British fast-fashion etailer Boohoo has come under severe pressure following reports of poor conditions in the Leicester garment factories used by the brand.
The online retailer, a stock market darling whose market value eclipsed rival Asos last year, has seen its share price nearly halve since the start of July.
The brand has undoubtedly been tarnished by allegations that its UK suppliers paid staff far below minimum wage levels amid unsafe working conditions. However, the consumer fallout from the scandal might be the least of Boohoo’s worries.
Review of its business model
Boohoo is the epitome of disposable fashion, with its fashion priced so low that many customers might only wear the items once before throwing them away. It is said to source over half of its clothing from UK factories, allowing it to respond very quickly to trends it spots on social media. It took the etailer only a week to shift its focus to at-home leisurewear following the announcement of the lockdown in the UK back in March.
If Boohoo wants to continue with these quick turnaround times, it will need to increase its prices to reflect the higher costs associated with sourcing from the UK. If it is still keen to keep its prices as low as possible then it will inevitably need to shift a higher proportion of its production to cheaper locations in Asia, resulting in longer lead times. The management team will therefore have some tough decisions to make.
Increasing transparency to get investors back on board
Boohoo launched an independent review into the working conditions at its suppliers and also announced a £10 million investment to address “malpractice” in its supply chain. But this has not done enough to sooth investor concerns, with biggest shareholder Standard Life Aberdeen having dumped the majority of its holding in the business, stating that Boohoo’s response was “inadequate in scope, timeliness and gravity”.
Lessons to be learnt from Primark
Boohoo should take a leaf out of Primark’s book, after it too came under pressure about working conditions at its suppliers a decade ago. In order to increase the level of transparency, it appointed an ethical trading director and also has an ethical trade and environmental sustainability team.
While this was unable to prevent the disaster that occurred at the Rana Plaza building in Bangladesh in 2013, in which more than 1000 workers lost their lives, it is telling that Primark led the efforts to provide compensation to the victims’ families – much more so than other retailers that had also used suppliers based at the facility.
Boohoo should therefore seriously consider stepping up the level of governance it has over the supply chain. That said, the etailer has been headed by John Lyttle as CEO since last year. Lyttle was previously COO at Primark and should therefore have first-hand knowledge of how Primark addressed these issues.
Re-establishing wholesale partnerships
In addition to its own brand websites, which include PrettyLittleThing and Nasty Gal, Boohoo sells through online marketplaces on a wholesale basis. However, partners including Zalando, Next and Asos removed Boohoo’s brands and collections from their sites following news of the allegations.
While the wholesale business only accounts for around 5 per cent of overall sales, Boohoo will be keen to re-establish this channel. This will not be possible until these partners are convinced that the etailer has taken corrective action to address its supply chain issues.
Dealing with consumer fallout
The mere fact that Boohoo has 5 million – mainly 16 to 30 year-old – customers in the UK should put to rest the notion that younger generations are heavily into brands that are sustainable. Perhaps not everyone is aware that working conditions are generally sacrificed to create a £5 dress, but it is fairly clear that the disposable fashion ethos is anything but sustainable.
Sales growth at Boohoo might take a small hit in the short term, but the experience of other fashion brands that were previously caught up in ethical trading scandals including Primark, H&M and C&A shows that consumers are easy to forget and forgive. Tellingly, a #boycottboohoo campaign has failed to gain traction on social media.
It is also worth noting that Boohoo already generates nearly half of its sales in overseas markets – with the US and Europe key. News surrounding the working conditions in the Leicester factories has been fairly sparse outside the UK, and hence overseas sales growth should remain firm going forward.
