MYER will nearly double its direct outsourcing of fashion, homewares and merchandise from China to $200 million a year by 2016 to help support its aggressive store roll-out program and profit from the growing proportion of sales generated by its Myer exclusive brands. 

Returning this weekend from Shanghai where Myer held a board meeting, chief executive Bernie Brookes told Business Day the group already administered $70 million in outsourcing from the region with a $50 million contract with Li & Fung, the world's biggest manufacturing-outsourcing company, to expire in August.

Mr Brookes said Myer would soon open an office in Shanghai and a second in Hong Kong to co-ordinate the increase in outsourcing by Australia's biggest department store with 40 staff in each location to be led by Myer's general manager of sourcing, John Amm, who has recently relocated to China with his family.





Much of the outsourced product will find itself in Myer's exclusive in-house brands, which last financial year contributed more than 17 per cent of sales and are earmarked to keep growing as they deliver premium margins for the business.

China has long been a prime destination for retailers seeking cheap products to fill their shelves and aisles; however, Mr Brookes warned that inflationary pressures in the burgeoning world power due to higher wages, evolving labour conditions and rising commodity prices could soon flow through to steeper prices at the check-out.

''They [factories] are all looking for price increases later in the year, for the next summer stock, and I think depending on how much cotton goes into a garment and depending on where the factory is [in China], we are going to see some inflationary pressure out towards the end of the year out of China,'' Mr Brookes said.

''When the new stock arrives, October, November, for summer, as that arrives it will be repriced at a higher level.''

Mr Brookes, who has been travelling to China up to three times a year for the past 25 years, said on his recent visit with other Myer directors that he noticed a shift in labour costs and general working conditions.

''The biggest change I saw now is in labour laws, and you are now seeing people work 44 hours a week as the sort of mandatory hours, seeing people earn rates that have double and triple time when they work over the 44 hours and have Sunday shifts where they get double and triple time.

''So Western world labour laws have caught up with China, and we are seeing therefore an increase in labour costs, and increases in electricity, and that is what is putting the pressure on prices.''

William Fung, co-founder and head of Li & Fung, said recently that wages and conditions for factory workers were surging and he has predicted China's overall wages bill would lift by 80 per cent over the next five years.

Apart from supplying Myer, Li & Fung does billions of dollars a year in work directly and indirectly for other retailers including US supermarket giant Walmart and, locally, Coles and Woolworths.

Mr Brookes and his board met with 65 suppliers in Shanghai, holding a conference and dinner at the Four Seasons hotel where discussions were held on moving $50 million in outsourcing currently undertaken done by Li & Fung to direct control by Myer, then on to new suppliers.

It was only the second time Myer had held a board meeting outside Australia, with the first held last year in Hong Kong.

The initial five-year contract with Li & Fung was signed in 2006 as Myer was cut away from the Coles Myer group and restructured by its private equity owners.

In Shanghai, Mr Brookes and his team updated the 65 suppliers about Myer's progress, retail conditions in Australia and the details surrounding the expiry of the Li & Fung deal.

Mr Brookes said higher input costs for outsourcing manufacturers in China was a key theme of his meetings.

''[Factories] are having to pay more for labour, with overtime rates and minimum hours and standard rates, paying healthcare, and so an average employee would pay 44 per cent on costs to the government for pensions and sick pay and illness pay; a lot of those have gone up,'' he said.

''Pressure on costs and entitlements, pressure on the base wage - and rightly so - seeing an increased standard of living of the factory worker in China, which I think is not only much needed but also quite exciting.''

Mr Brookes said some outsourcing was moving geographically within China to keep a lid on rising labour and raw material costs.

''The cycle [in China] is enormous, changes every couple of years, and the changes I have seen is a move away from the Pearl River delta area, which is the south China area, and everybody is moving north where the electricity prices are cheaper, where the cost of resources and labour is significantly cheaper and there are a number of incentives by some of the local governments to relocate factories.''

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So what is the solution?