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”

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.