For the Instagram and Tik-Tok generation – the key market of ultra-fast fashion – price, choice and newness are what matters. Customers want to buy today what their favourite social influencer or celebrity wore yesterday – and then boast about their new purchases online. For Boohoo, it’s all about speed and agility. Small runs (of maybe 300 to 500 items at a time) minimise inventory risk and limit the need to mark down prices. This model favours a sub-contracted network of small suppliers, each with fewer than 10 workers and situated close to home.
In June, activist group Labour Behind the Label alleged that to meet the high demand during lockdown, Leicester’s garment manufacturers continued to work at full capacity. Many were in dilapidated buildings with poor ventilation, with neither social distancing nor any form of protection. When some workers began showing Covid-19 symptoms, it said they were told to carry on working to fulfil orders.
The implication was clear. Throughout June, Covid-19 cases in Leicester rose so much that its lockdown had to continue after 4 July, when it was lifted in the rest of the country. The allegation was that the garment industry was to blame. And the company taking about 80 per cent of its production was: Boohoo.
Public consciousness
The Sunday Times then published an article that claimed that an undercover reporter had been paid £3.50 an hour, way below the national minimum wage of £8.72. This was in a factory, it said, called Jaswal Fashions, a supplier of Boohoo. Boohoo’s share price dived.
In response, Boohoo issued a long statement saying that it was “shocked and appalled by the recent allegations” and “we are committed to doing everything in our power to rebuild the reputation of the textile manufacturing business in Leicester”. Perhaps boohoo’s directors hadn’t expected their company to absorb the supply chains of its rivals who had earlier pulled out due to similar concerns.
Boohoo added that Jaswal Fashions had never supplied the group and it believed that another (unidentified) business was using Jaswal’s former premises. The order had been placed with a UK company, which had sub-contracted to another, which had made the garments in Morocco, and these were what The Sunday Times had witnessed being repackaged for Boohoo’s Nasty Gal brand.
A person who worked in the sector confirmed that orders placed with one supplier are often outsourced to another factory, “usually via family connections. Sometimes retailers are even unaware of what ‘country’ their products are made in”. Audit trails are a waste of time, he added, “because I found that suppliers will just sign anything. The only way to properly audit how garments are made, is to have physical boots on the ground, inspecting factories in person. With hundreds of suppliers, scattered around in multiple countries, that’s complex and very expensive. That’s why so many retailers don’t do it.”
It’s déjà vu all over again
All this rather miffs Sarah O’Connor of the Financial Times. She had drawn attention to the scandal two years ago (May 2018: ‘Dark factories: labour exploitation in Britain’s garment industry’). She found then that the going rate for sewing machinists was £4-£4.40 an hour, and £3 for packers. How did the unscrupulous suppliers get away with it? Simple. If someone works 40 hours for £4.40 an hour, it’s recorded as 20 hours at £8.80.
She gave an example of a sweatshop owner being paid £2.33 for making a £7 Boohoo dress, which a legally compliant factory owner (using expensive machines) said he could not make for less than £5.65. Undercover workers sent by Channel 4’s Dispatches programme had found similar practices in 2010 and 2017. Research by the University of Leicester in 2015 found that the low wages applied mostly to “female workers whose language and/or socio-cultural capabilities are too limited to work in other industries”. It also said that undocumented workers (migrants, or students, or people with visitor visas, with no right to work in the UK) constitute the most vulnerable group. The research said that they “often work for even lower or no wages; work night shifts; and are dismissed at will…”
In a recent article, Ms O’Connor says that she first heard about Leicester’s dark factories from a “senior Whitehall figure”. They were an open secret. A Leicester official warned her that shutting them down would make people unemployed. There was no other work they could do.
In 2018, Ms O’Connor testified to a Parliamentary Select Committee. So did Carol Kane, Boohoo’s co-founder and executive director. The government rejected every one of the committee’s recommendations.
The disrupter disrupted
As Algy Hall pointed out recently, the scandal torpedoes Boohoo as a sustainable investment. For those concerned about environment, social, and governance (ESG) values, Boohoo fails on all three counts.
In response to the allegations, Boohoo has announced an independent review of its UK supply chain, to be led by Alison Levitt QC. The existing review by independent, ethical audit and compliance specialists is to be speeded up. And it’s “prepared” to spend £10m to eradicate bad practice. Good intentions, then. All that’s missing is actually doing more about it.
The environment also suffers due to fast-fashion. It’s easy to overlook the carbon footprint from air freighting supplies and from returns of internet purchases. Boohoo’s main fibre is polyester. That sheds microfibres, which pollute land, rivers and oceans. Boohoo says it’s using more recycled materials. Cotton relies on fertilisers and pesticides, and up to 20,000 litres of water can be needed to produce just 1kg. Organic cotton needs much less, but relies on cheap labour. Boohoo is “exploring” more sustainable sources. Good intentions again. Boohoo denies “wear-it-once” accusations. 72 per cent of fast-fashion goes to charity shops, it says; and 51 per cent is worn until it falls apart. An interesting quirk of mathematics.
On governance, there’s concern that Mahmud Kamani, its executive chairman and co-founder, wields too much power. Take PrettyLittleThing. Boohoo bought two-thirds of it in December 2016 for £6m. After Boohoo was recently accused (falsely) of overstating the contribution of this investment to its cash flow, boohoo used most of a £200m share placing to help buy out the remaining third from its two shareholders. One was Mr Kamani’s son, Umar. The price? Between £270m and £324m – about 100 times more per share than four years earlier. Boohoo’s independent directors said that this price was fair and reasonable.
Being on Aim, Boohoo can follow the Quoted Companies Alliance (QCA) Governance Code, a code specifically tailored for small and mid-sized quoted companies. Boohoo is much larger. The QCA code allowed boohoo to adopt a woeful management ‘incentive’ plan at the end of June. If the directors can crank up the share price to 600p on 17 June 2023, the two co-founders, Mr Kamani and Ms Kane, will receive £50m each (on top of the uplift in value of their substantial shareholdings). Another of Mr Kamani’s sons, Samir, who heads up BoohooMAN, will receive £25m. If Boohoo pays out these maximum amounts, it could create shares to dilute shareholders’ investments by 2 per cent. The UK Corporate Governance Code would have required a shareholder vote for this. Proxy voting advisers would have been all over it. But Boohoo is a Jersey company (presumably for tax reasons) and, it says, a vote is neither required under the less stringent QCA code, nor under the Aim rules.
Nailing jelly to the wall
So boohoo’s not for ethical investors. The unethical case goes something like this:
- It’s unrealistic to expect any retailer to police its supply chains. Ethical investing is not always practical.
- Why pick on boohoo? Many other everyday products, such as smartphones, computers and coffee, involve exploitation (details are on slaveryfootprint.org.) And plenty of UK workers, such as some self-employed, receive less than the minimum wage.
- If UK sweatshops are forced to comply with legislation, and they close down, manufacturing will shift to countries where pay and working conditions come under less scrutiny. Boohoo already sources about 60 per cent of its products from outside the UK.
- Just as UK investors are less concerned about foreign working conditions, many foreign investors remain unconcerned about UK social issues – they’ll step in if the price falls too far. Boohoo now makes half its sales abroad.
- Focus on the positive. Boohoo is about growth – and it’s committed to helping its contracted suppliers grow too, provided they comply with its code of conduct. It also has industry-leading payment standards that cannot be matched by competitors. And its marketing spend of £90m a year, plus its network of 14m active customers and millions of social media followers, is a barrier to entry for competitors.
- Boohoo’s recent purchases of high-street brands, such as Karen Millen, Coast, Oasis and Warehouse, suggest that it could diversify into more expensive, higher-margin, online businesses. Another catalyst for growth?
- And the negatives. Boohoo’s brands depend on reputation. It’s gone toxic with some social influencers and its adverts are blocked from some websites. That could blow over. There’s political risk too. The government was complicit two years ago, but it’s become notoriously unpredictable, and who knows whether it will take action this time.
Awkward choices
Boohoo has a strategic decision to make. Should it make the right noises, carry on and wait for the storm to pass? Shift its supply chain out of the UK, so increasing production times for its UK customers? Or try to clean up Leicester’s garment industry? That would require co-operation, and the increased bureaucracy and costs would lower margins and profits.
Meanwhile, private companies such as Missguided and small Aim companies below the radar of public scrutiny, would be glad to step into any vacuum. Boohoo’s suffering the sort of dilemma that disrupters face when they come of age.
