In March 2020, it was reported that Global fashion brands had refused to pay for over $16 billion worth of goods since the outbreak of COVID-191. When the pandemic hit Europe and the U.S. and stores were forced to close, many brands and retailers responded by pushing the risk down the supply chain, cancelling orders placed before the crisis - some of which had already been shipped. This financially devastated factories since they had already paid for fabric and other production costs for these orders. Many were reported to have been left with no money to pay workers' wage.
In April 2020, the International Labour Organization (ILO) issued a call to action from across the global garment industry to support manufacturers during the COVID-19 pandemic, leading many fashion brands to commit to paying their suppliers.
As of March 2021, all fashion companies held by EdenTree have promised to pay their suppliers, but one year into the COVID-19 pandemic, questions remain regarding the long term impact that the pandemic has had on the industry’s ability to manage its supply chain. Therefore, in the second quarter of 2021, EdenTree engaged with ten fashion companies in our holdings seeking to find answers to these questions.
When asking about the general impact the pandemic has had on them we noted that companies most affected by the pandemic were those with little to no online presence, and those with limited casualwear offerings to clients, particularly brands which rely on older clientele or luxury brands relying on tourists.
Most companies we engaged with, with the exception of Primark, saw an increase in online sales during the first periods of lockdown, despite a slight decline when stores reopened, this nevertheless remained a trend. Primark stated that whilst they are considering trialling a click-and-collect model, they do not see themselves having an online offer in the future, potentially leaving them vulnerable to future disruptions.
All companies we engaged with noted a shift in consumer demand towards casualwear and athleisure, and have said that they’ve adapted to this by redesigning their formalwear to casualwear and where possible using fabrics from cancelled orders.
Whilst all companies in our holdings have promised to pay suppliers for cancelled orders, approaches towards managing order cancellations were different across the peer group. Some companies had set cut-off dates by which they would accept completed orders from suppliers. When asked whether they believe that this would increase pressure on suppliers to complete orders, companies replied that the cut-off date was calculated in-line with the regular lead time terms at time of cancellation for majority of orders, and therefore they do not believe there would be an increased risk. With regards to in-production orders, some companies replied that suppliers would only be paid for the cost of the fabrics and not labour costs, with N Brown Group replying that any orders cancelled and not re-phased, suppliers would not receive payments.
Companies with an international presence said that where they could, they diverted orders to shops in countries which were not in lockdown to use the garments and avoid cancellations.
Many companies discussed the importance of a symbiotic relationship between suppliers and the success of the business. One example is Sosandar, who explained that because they treated suppliers fairly during the pandemic, suppliers are now prioritising Sosandar orders. A few companies noted that not only do they believe that cancelling orders is unethical, there is also a co-dependence with factories, as if they had cancelled orders the factories would have been insolvent and there would be a shortage in factories following the pandemic.
All companies reported to have attempted to avoid waste production as much as possible, and said that they have paid suppliers for all cancelled orders where fabric was purchased and have redesigned models in order to avoid waste generation. Whilst this is generally encouraging, it was interesting to hear that at times the need to use up existing fabrics prevented companies from advancing their sustainability goals. For example M&S were unable to use recycled polyester and organic cotton in their clothes due to the fact that they needed to finish using fabrics purchased pre-pandemic.
Other examples include Hugo Boss who sold some of their fabrics and trims to third parties, donated clothes to refugees, and have started a new repurposing initiative where developers are first asked to look at what material they have in stock before designing a new product.
Many companies have passed on the avoidance of waste to the consumer, by having sales in stores to reduce levels of inventory, some with incentives for customers, such as M&S raising £8m for the NHS by donating a portion of their sales.
Supply chain management
When enquiring about payment conditions to suppliers, replies varied from 30 to 120 days either upon invoice or shipping of garments, with 30 days being the most common answer. The majority of companies said that they did not extend the payment conditions to suppliers, with the exception of M&S and Primark, with Primark reverting back to normal payment conditions of 30 days (from 180 days) and M&S remaining with increased payment conditions from 90 days to 120 days. We’d also noted a wide range of production lead times across all companies ranging from 6 weeks to 9 months, and the vast majority of companies having none-to-few own production factories, but rather sharing factories with other brands.
Some brands offered financial assistance to suppliers during the COVID-19 pandemic, for example Hugo Boss, N Brown Group and Primark had financial assistance payment schemes to suppliers, although when asked how suppliers qualify for these schemes most companies were unsure. Sosandar placed large orders with struggling suppliers, Adidas brought orders forward to help suppliers, and NEXT said they helped suppliers on a case by case basis. M&S tried to assist suppliers by submitting proposals to the Department for International Development (DFID) to support their COVID-19 Vulnerable Supply Chains Facility (VSCF).
Supply chain Health & Safety
All companies said that there has been a decrease in audits performed during the year compared with prior years, which also made it difficult to monitor that H&S rules were being adhered to. Adidas, Primark, NEXT, and M&S, said that they had operational staff located in most countries which were able to monitor the factories. Other companies, such as M&S and JD Group moved to part virtual audits, which involved the use of video calls and photos for documentation, but all companies believed that virtual audits are merely a temporary solution and will never replace physical audits.
Some brands mentioned that they provided guidance for social distancing to factories, engaged with trade unions to discuss any issues, and operated a grievance mechanism related to COVID-19 H&S for employees. Primark has also stated that they donated PPE to some factories.
When asked about order placements from countries with large COVID-19 outbreaks, such as India, all companies replied that they did not stop ordering from these countries. The majority of them did admit that they struggle with the dilemma of placing orders and potentially risking factory outbreaks, compared with not placing orders and workers suffering poverty as a result, but added that normally once they learn about an outbreak in a factory it is too late to act upon it as it is already widely spread.
We learned that for companies with in-country operational teams the pandemic has not led to more frequent conversations with suppliers as this was done on a regular basis prior to the pandemic, whereas others have noted more regular conversations with suppliers.
In the event of a factory lockdown, companies reported that they have extended the delivery date accordingly. As many payment terms begin when shipping garments, we enquired whether this lead to tight deadlines and additional pressure to fulfil orders for suppliers. Companies replied that as supplier cash flow is dependent on bank financing relating to commitment to orders, rather than delivery of final goods, delayed orders would not affect their funding.
All companies we’ve engaged with said that one year into the pandemic, business has returned to near normal and current payment conditions are believed to be optimal. As the pandemic has reportedly left many garment workers facing poverty, we believe future disruptions may have a detrimental impact on the industry.
We will continue to engage with companies on the topic of supply chain management, and we hope that other investors follow suit.