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Chasing The Lowest Wage: How Do We Distribute Profits Fairly?

Last month we had the pleasure of reading one of the most ingenious pranks that anyone has ever executed in the world of sustainable fashion. The Yes Men, a duo of activists, organized an announcement pretending to be Adidas, appointing a former Cambodian union leader as their new co-CEO. This announcement was followed by a “revolutionary plan” to improve the conditions for workers in garment factories in Asia, and presented a new “carefully distressed” range of garments “upcycled from clothing worn non-stop for six months by Cambodian workers who are owed wages withheld during the pandemic”. To top it off, they organized a fake fashion show which was so credible that news outlets published articles about the new era for Adidas.


10/10 from us, extremely entertaining and smart, thank you!!


But in this article we want to dive deeper in the issues that led to this press release.

  1. How is it that garment workers are paid so little?

  2. How can brands keep the salary that they are owed? Who holds the responsibility and risk when an order is placed?

  3. How is the money consumers pay distributed between the different entities involved in the making and distribution of that item?

We know by now that the prices set by brands skew consumers' perception of the real value embedded into our clothing. As consumers, it’s difficult to connect the tag on a $5 t-shirt to the labor and materials involved in production. If we did, the prices might start to seem ridiculous.


The “race to the bottom” has totally ruined our perception of value; we literally have no idea what our clothes (or food, or anything else) should cost, and low prices have become so normalized that we don’t even second-guess them. How is it possible that all the materials, logistics, and people that account for garment production amount to a few dollars?Many of those costs are fixed; the price of cotton isn’t negotiable, even at scale. How much is left over to pay for labor and who is making what profit? - Vogue

There is no formula that can tell us exactly who is making what profit, however, there are some great sources that give us an idea of it, and we think it might surprise you. When buying food, we assume that most of the price goes into the ingredients, and to pay the people who process them. In Fashion, this would mean that most of the price we pay reflects the price of materials, and the cost of labor required to cut, stitch, and package the garment.


But the truth is quite different, as explained in this great infographic by the Clean Clothes campaign.

According to them, only 0.6% of what we pay goes to the garment worker, 0.9% is for overhead costs in factories, such as electricity or office staff, and 12% is the cost of materials. All of this adds up to less than 15%, so where does everything else go? And why are these percentages so low?


HOW BRANDS BREAK DOWN THEIR PROFIT?

Retailers and brands make a profit of more than 70% of the entire cost. They are the ones who set the prices at which items are bought from manufacturers, and those at which consumers buy them.


Most people who work in this sector are not allowed to share confidential information on the matter, however there is an amazing article by Vogue that shares some information from behind the seams:

Let’s assume a designer is using quality materials and paying its garment workers an above-average wage; the materials and labor will arguably be the highest costs. The industry standard for a profit margin is between a 2.2 and 2.5x markup, meaning a dress that cost a designer $100 to produce might be sold to a retailer for $220. That retailer has to mark it up by 2.2x again to make its own profit, bringing the final price up to $484.

If we used these values to do a reverse calculation on a $15.00 tee, the retailer would be marking it up 2.2x from $6.80, the designer would apply its 2.2x markup before that, meaning that only $3.00 is left for the fabric, pattern-making, sampling, trims, handwork, packaging, duties, shipping, labor costs.


Now reflecting on a $5 price tag is unnerving, but brands hold the product pricing power and push manufacturers to cut corners when it comes to meeting brands’ cost demands.


“Retailers would tell us, ‘We want 1,000 of this item for $21 a piece,’ and the factory would quote us $40,” she says. “But eventually, they’d come down to $21. How do you get there? Who is losing out? The fabric is a steady cost, so it’s the workers losing out.” - Vogue

The reality is; profits trickle downwards, but how do we ensure they’re falling fairly into the right pockets?

A major consequence of the current system we operate in is that millions of garment workers do not earn a living wage. Good Clothes, Fair Pay is a campaign by Fashion Revolution demanding living wage legislation across the garment, textile and footwear sector. You can learn a lot about living wages through their FAQ.


If you are curious to see just how big the issue of living wages and the unfair distribution of profit is, the Clean Clothes Campaign has developed an online open source tool that allows you to see which brands pay living wages, or have taken action to fix this issue.


The categories to measure action on Living Wages are: Supply Chain Transparency, Living Wage Paid, Action Plan, Public Commitment, and Separate Labour Costs. A total of 311 brands have been surveyed, based on publicly available information, and information shared directly by brands. The tool allows users to search specific brands, or sort them by their score in one of their categories.


It’s quite sad to see that the highest score is C, on a scale from A (best) to E (worst) in the category Living Wage Paid. As we write this in February 2023, Gucci is the only brand to score a C, with all other brands being Ds or Es. Zeeman and Gildan Activewear Inc. received a full score for Transparency, Action Plan, Public Commitment, and Separate Labour Costs, but still Living Wages are not paid.


Transparency is where brands score the highest, with 94 brands scoring 4 or 5 stars (out of 5), but what is the point of being transparent if the actions behind are not concrete? What is the point of showing who your suppliers are, if in those factories workers are getting paid less and less, with the cost of garments always being pushed lower?


HOW SPEED, VOLUME, AND SALES AFFECT PRICES

Another issue around prices that might not be so straightforward is how this relates to speed, volume, and sales.


The price tag on garments is not what the brands use to calculate revenue and how much they are willing to pay their suppliers. Brands know that a proportion of all clothes ends up being discounted, or never sold, so they pay manufacturers a cost per item that is lower than it should be.


According to an article by Business of Fashion, in January 2022 44% of apparel products were on discount in the US, with an average of 41% off. These numbers were particularly high, because brands wanted to get rid of the stock accumulated during the pandemic, but discounts are standard in the industry, and our guess is that the real average price is about 75% of the original one.


When you pay $40 for a t-shirt, brands expect to make less on average, to account for the pieces that are discounted, incinerated, landfilled, or downcycled. 75% of it, in this case, is $30. This decrease trickles down to the price determined for the manufacturer and eventually the amount left for the garment worker.


With the speed at which fast fashion brands launch new collections, and have to empty stores and warehouses, the proportion of clothes discounted or discarded is much higher than it should be. This brings down the average revenue per piece, the manufacturer’s quote per piece, and the wages that end up being paid to factory workers.


Wouldn’t it be better to have a world where everything that is made is valued for the work that has been put into it, rather than having to throw things away because new collections have to come in at record speeds?


THE RACE TO MEET BRANDS DEMANDS, DRIVEN BY POWER IMBALANCE

After reading all this, you might want to ask, why do manufacturers accept such low prices for the products that they make?


Firstly, there is a historical reason. Brands are often based in the Global North, and supply from the Global South, in countries that are still recovering from the effects of colonialism, where currencies are of much lower value. You can read all about this in our last article, which analyzes the links between Fashion and Colonialism.


Secondly, there is a major power imbalance that we have mentioned in previous articles, including an insightful interview with Kim Wan der Weerd and Jessie Li, from Manufactured Podcast, where they explained the imbalance between the risks and rewards between players of the supply chain.


Manufacturers are the ones making major investments in machinery, personnel, and even materials, therefore they can’t afford to lose the relationships that they have with brands, and the orders that they place each season. There is also an oversupply of suppliers and manufacturers for brands to choose from meaning if a brand’s demand for lower prices are not met, they can simply move on to the next one who will. Brands know this, which brings a major power imbalance.


Manufacturers are so dependent on brands to place orders, that they simply have to accept any price, and cut corners where they can, which most of the time means in worker’s wages. Brands and retailers are the ones who set the terms, in which the real value of products and prices do not match up.


FAIR PROFITS AND DEGROWTH

In the effort to grow and keep up with next season's styles, brands demand a high quota from their suppliers which continues a cycle of overproduction and unfair labor – a system we know as ‘Fast Fashion’. This system is fuelled by a growth mindset which forms the basis for our capitalist society and maintains an unfair profit margin for the people producing those garments.


Degrowth is a movement that directly contradicts this capitalist system. Through a reduction in production and consumption in the Global North and liberation from one-sided Western paradigm of development, this movement aims to ensure environmental justice and well-being for all while living within our planetary boundaries. If you’re interested, we’ve discussed this topic quite a bit here.


A degrowth system decelerates production, which according to author James B. Mackinnon and us, is the only way for the industry to become greener and reduce our total impact.


But that leaves us to question; If we start producing and buying less to curb the environmental impact of fast fashion, how will that affect garment workers in countries like the Global South? Would buying less and better made clothing make fashion inaccessible to lower income consumers?


BANGLADESH CASE STUDY

In a recent piece titled, The Price is Wrong, James B. Mackinnon traveled to Bangladesh to attempt and answer these questions, visiting clothing factories and speaking to factory owners to gain insight from those intimately involved in Fast Fashion. The verdict; clothing is too cheap.


After the Rana Plaza disaster in 2013, factories began to abide by strict building and safety codes. Many of these plants are run by the next generation of leaders who understand the global impact of fashion and are transparent about the reality for garment workers in Bangladesh. James B. Mackinnon spoke to one of these leaders, Abdullah Al Maher, an executive in the apparel industry in Bangladesh to gain an insider's perspective.


All figures are pulled from Mackinnon’s words:


Expecting him to defend fast fashion, Mackinnon asked Maher,


What would happen to a company like Fakr Fashion if consumers in the United States, the United Kingdom, and Europe decided to buy less clothing than they do today? Maher: “You know,” he said, in the tone of one sharing a secret, “it wouldn't be so bad.”

That sentiment is surprising coming from a country who relies on the apparel industry for 85% of their exports. The Fast Fashion model fuels the Bangladesh economy, providing employment and industry, but is that employment sustainable for garment workers? While clothing exports brought $42 billion into the country in 2021, 1/5th of the residents continue to live below the poverty line.


Mackinnon spoke to Shahida, a 23 year old sewing machine operator from the Narayanganj region, who told him she had a nine hour work day unlike her usual 14, making 9,000 taka (equivalent to $90/month). Proudly, she said that her production line alone produced 1,200 jackets a day.


For context, the monthly minimum wage in Bangladesh is 8,000 taka (around $80). In 2018, unions demanded an increase to 16,000 taka but garment factory owners — including those who want their workers to earn more — resisted. Why? They argued that the increase would result in factory closures unless brands committed to pay more for the clothes the factories made and not take business elsewhere.

The price offered from buyers keeps decreasing.


According to Shahidur Rahman, a sociologist at Brac University in Dhaka studying Bangladesh's garment industry, if we want to see a more sustainable fashion industry, and one that pays fair wages, then brands need to pay more to their clothing suppliers, which means that price tags will increase.


If we are to increase prices, how can we ensure the increase goes into the pockets of garment workers?


“The answer, Maher said, would be to track and audit the changes through the same kind of independent organizations the factories already work with. In 2013, for example, H&M began working with the Switzerland-based Fair Wage Network to assess whether the workers who produce its clothes are being adequately paid. Nearly a decade later, the retailer has still not received fair-wage certification. One of the key actions H&M needs to take, the Fair Wage Network reports, is reconsidering whether the prices it’s asking from the factories are “placing suppliers in the optimal conditions to pay a living wage or a fair wage.””

And what will this mean for the over 4 million Bangladeshis working in apparel? Rayhan and Maher seem to think it’s a reality the Bangladesh will have to confront.


WHAT COULD A FAIR FASHION LOOK LIKE?

Although we can’t slow fashion overnight, we can look to other brands and organizations working to create more equitable supply chains.


Scandinavian label Asket explored Full Traceability through their Impact Receipt which records and reports the true environmental and social cost of each garment. To ensure an equitable fashion future becomes our reality, we need more brands to increase price transparency to hold themselves and other industry leaders accountable for how profit moves across fashion supply chains, and work to improve those conditions.


Platform Living Wage Financials (PLWF) is a great resource made up of 19 financial institutions who encourage, support and monitor investee companies to enable living wages and living incomes in global garment and footwear supply chains.


According to their Annual report from 2022, brands are increasingly considering their policies around procurement to ensure it supports suppliers in their ability to provide a living wage. This increase signals a change in brand priorities, and with more eyes on the decisions of big brands like Adidas, hopefully more profits go directly to garment workers pockets.


We envision a world where Fashion is slowed down, made better, with fairer prices. This would allow factory owners to invest more time and funds into their operations, which would lead to more efficient machinery, renewable energy, training for their employees to have more ambitious career paths, improve the working conditions in the factories, and, most importantly, be able to pay decent wages.


It’s not about perfection for brands, it’s about better practices that take into account the livelihood of the people who make our garments. While there might not be a simple and quick solution for how to fairly distribute profits in our complex fashion supply chains, brands can work with organizations that are helping make sure profits end up in the right pockets!


Until next time friends, always be curious and #StayDiligent x


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