The supply-chain tie-up with Chinese sourcing giant Li & Fung is a vote of confidence in the flagging retailer.
Debenhams’ new £40m credit facility, agreed with its existing lenders last week, may have bought the department store extra time to agree a broader refinancing and recapitalisation, but it is the partnership with sourcing group Li & Fung that could add greater value in the long term – to both parties.
Debenhams expects the agreement with Li & Fung – also announced last week – to “cover a material part of our own-brand sourcing”, and deliver “improved product quality and lead times, higher achieved margins and better working-capital efficiency”.
While suppliers and analysts have called the £40m credit facility a “side show” and “drop in the ocean”, the new sourcing partnership has been hailed as an important vote of confidence from a leading, global sourcing giant in a struggling department store. So how will it work?
For Debenhams, the partnership is an opportunity to consolidate its supply base and bring in new suppliers, believes a source close to the department store: “Debenhams will have access to a fully integrated digital platform, which is certainly more efficient than its current, fragmented model.
Most of Debenhams’ stores are profitable and cash-generative
David Beadle, vice-president – senior credit officer at Moody’s
“With Li & Fung’s virtual 3D-design tools, Debenhams will be much quicker in terms of product development, turning around new lines in hours rather than weeks.” Currently, own-brand and exclusive partnerships account for 50% of Debenhams’ total sales.
“The focus is on better product, shorter lead times and reduced costs,” the source adds.
The sentiment is echoed by Debenhams chief executive Sergio Bucher, who said in a statement that the partnership with Li & Fung will be a key part of its turnaround plan: “It gives us access to state-of-the-art technology in the LF digital platform, providing end-to-end visibility across our supply chain. This will help us anticipate and respond more quickly to trends and our customers’ preferences, as well as delivering better-quality product.”
One private-label supplier says Debenhams wants to benefit from Li & Fung’s “octopus tentacles” – a reference to the group’s dominance in sourcing in the Far East: “You want Bangladesh? You want Cambodia? You’ve got it [with Li & Fung],” he says. “But retailers often presume that they own factories. They don’t. They won’t be on top of your product – they’re just a finance house.”
As retailers increasingly search for direct relationships with factories rather than through suppliers, Debenhams’ scope – even in troubled times – offers an opportunity to a “middle man” such as Li & Fung. Despite 50 stores earmarked for closure and a new approach required for a further 20, Debenhams still trades profitably from 100.
“You need a strong supplier to be a good retailer, and Li & Fung is a gigantic middle man. They have huge buying powers and are tough negotiators,” says the private-label supplier. “They’re a fantastic business.”
Li & Fung look at consolidating suppliers, so for them it’s business as usual
John Stevenson, Peel Hunt retail analyst
Analysts suggests that Li & Fung could certainly benefit from the partnership.
“Debenhams’ business model is facing challenges but it does have a wide range of customers and products,” says David Beadle, vice-president – senior credit officer at Moody’s. “Most of their stores are profitable and cash-generative.”
Peel Hunt retail analyst John Stevenson agrees: “It’s an opportunity for Li & Fung to take that business,” he says.
Another industry observer adds: “This is what they do. They look at consolidating suppliers, so for them it’s business as usual. You could ask, why didn’t it happen sooner?”
But where Li & Fung could triumph, existing suppliers may suffer. Several sources believe Debenhams will cut ties with existing partners.
One menswear supplier likens the partnership to that of Marks & Spencer and the Lindsey brothers, who signed a deal with the retailer in 2017, after being hired in 2014 as sourcing directors for general merchandise to make savings in its clothing supply chain. They were previously responsible for the growth of Next Sourcing, which streamlined Next’s supply chain to improve speed and efficiency.
“I’m surprised that Li & Fung would want to partner with Debenhams – why would anyone want to touch the business? – but it’s a sensible move for Debenhams to take,” he says.
In Marks & Spencer’s case, the deal with the Lindsey brothers coincided with the retailer pulling away from more of its third-party suppliers in a bid to streamline its processes and cut costs.
The source close to Debenhams says it is “too early to tell” whether it will follow a similar path. Within the last six months around 15 sourcing jobs have been cut as a result of a restructuring. Debenhams could not confirm whether it would make further redundancies to its existing supply chain, but Drapers understands there are no immediate plans to do so.
Looking ahead, the £40m credit line, which Debenhams said will “act as a bridge to facilitate a broader refinancing and recapitalisation”, gives the department store some short-term respite from its immediate financial problems and pressure from its biggest shareholder, Sports Direct-to-House of Fraser tycoon Mike Ashley, who last month managed to win enough votes to force chairman Sir Ian Cheshire to resign and to remove Bucher from the board. The £40m facility is the exact same value as a loan offered by Ashley, which the Debenhams board rejected in December.
“Lenders want to reach an agreement on the longer-term capital structure, but that remains uncertain,” says Moody’s Beadle. “Debenhams said they want to refinance their debt facility by the first half of this calendar year, but we don’t know what that will look like yet. We could see losses to some of its financial creditors.”
But if analysts were forced to pick a likely outcome, there are no prizes for guessing what that might be: a company voluntary arrangement (CVA). Only two weeks ago, property experts warned Drapers that Debenhams would be likely to file for a CVA ahead of its next quarterly rent deadline at the end of March to accelerate the rate of planned store closures.
“A CVA doesn’t need shareholder approval,” says Peel Hunt’s Stevenson. “Debenhams is not going to negotiate terms with landlords so, in the long term, it will be a CVA-driven solution.”
Li & Fung declined to comment on this piece.
The Drapers Verdict
Debenhams has been handed a lifeline. Even if the consensus that the £40m credit facility is just a token, a show of support from core lenders, it could – just about – take the spotlight away from the department store for the next few months. Who knows, the acronym “CVA” might get a break, too?
But if Debenhams hoped for short-lived anonymity, its sourcing partnership with Li & Fung has thrown it straight back into the limelight. The fact that a leading, global sourcing group has chosen to partner with a struggling department store is a public show of confidence in Debenhams, which will get access to a far superior, integrated digital platform. It will also benefit from Li & Fung’s stronghold in the Far East.
Li & Fung, too, sees opportunity in Debenhams’ customer base and profitable stores.
But no one is betting on a fairytale ending.