If You Want Gin­seng, On­tario Has Plenty

Glob­al­iza­tion ▶ As a big Hong Kong buyer strug­gles, farm­ers feel the pain ▶ “I’ve got to turn it into cash, and no one’s buy­ing”

Bloomberg Businessweek (North America) - - Global Economics -

Peter Vanberlo has C$2.5 mil­lion ($1.9 mil­lion) of pre­mium Amer­i­can gin­seng in 546 plas­tic-wrapped boxes, just wait­ing to be shipped to China. And wait­ing, and wait­ing.

His sale of the Septem­ber har­vest of the beige, gnarled roots—pop­u­lar in China for their pur­ported health and aphro­disiac ben­e­fits—is stalled be­cause the big­gest buyer, a com­pany in Hong Kong, melted down spec­tac­u­larly in Jan­uary, leav­ing farm­ers such as Vanberlo in limbo. “It’s just stuck here,” he says. “I don’t want it sit­ting here. The banks don’t like it sit­ting here. I’ve got to turn it into cash, and no one’s buy­ing, be­cause ev­ery­one is wait­ing to find out what hap­pens with this big buyer.”

The “big buyer” is Hang Fat Gin­seng, a com­pany whose stock trades in Hong Kong. It was founded by broth­ers Jef­frey and Matthew Ye­ung more than two decades ago. From its ori­gins as a whole­saler of Chi­nese medicine, Hang Fat grew to dom­i­nate the North Amer­i­can gin­seng trade, buy­ing as much as 70 per­cent of On­tario’s crop.

In 2015, how­ever, the com­pany sud­denly stopped pay­ing, and no one will­ing to com­ment for this ar­ti­cle knows why. Hang Fat had a stress­ful 2015 based on re­cent fil­ings. The pre­lim­i­nary an­nual re­port shows the com­pany has been dis­count­ing its prod­ucts. For all of 2015 the com­pany lost HK$438 mil­lion ($56.5 mil­lion) on sales of HK$1.2 bil­lion. In 2014 its main­land cus­tomers took 90 days to pay; last year, in the mid­dle of China’s eco­nomic slow­down, it took them 189 days.

The 150-odd gin­seng grow­ers in Nor­folk County, Ont., didn’t know what was hap­pen­ing to their big buyer, but by the fall it was clear some­thing was wrong. Vanberlo es­ti­mates that a third of lo­cal farm­ers sold their en­tire crop last year to Hang Fat and haven’t been paid, while an­other third are owed 50 per­cent. Then on Jan. 28, at 9:30 a.m., a ru­mor spread in Hong Kong that some­one was dump­ing Hang Fat stock. By 10:36 a.m., when trad­ing was sus­pended, the shares had plunged 91 per­cent, wip­ing HK$7.1 bil­lion off the com­pany’s mar­ket value.

Within weeks, a cred­i­tor of Hang Fat’s had ap­pointed re­ceivers from PWC to sell com­pany-owned shares equiv­a­lent to 25 per­cent of its mar­ket value. Hang Fat re­mains sol­vent and the Ye­ungs are still di­rec­tors, but any change of con­trol would give cred­i­tors the right to call in loans, ex­pos­ing it to fur­ther tur­moil.

The icy win­ters and sandy loam that gin­seng thrives on have turned On­tario into the world’s largest pro­ducer. For the grow­ers in Nor­folk County, 90 miles south­west of Toronto, gin­seng is buried gold. The crop contributes C$630 mil­lion an­nu­ally to the prov­ince’s econ­omy, ac­cord­ing to the On­tario Gin­seng Grow­ers As­so­ci­a­tion. But the as­so­ci­a­tion can’t pre­dict the im­pact of the Hang Fat “sit­u­a­tion,” as lo­cals call it.

Last month grow­ers met in Delhi, Ont., a town of 4,000 sur­rounded by rows of straw-cov­ered mounds of gin­seng be­neath tarps that pro­tect the shade-lov­ing plant in sum­mer. They packed into a lo­cal hall for the OGGA’S an­nual meet­ing. Chair­man Carl Atkin­son spoke of “sit­u­a­tions out of our con­trol” and “in­cred­i­ble in­sta­bil­ity.” “There was noth­ing new,” says Vanberlo, who grows the root on 60 of his 1,500 acres. He says about 4 in 10 lo­cal farm­ers rely heav­ily on the crop.

In Fe­bru­ary, Hang Fat said in a fil­ing to the ex­change that the Ye­ung broth­ers “were ex­pe­ri­enc­ing cer­tain fi­nan­cial dif­fi­culty,” and that 850 mil­lion shares had been sold to sat­isfy cred­i­tors. The Ye­ungs had pledged al­most a quar­ter of the com­pany’s shares against loans “for per­sonal use.” From 2011 to 2014, the year the com­pany went pub­lic, Hang Fat’s rev­enue al­most tripled, to HK$1.2 bil­lion, while profit grew at an an­nu­al­ized rate of 67 per­cent. In China’s stock mar­ket rout last July, Hang Fat shares halved in five days. In mid-fe­bru­ary, Hang Fat said it planned to is­sue 40 bil­lion new shares for HK1¢ apiece, to pay debts. If the plan gets share­holder and reg­u­la­tory ap­proval, it will leave the Ye­ungs with less than 5 per­cent of the com­pany. Hang Fat and the broth­ers didn’t re­spond to re­quests for com­ment. In the re­cent 2015 an­nual re­port, the au­di­tors state “the Group’s abil­ity to con­tinue as a go­ing con­cern is highly de­pen­dent upon the fi­nan­cial sup­port from its bankers and the Group’s abil­ity of rais­ing cap­i­tal from new in­vestors.”

For Vanberlo, it’s one more chal­lenge in the busi­ness of grow­ing the lu­cra­tive but frag­ile crop. “Gin­seng wants to die the mo­ment you put the seed in the ground,” he says. “We’re just kind of hop­ing it’ll sur­vive this, too.” �Ben­jamin Robert­son, Ka­tia Dmitrieva, Jeanny Yu, and Jen Skerritt

The bot­tom line Gin­seng farm­ers add C$630 mil­lion to On­tario’s econ­omy, but that fig­ure could shrink be­cause of a ma­jor buyer’s melt­down. Edited by Christo­pher Power and Matthew Philips Bloomberg.com

Gap carved out a niche as a cool, ev­ery­day ap­parel com­pany be­gin­ning with its found­ing in 1969. It dom­i­nated un­til about 2002, when a fast-paced ex­pan­sion left its fi­nances in dis­tress. Af­ter bring­ing in a se­ries of ex­ec­u­tives and slash­ing costs, it fum­bled over the next decade. In 2011, Peck be­came pres­i­dent of Gap North Amer­ica, soon in­tro­duc­ing a line of col­ored jeans that led to two years of com­pa­ra­ble sales growth and reestab­lished the com­pany as a leader in ca­sual Amer­i­can style. “When col­ored denim came out, it was great for ev­ery­one be­cause peo­ple didn’t have it. It was new and fresh,” Ap­pel says.

Gap has since suf­fered an iden­tity cri­sis. The com­pany—which in­cludes Old Navy, its best-sell­ing brand, and Banana Repub­lic—is con­fronting the same forces as other la­bels, J.crew and Aber­crom­bie & Fitch among them. (Same-store sales growth at Old Navy has de­clined in four of the past five months.) As fast-fash­ion re­tail­ers such as H&M, as well as In­ter­net ap­parel com­pa­nies, have gained mar­ket share, shop­pers—es­pe­cially mil­len­ni­als, who fa­vor th­ese chains—find them­selves with more op­tions and lower prices.

“We have too many stores,” says Joan Volpe, man­ag­ing co­or­di­na­tor for the Cen­ter for Pro­fes­sional Stud­ies at the Fash­ion In­sti­tute of Tech­nol­ogy. “We have the de­vel­op­ment of mo­bile and e-com­merce, so it isn’t that a re­tailer can’t pros­per, it’s the model that’s got to change.”

Ev­ery re­tailer is com­pet­ing for a shrink­ing pool of cus­tomers who lately spend more of their money on meals or ser­vices, such as man­i­cures and travel. Still, they de­mand greater value and dis­counts from their cloth­ing pur­chases, says Gabriella San­taniello, pres­i­dent and founder of re­tail re­search com­pany A-line Part­ners. That can hurt re­tail­ers in the long run if they can’t find ways to max­i­mize traf­fic with­out cre­at­ing the im­pres­sion that every­thing is al­ways on sale.

Gap reg­u­larly of­fers dis­counts to move in­ven­tory sit­ting on shelves and racks longer than it should. Signs ad­ver­tis­ing dis­counts of 30 per­cent, 35 per­cent, 40 per­cent are ubiq­ui­tous. “To as­sert we’re not go­ing to be a pro­mo­tional brand would be in­ap­pro­pri­ate,” Kir­wan says, “but I think we can change the way we com­mu­ni­cate value to the cus­tomer.”

Last June the com­pany an­nounced it would close a quar­ter of Gap stores in North Amer­ica, about 175. It has elim­i­nated 250 jobs, mostly at Gap head­quar­ters. The com­pany has re­vamped its web­site to fea­ture 360-de­gree views of prod­ucts and added video. It’s up­dated win­dow dis­plays and in­stalled in-store sig­nage to point out the at­tributes that make its jeans and T-shirts unique. And it’s try­ing to be more nim­ble, test­ing small num­bers of items on­line to de­ter­mine what shapes and de­tails cus­tomers like best be­fore stock­ing larger amounts in stores.

“We have a mas­sive amount of cus­tomer eye­balls on our brand ev­ery day,” Kir­wan says about Gap’s so­cial me­dia fol­low­ers, which in­clude about 7.7 mil­lion fans on Face­book and 1.2 mil­lion on In­sta­gram. The com­pany spends to mar­ket prod­ucts but isn’t plan­ning a full-blown ad cam­paign un­til the hol­i­day sea­son.

De­spite the stum­bles, some Gap cus­tomers are loyal. Al Disal­va­tore, a 35-year-old pas­tor and school prin­ci­pal in Drums, Pa., shopped at a lo­cal store monthly be­fore it closed last July. Now he drives al­most two hours to go to a Gap in Philadel­phia, though not as of­ten as be­fore.

Ap­pel and other re­tail ex­perts say Gap is still an at­trac­tive brand, but it will have to dif­fer­en­ti­ate it­self in a crowded mar­ket. That re­quires re­sist­ing the urge to turn to what’s worked in the past, says an­a­lyst Howard Tu­bin of Guggen­heim Se­cu­ri­ties. “You need to pick a niche or a point of view,” he says. “The cus­tomer isn’t go­ing to come run­ning back into the store be­cause it’s a new sea­son and there’s more color. You need that wow fac­tor back.” �Lind­sey Rupp

“We have a mas­sive amount of cus­tomer eye­balls on our brand ev­ery day.” ——Jeff Kir­wan, global pres­i­dent, Gap brand Year-over-year change of sales at Gap brand stores open at least a year and on­line

Color denim jeans hit the shelves Con­sec­u­tive quar­ters of sales de­clines The bot­tom line In­vestors and an­a­lysts are pes­simistic about Gap’s abil­ity to turn around eight straight quar­ters of sales de­clines.

Matthew Ye­ung

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