF USA has set a powerful example of how to do just that.

I drilled down on additional retail and licensing topics in my exclusive follow-up interview with Rick Darling. Look for it here soon.