Look closer: Is there blood on your shirt?

Reading Time: 4 minutes

india-garment-workersThree H&M shops, outlets of the Swedish fashion chain Hennes & Mauritz, recently opened in Bangkok, attracting droves of mostly female teenagers to buy what they feel is reasonably priced branded youth fashion.

H&M has precisely met the point of time when the rising spending power and increasing brand consciousness of the younger middle-class in urban Thailand is causing shopping sprees of people on the hunt for Western-style ‘fast fashion’.

Under similar preconditions, H&M entered four other markets last year, namely Bulgaria, Mexico, Latvia and Malaysia. Net profits of the company, the world’s second largest clothing retailer behind Spain’s Zara and ahead of US-based GAP, rose by 6.6 per cent to $2.7 billion in 2012.

This is good for the company’s stakeholders, but it again raises the question on what such huge profits are based on, as they are certainly not reflected in the product as such, let alone their quality.

H&M’s fashion is sewn in Cambodia, Vietnam, Indonesia, Bangladesh, India, Sri Lanka and other low-cost destinations, as it is the case with all discount fashion chains.

The interesting thing is that H&M clothing has been available at informal shops in market areas such as Pratunam in Bangkok before, be it as grey imports or equipped with fake labels for a fraction of the price. Anyway, the quality did not differ from what is now sold in the fancy shopping mall stores.

It is, of course, all just a branding exercise.

The recent collapse of a garment factory in Bangladesh, a country where H&M has been fighting with labour unions over years over the improvement of working conditions, safety standards and pay, has highlighted the question again: Why are costs and profits in the fast-fashion industry so extremely distorted?

Also, when nearly 300 workers passed out due to overwork, fumes from chemicals, poor ventilation and malnutrition at a Cambodian factory supplying H&M in April 2011, why do these people have to work under conditions of the early industrial era of the 19th century, or, even similar to slaves, as the new Pope Francis put it on Labour Day 2013?

Collapsed garment factory building in Dhaka, Bangladesh, April 24
Collapsed garment factory building in Dhaka, Bangladesh, April 24

Fashion retailers have been busy to counter allegations that they are stoking low labour standards and wages with their extreme price pressures on traders and manufacturers. Some have touched base with NGOs such as the Clean Clothes Campaign, others, such as H&M, have released a list of their supplying factories that are supposed to follow the H&M code of conduct. H&M lists more than 160 supplying factories in Bangladesh alone, but, to their credit, the factories in the collapsed building, which were run by Phantom Apparels, Phantom Tac, Ether Tex, New Wave Style and New Wave Bottoms, are not among them.

However, talk is cheap. German discount fashion retailer KiK, which has been under scrutiny from clean clothes campaigners over years, has said it has pulled out from high-risk factories in Bangladesh already in 2008, citing inferior labour conditions. Interestingly, a large number of products with the KiK fashion label have been found under the debris of the collapsed factory. The company said is was “surprised, concerned and appalled” by the findings.

Italy’s fashion chain Benetton, which originally said it was not making clothes in the collapsed Bangladesh garment factory, also had to change its course when Benetton shirts turned up in the rubble.

Pope Francis said he had been “shocked” by reports that some of the Bangladesh labourers had been paid just $50 a month. Maybe the Vatican’s media department should seek consultancy from Inside Investor on minimum wages in ASEAN.

So: Why do textile workers need to be exploited in such a way? Apparently, it won’ t lower the profits of a textile chain in a great way if labourers would get a decent salary in the sweatshops.

In fact, wage payments for garment workers such as in Bangladesh, but also in Cambodia, Myanmar or Vietnam, just account for 1 to 2 per cent of the sales price of a textile product.

Let’s do the math and take a generic branded T-shirt that sells for $15 in a shop in the US, for example. Of that price, a factory worker sees probably 20 cents. The factory owner sells the shirt, with raw material costs already factored in, at around 80 cent to a trading agent, who gets a cut of about the same amount from the buyer. It costs about $1 per shirt to cover shipping and duties.

When the T-shirt arrives at its destination at a retail warehouse, it therefore cost $2.80 for the fashion company. 20 per cent of the sales price, or $3, goes into marketing and advertising, 5 per cent, or $0.75, into running operational costs, and the remaining amount, minus local sales taxes, flows as profit to the fashion chains, in this case around $7.50 per shirt. In this example, the profit margin for the fashion label is 50 per cent.

Bangladesh dead workers
Bodies of textile workers in the streets of Dhaka. 430 people died in the desaster.

So, even if the wages for the garment workers would be instantly doubled (plus 100 per cent, 40 cents instead of 20 per cent per shirt) , it would reduce the profit margin of the fashion label by just 2.66 per cent. That said, the fashion companies would easily be able to afford covering adequate salaries for factory workers from their profits without risking to wreck their balance sheets.

The fashion labels argue that they have to calculate every percentage point change in the supply chain to remain competitive in the discount fashion environment. However, critics say that labour wages are the easiest part of the chain to squeeze because businesses can easily control them, unlike the price of cotton, shipping, duties or shop rents.

At the end, textile companies will have to change their business matrix anyway. The era of super-cheap labour in Asia is ending, and at least Western consumers get increasingly wary about incidents such as in Bangladesh’s garment factories.

It will take time though to enlighten the new enormous consumer armada arising, Southeast Asia’s youth, who storm every new fashion shop as soon as it opens, in their eagerness to climb up the social status ladder by showing brand awareness without knowing on what chimaera this is built on.

 

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Three H&M shops, outlets of the Swedish fashion chain Hennes & Mauritz, recently opened in Bangkok, attracting droves of mostly female teenagers to buy what they feel is reasonably priced branded youth fashion. H&M has precisely met the point of time when the rising spending power and increasing brand consciousness of the younger middle-class in urban Thailand is causing shopping sprees of people on the hunt for Western-style 'fast fashion'. Under similar preconditions, H&M entered four other markets last year, namely Bulgaria, Mexico, Latvia and Malaysia. Net profits of the company, the world's second largest clothing retailer behind Spain's Zara...

Reading Time: 4 minutes

india-garment-workersThree H&M shops, outlets of the Swedish fashion chain Hennes & Mauritz, recently opened in Bangkok, attracting droves of mostly female teenagers to buy what they feel is reasonably priced branded youth fashion.

H&M has precisely met the point of time when the rising spending power and increasing brand consciousness of the younger middle-class in urban Thailand is causing shopping sprees of people on the hunt for Western-style ‘fast fashion’.

Under similar preconditions, H&M entered four other markets last year, namely Bulgaria, Mexico, Latvia and Malaysia. Net profits of the company, the world’s second largest clothing retailer behind Spain’s Zara and ahead of US-based GAP, rose by 6.6 per cent to $2.7 billion in 2012.

This is good for the company’s stakeholders, but it again raises the question on what such huge profits are based on, as they are certainly not reflected in the product as such, let alone their quality.

H&M’s fashion is sewn in Cambodia, Vietnam, Indonesia, Bangladesh, India, Sri Lanka and other low-cost destinations, as it is the case with all discount fashion chains.

The interesting thing is that H&M clothing has been available at informal shops in market areas such as Pratunam in Bangkok before, be it as grey imports or equipped with fake labels for a fraction of the price. Anyway, the quality did not differ from what is now sold in the fancy shopping mall stores.

It is, of course, all just a branding exercise.

The recent collapse of a garment factory in Bangladesh, a country where H&M has been fighting with labour unions over years over the improvement of working conditions, safety standards and pay, has highlighted the question again: Why are costs and profits in the fast-fashion industry so extremely distorted?

Also, when nearly 300 workers passed out due to overwork, fumes from chemicals, poor ventilation and malnutrition at a Cambodian factory supplying H&M in April 2011, why do these people have to work under conditions of the early industrial era of the 19th century, or, even similar to slaves, as the new Pope Francis put it on Labour Day 2013?

Collapsed garment factory building in Dhaka, Bangladesh, April 24
Collapsed garment factory building in Dhaka, Bangladesh, April 24

Fashion retailers have been busy to counter allegations that they are stoking low labour standards and wages with their extreme price pressures on traders and manufacturers. Some have touched base with NGOs such as the Clean Clothes Campaign, others, such as H&M, have released a list of their supplying factories that are supposed to follow the H&M code of conduct. H&M lists more than 160 supplying factories in Bangladesh alone, but, to their credit, the factories in the collapsed building, which were run by Phantom Apparels, Phantom Tac, Ether Tex, New Wave Style and New Wave Bottoms, are not among them.

However, talk is cheap. German discount fashion retailer KiK, which has been under scrutiny from clean clothes campaigners over years, has said it has pulled out from high-risk factories in Bangladesh already in 2008, citing inferior labour conditions. Interestingly, a large number of products with the KiK fashion label have been found under the debris of the collapsed factory. The company said is was “surprised, concerned and appalled” by the findings.

Italy’s fashion chain Benetton, which originally said it was not making clothes in the collapsed Bangladesh garment factory, also had to change its course when Benetton shirts turned up in the rubble.

Pope Francis said he had been “shocked” by reports that some of the Bangladesh labourers had been paid just $50 a month. Maybe the Vatican’s media department should seek consultancy from Inside Investor on minimum wages in ASEAN.

So: Why do textile workers need to be exploited in such a way? Apparently, it won’ t lower the profits of a textile chain in a great way if labourers would get a decent salary in the sweatshops.

In fact, wage payments for garment workers such as in Bangladesh, but also in Cambodia, Myanmar or Vietnam, just account for 1 to 2 per cent of the sales price of a textile product.

Let’s do the math and take a generic branded T-shirt that sells for $15 in a shop in the US, for example. Of that price, a factory worker sees probably 20 cents. The factory owner sells the shirt, with raw material costs already factored in, at around 80 cent to a trading agent, who gets a cut of about the same amount from the buyer. It costs about $1 per shirt to cover shipping and duties.

When the T-shirt arrives at its destination at a retail warehouse, it therefore cost $2.80 for the fashion company. 20 per cent of the sales price, or $3, goes into marketing and advertising, 5 per cent, or $0.75, into running operational costs, and the remaining amount, minus local sales taxes, flows as profit to the fashion chains, in this case around $7.50 per shirt. In this example, the profit margin for the fashion label is 50 per cent.

Bangladesh dead workers
Bodies of textile workers in the streets of Dhaka. 430 people died in the desaster.

So, even if the wages for the garment workers would be instantly doubled (plus 100 per cent, 40 cents instead of 20 per cent per shirt) , it would reduce the profit margin of the fashion label by just 2.66 per cent. That said, the fashion companies would easily be able to afford covering adequate salaries for factory workers from their profits without risking to wreck their balance sheets.

The fashion labels argue that they have to calculate every percentage point change in the supply chain to remain competitive in the discount fashion environment. However, critics say that labour wages are the easiest part of the chain to squeeze because businesses can easily control them, unlike the price of cotton, shipping, duties or shop rents.

At the end, textile companies will have to change their business matrix anyway. The era of super-cheap labour in Asia is ending, and at least Western consumers get increasingly wary about incidents such as in Bangladesh’s garment factories.

It will take time though to enlighten the new enormous consumer armada arising, Southeast Asia’s youth, who storm every new fashion shop as soon as it opens, in their eagerness to climb up the social status ladder by showing brand awareness without knowing on what chimaera this is built on.

 

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