M1 Tronc Commun RSE/CSR Exam

Read the article and answer the following question.

Q. How would you advise Boohoo to deal with labour issues going forward? Justify your
answer.

Boohoo comes out fighting after market tears it to shreds

Financial Times by Jonathan Eley, Patricia Nilsson and Attracta Mooney July 9 2020

Boohoo’s chief executive insisted that his company had “nothing to hide” after fresh allegations
about the treatment of workers who make its clothes. Some of the fast-fashion retailer’s biggest
investors are betting he is right. The company’s largest independent shareholder, Jupiter Asset
Management, increased its holding on Monday, even though Boohoo’s share price went into freefall
after the Sunday Times alleged that factories supplying Boohoo were paying as little as £3.50 an
hour. The fund manager raised its Boohoo stake, acquired through its recent takeover of Merian
Global Investors, from 9.6 to 10.1 per cent “following conversations with management about its
strategy”. Another top-25 shareholder said that while it was “fully aware” of recent concerns and
would be raising them with management, “this kind of supply chain issue is not new and one we
have identified and discussed as a significant business risk for Boohoo and many other retailers in
the fast-fashion industry”. The support from investors provided some relief to Boohoo in an
otherwise crushing week that had seen more than £2bn wiped off the retailer’s £5bn market value
between Monday and Wednesday, and left it battling a backlash on social media, the suspension of
its brands from several fashion websites and threats of enforcement action. Boohoo has shrugged
off previous revelations about suppliers in Leicester, including an investigation in 2018 by the
Financial Times that found unsafe working conditions, unauthorised subcontracting and
underpayment of wages. But a suggestion that the city’s cramped, low-tech factories contributed to
a spike in Covid-19 cases, and threats from cabinet ministers to shut down those not practising social
distancing, mean this time it may be harder to bounce back.

Boohoo came out fighting on Wednesday, appointing a senior QC to investigate its supply chain and
promising to strengthen its own compliance auditing processes and invest in improving conditions in
Leicester — at a total cost of £10m. “We want consumers to believe in our brand,” said chief
executive John Lyttle. Its share price recovered some of its losses on Thursday morning, jumping 30
per cent. Many Boohoo products are made by large suppliers in the world’s garment manufacturing
hubs such as Bangladesh, China and Morocco. But about two-fifths are made in the UK, mostly in
Leicester. Factories there can copy designs worn by celebrities and produce them in small batches
quickly. If they sell well, Boohoo can scale up its orders.

Mahmud Kamani and Carol Kane, the company’s co-founders, spent decades in the clothing supply
industry and are personally acquainted with many factory owners. One of the companies mentioned
in the Sunday Times report is controlled by a director who has business interests with Mr Kamani’s
elder brother. Carry Somers, founder of the industry campaign group, Fashion Revolution, said her
main concerns about Boohoo’s supply chain were that she could not learn anything about it. “They
say [the factory allegedly paying low wages] is not one of their authorised suppliers, but how do
shareholders know that if they don’t publish a list of suppliers?” Boohoo ranks near the bottom of
Fashion Revolution’s supply chain transparency index of the world's 250 largest fashion brands. It

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still fared better than some, but Ms Somers said most of the retailer's points came from having
published the policies that its suppliers needed to abide by. “Policies are one thing, but what’s really
important is how these are carried out,” she said. Fiona Lambert, a sourcing expert who has worked
for Next and River Island, said labour abuse in Leicester had gone on unchecked for years, partially
because better wages would lead to many buyers moving work abroad.

“Anyone doing the right thing should know what the lowest possible price [a manufacturer can
produce at] and my concern is that some clothing prices just don’t add up.” Mr Lyttle said suppliers
should only subcontract to companies that are approved by Boohoo and comply with its code of
conduct, which includes provisions about wages and working conditions. But he planned to expand
the company’s existing presence in Leicester so it could “look at all premises, not just those on our
lists”. A longstanding problem for Boohoo is that production of its clothes may be outsourced from
trusted suppliers into a network of more than 1,000 tiny outfits that typically employ less than 10
staff each and move around the city. But some analysts are sanguine about the costs that could
come from a clean-up of the industry. John Stevenson at Peel Hunt has made no changes to his
profit forecasts for Boohoo because he does not think its profitability is under threat. “The company
operates on a cost-plus model. If costs rise they will increase prices,” he said. “If a £7 dress suddenly
costs £8, will demand disappear? I doubt it.” John Lyttle, Boohoo chief executive: “We want
consumers to believe in our brand. We have nothing to hide”.

Boohoo’s profit margins are higher than those of online rivals such as Asos and Zalando, although
this is partly because Boohoo sells only its own products and outsources much of its IT. Gross
margins, which reflect only the difference between the cost of goods and their sale price, are
comparable with other retailers, said Mr Stevenson. “They don’t appear to be making supernormal
profits on the back of Leicester.” There have been suggestions that social media influencers, a key
conduit between Boohoo and its young customer base, might now become more wary of the brand.
“If you are an influencer and you were to promote Boohoo right now you would lose a huge number
of followers,” said Sara McCorquodale, founder of Corq, an analysis agency. “The influencer business
is about popularity . . . influencers ignore this at their peril.” But there is little evidence that
unsavoury conduct revelations have a significant impact on consumers, especially at the budget end
of the industry. “Values tend to wash out at the till,” was the wry observation of one prominent
fashion industry executive.

The removal of Boohoo brands from third-party platforms including Asos, Next Label, Zalando and
Very.co.uk is also unlikely to be costly in financial terms. Boohoo said that such wholesale revenue
accounted for less than 4 per cent of the total in its latest financial year. Ms Somers of Fashion
Revolution said more forceful government intervention was needed to stamp out labour abuses.
“We know that some of these brands will only respond to legislation.” In the longer term, Boohoo’s
growth and diversification — it has acquired other brands such as Karen Millen and Oasis to widen
its appeal — will dilute the influence of Leicester. The city’s factories produce only simple designs
and its limited capacity means its overall share of the mix will shrink. It has already fallen from 71
per cent of Boohoo’s production in 2014 to about 40 per cent now. Even so, the latest revelations
could still have a cost beyond the £10m set aside by the company for better enforcement. Elevated
scrutiny of the company is likely to continue, as will pressure to join groups such as the Ethical
Trading Initiative. Boohoo cherishes its entrepreneurial spirit and reputation as a disrupter. But as
investors including Jupiter demand closer engagement with the company over labour issues, Mr
Lyttle faces the challenge of not just expanding the company — but helping it to grow up.

https://www.ft.com/content/6e4b36b5-2174-4410-ab6d-5eb492792d6d

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