Sunny day, sweeping the clouds away. On my way to where the air is sweet. Can you tell me how to get, how to get to Sesame Street?
Do you remember watching the TV show Sesame Street? I do. When I was a kid, the part of the show that fascinated me the most were the “how it’s made” videos. I remember watching endless parades of freshly sharpened, rainbow-colored pencils being packed with industrial precision into waiting cardboard boxes, and delectable dollops of chocolate being marched in neat, obedient rows on swiftly moving conveyor belts that deposited them into vaguely familiar-looking cellophane packets. All I wanted to know was how each and every thing in the world was made. These days, when I read news stories about how things are made in the global economy, namely the clothes that I wear, sewn by textile manufacturers in Bangladesh, I’m a lot less excited to find out the truths about production lines and the people who make things. Sometimes, reality is too harsh.
Coronavirus Domino Rally
As the coronavirus outbreak immobilises the global economy, all parties along supply chains are feeling the squeeze. The fashion retail sector is experiencing a domino effect of financial strain. Stalwarts such as H&M and Nordstrom have announced production furloughs due to low business volume, with H&M reporting that a whopping 74% of the global group’s 5,065 stores are currently being closed due to the coronavirus. That closure, “together with subdued demand in the markets that are still open, has had significant negative impact on sales so far in March,” reports the brand. Net sales in March were down 46% for the Swedish brand. With bottom lines at risk, operations are being cut back across the board.
As if future lost income was not bad enough, brands and retailers asked for discounts on already-placed orders.
H&M is not the only fashion label facing tough times. British label Laura Ashley is searching for a buyer as its company recently began bankruptcy proceedings. Primark reported that all of its 376 stores in 12 countries are now closed, which means an eye-watering loss of 650 million pounds (USD 796 million) in net sales per month.
Sadly, that means that all along the supply chain, other parties in the textile industry are affected too. In mid-March, global workers’ rights group Clean Clothes Campaign said more than 100 factories in Bangladesh have already lost production orders. As if future lost income was not bad enough, some brands and retailers have been asking for discounts on already-placed orders. This is detrimental for factories that have already paid to purchase raw materials for the now cancelled or postponed goods. The usual practice is that fashion brands don’t pay until the goods are produced and shipped, which means a cash flow problem is now passed onto those factories.
The Clothes of Shame
According to Sourcing Journal, brands like Zara, Mango, H&M, Primark, Macy’s and J.C. Penny are some of the apparel brands that have halted production, which has left their vendors in the lurch. Other brands also doing the same are Ann Taylor, American Eagle and Uniqlo. Zara has even told its vendors to hold ALL production.
Another supplier was blunt: “We are screwed big time.”
The truth is, a country like Bangladesh relies on garment production for as much as 80% of its exports. “Just in the last one week, an estimated $100 million [in orders] have been asked for cancellation in Bangladesh,” reports Sourcing Journal. “It seems that…maybe 80 percent of factories will not be able to pay more than a month [worth of wages], and 20 percent may.”
But it’s now estimated that not even 20% of factories can continue to pay their staff after the next 30 days.
What will happen to the factory workers who won’t get paid? With reports of skyrocketing food prices in some developing countries, due to unharvested crops and increased demand for certain goods, it’s anyone guess how Bangladeshi workers will fare in the next few months.
“Meet Our Business Partners”
In tough times like these, some global brands are standing by their counterparts. Primark has set up a hardship fund to pay the wages of factory employees affected by their canceled orders. This covers Bangladesh, Cambodia, India, Myanmar, Sri Lanka and Vietnam.
H&M has reportedly kept good on its promise to take all orders that are ready or in the work-in-progress stage. “They didn’t cancel the existing ready goods, nor did they ever say that they wouldn’t take the ones which were work in progress. Initially, they asked us to put them on hold and then almost immediately said they would take them all,” says Bangladesh Garment Manufacturers and Exporters Association (BGMEA) president Rubana Huq. What they did halt were orders slated for April, May and June, with hopes to resume them in a few weeks’ time.
But while it’s easy to villainize some fashion brands for their knee-jerk reactions in the coronavirus situation, their quick measures to cut costs and stay afloat may not be 100% evil. Let’s face it, the closure of a large fashion change would not be helpful to a country like Bangladesh, who is so dependent on its fashion export industry. They’re all in the supply chain together, and the idea of “sustainability” now has a bigger meaning than just being environmental. It’s in everyone’s best interests that businesses remain viable.
And what with the American unemployment benefit claims doubling in just one week to hit 6.6 million claims, it looks like consumer spending in the US will not be increasing much in the next month or two, or possibly even the next quarter. Perhaps we should not be entirely harsh with big fashion brands for being cautious.
A Time For Change
From the other end, there are some apparel industry players who have pointed out that the most common practice of shifting the financial burden to manufacturers is simply unethical. “What this perilous state of affairs brings to light is the ethics of companies when dealing with their apparel manufacturing partners,” writes Mostafiz Uddin in Sourcing Journal. “It would appear that, in some cases, the moral compass of many fashion companies is askew, as they seem to forsake the relationships that have been built with their partners and are prepared to cut them adrift during these unprecedented times.”
Instead of using a contract as a way to protect both parties, the small print is now used as the prextext for cancellation of orders or delay in payment. It’s a one-way conversation, where C-level executives are giving orders and there is no open dialogue between the parties.
What are the consequences for manufacturers? One supplier responding to a recent Better Buying survey said that the halted production has “created a short-term liquidity crisis. It has caused an inability for us to pay our vendors, employees and landlords. All cash is being preserved to pay our employees first and foremost.”
Another supplier was blunt: “We are screwed big time.”
If the big brands don’t change their one-sided practices, they may find themselves equally in a bind when their suppliers put their feet down. In its recently released “Guidelines for “Better” Purchasing Practices Amidst the Coronavirus Crisis and Recovery” report, industry pressure group Better Buying has suggestions for better practices. It urges brands and retailers to prepare for a future where their suppliers will not provide credit through long payment terms, and will even expect advance deposits or COD payments.
Amongst other suggestions, it also advocates that fashion brands and retailers should secure the cash their company needs in order to cover their contractual obligations, including accounts payable with suppliers. That means that companies like H&M, which pushed forward a “Pay Later” program (where “members of H&M’s customer loyalty programme can shop and pay later against invoice, whether shopping in store or online”), shouldn’t be resorting to these methods to run their businesses. If their business model is risky, that risk shouldn’t be passed on to their counterparts when the chips fall. That’s just bad business.
In times like this, internal belt-tightening measures should be the first port of call, such as cutting executive pay. So far, one brand even asked their executives to take a haircut to the tune of 20% reduction of salary, albeit temporarily.
If no other lessons are learned from this COVID-19 driven situation, at least we should take note that pretending everything is business as usual is not the solution either. Fashion retailer Asos has taken heat for staying online and open for business, thus forcing their workers to carry on working in unsafe conditions. Asos explained it this way. “We are striking the right balance between keeping our warehouse operational, for the good of our employees and the wider economy.”
Getting to Sesame Street
Amidst all the doom and gloom, will there be good times ahead soon? China’s sleepy-eyed emergence from the previous strict lockdown means that consumer activity is picking up, with some brands seeing a rebound in demand as stores quickly reopen. But is China’s market a big-enough tide to lift all boats?
The World Trade Organisation doesn’t think a full trade rebound will be so soon. World merchandise trade is set to plummet by between 13 and 32% in 2020 because of the coronavirus pandemic, and a recovery in trade probably won’t happen till 2021, depending on how countries react to and handle the outbreak. As in that cheery theme from Sesame Street, sunny days ahead are what we’re all looking for. In the meantime, we will just have to be patient–and remember to whom we have obligations, contractual or otherwise.
UPDATE: On 9 April 2020, Zara announced that it was fulfilling all of its financial responsibilities by paying its suppliers, in the wake of an online petition that circulated by a non-profit organisation. The #PayUp petition was launched on 3 April 2020.