Derek used to look forward to Levi Strauss’s semi-annual summits for its suppliers.
Held in sumptuous five-star settings far from the dust and din of factory life, they not only served as a welcome respite from the daily manufacturing grind but also offered insight into the denim Goliath’s growth strategy for the months ahead.
But something shifted in the past six months, claimed the executive, who asked to use a pseudonym and declined further identification because he feared retaliation. Derek said that at an October event in its home city of San Francisco, Levi’s herded him and other strategic partners into conference rooms at the hotel where they were staying. There they were trapped, as he characterized the situation, until they agreed to slash the price of new orders by 20 to 25 percent.
According to Derek, Levi’s repeated its roundup in the first week of March, except the backdrop was sunny Bangkok instead of the breezy Bay Area. The change in scenery made no difference, however. This time, he said, the blue jean maker wanted to lop another 10 percent off their prices. “Eventually we had to say yes, otherwise we cannot get out of the room,” he said.
Other buyers, including Gap and Wrangler owner Kontoor Brands, have also solicited discounts of late, somewhere in the ballpark of 20 percent, though they weren’t as aggressive as Levi’s, Derek said. All their “beating up,” he said with a laugh, was done virtually, not in person. And he never felt like he couldn’t refuse their requests.
With the Chip Bergh-helmed brand, however, Derek was made to feel like he couldn’t say no, even though agreeing to its terms meant “negative margins,” meaning that he would lose money with every shipment he delivered. He said that in some instances, the jean maker demanded that the discounted prices be applied retroactively to materials that were purchased months before at higher costs. Levi’s was a major buyer, he said, and without its business, the factory wouldn’t be able to run or pay its workers.
2023 was already shaping up to be a tough year for Derek’s company. Orders are down by 50 to 70 percent, which means the additional squeeze is only making things worse. Derek said brands frequently talk about “partnership” and the need to support them when times are hard, as they certainly are with Russia’s war on Ukraine jacking up inflation and growth slowing worldwide.
But if suppliers have to support buyers, who will support suppliers?
“Next time, maybe we have to give them [everything] for free,” Derek said.
Over in Bangladesh, Mohammad, who also spoke on the condition on anonymity, is facing a similar quandary. Centric Brands, whose portfolio of licensed brands includes Hudson Jeans and Lucky Brand Jeans, he said, has accepted only half of an order it placed more than six months ago. Now, his factory is saddled with hundreds of thousands of jeans, all unpaid. Centric told Mohammad that it would take the rest of the goods if it received a sizable discount, something in the range of $22,000. Left without a choice, he agreed, except that the company keeps pushing back the shipment date. Right now, October is being targeted.
“I don’t know how it is possible to keep these goods for so long,” Mohammad said. “Everything has an expiry date, right? I don’t know what will be the fate of these goods since we have big liabilities with them.” These include the cost of fabrics, accessories and trims, plus the labor involved in their cutting and sewing, all of which his factory has paid for upfront.
Another buyer, LPP, called its suppliers for a meeting to cut prices. Mohammad has also been holding hundreds of thousands of garments for the Polish retailer, which closed its 500-plus stores in Russia shortly after the invasion, jettisoning a 19.2 percent slice of its revenue. LPP asked for 20 percent off, which Mohammad couldn’t accept. They’re still negotiating, though he’s more understanding of the company’s situation and calls it a “good customer” otherwise.
Centric’s actions, however, are harder to justify, Mohammad said. He said that he’s on the hook for ever-higher interest rates on his bank loans while payments hang in limbo. And if other customers don’t start placing orders soon, his production floor will come to a standstill, meaning jobs will be at risk.
Mohammad doesn’t think it’s right for brands to leave suppliers like him in the lurch.
“We already invested for them by trusting them or based on a contract,” he said. “And if suddenly they come and ask for discounts. I mean, that’s not our problem; that’s your problem. You already placed the order; you made a contract. Now how can you ask for this?”
Sourcing Journal reached out to a dozen denim suppliers, including ones that were previously vocal about canceled orders during the pandemic, to find out how current economic circumstances have affected their businesses. Only Derek and Mohammad were willing to speak on the record. The rest, even with a guarantee of anonymity, were hesitant to go public with their woes because they couldn’t risk being unmasked and then losing what little business they have retained. Manufacturers fought back during Covid-19 because the en-masse cancelations left them on the precipice of dissolution. Now, it appears that they are being pushed back to the edge, but they fear that coming forward will only hasten their demise.
Andrew Olah, founder of the Kingpins trade show, previously intimated that something was brewing in the tight-knit world of denim.
“I am disappointed and embarrassed by recent news of buyers’ behavior,” the denim veteran wrote in his newsletter in December. He described breakfasting one morning when a “very well-known, vertical, full package” mill owner in Pakistan rang him out of the blue to complain about a customer—a “very famous” retailer—that called him a “partner.”
“He does not feel like their partner but their doormat because he is a recipient of abuse and unethical behavior with a whiff of ‘if I don’t do what they say they will never buy from me again,’” Olah wrote. “He was and remains beside himself. What can he do when an important buyer abuses the terms of trade that were contractually agreed on? How can he survive? How can his workers keep their jobs when confirmed contracts are ignored or unilaterally renegotiated with the threat of canceled business always hovering in the air if one is not compliant [with buyers’] demands?”
Other stories soon flooded in with a familiar throughline: brands weren’t taking orders they had placed and produced, suppliers told him. They were demanding discounts, or applying them without any discussion.
“When seven unconnected companies from assorted countries call me with the same story, what am I to think?” Olah said. “Does something become omnipresent when seven people tell you the same thing? Overhanging all these demands is always the implied threat of lost business—both current orders and future business.”
Suppliers are frightened, he told Sourcing Journal. While he’s heard of multiple brands behaving unethically, Levi’s is “too important of a leading brand to have these kinds of rumors circulating so wildly,” he said.
Centric Brands and Gap did not respond to requests for comment, while Kontoor said that it was in a quiet period before it reports earnings and was therefore unable to provide a statement. LPP told Sourcing Journal that there is “no truth” in the “alleged backlog” and that any rescheduling of deliveries was designed to protect its suppliers from outright cancelations. It is a responsible company, a representative said, and is committed to “applying fair and transparent terms of cooperation” that are discussed with and agreed upon with its partners. Meanwhile, a spokesperson from Levi’s, disputed the depiction of vendor negotiations as “misleading” and “often completely false.” When asked about Derek’s allegations, the representative said that it has not canceled or asked for discounts on any existing orders, nor is it extending payment terms, which is “consistent with our longstanding supplier relationships and commitment to the wellbeing of workers in our supply chain.”
At a recent American Apparel & Footwear Association event, Liz O’Neill, executive vice president and chief operations at Levi’s, spoke of “consistent values” stretching back to the iconic brand’s 1853 founding. Asked about how it “sticks to its values” when the economy is slowing down, she said that Levi’s will continue to pay its suppliers as on time as it possibly can, though “it’s never perfect.” And if they need to be paid in advance, there are financing programs that allow that as well.
“At the end of the day, we need our suppliers to be healthy because we need them,” O’Neill said of Levi’s, which last week posted a first-quarter revenue growth of 6 percent to $1.7 billion. “It is a symbiotic relationship. So finding ways to make sure that we can live up to those values while we are also running a business framework is part of that.”
A 2020 report by the Transformers Foundation, a denim-focused nonprofit that Olah founded the same year, described how the sector needs to do better. It explained that the “problematic” power imbalance between buyers and denim suppliers has allowed brands, retailers and importers to “walk away” from their contracts with suppliers “without almost any consequence.” Even the best factories in the world, it said, cannot operate, much less provide fair wages and safe working conditions for workers, under such duress.
Olah is following up with one of the recommendations of the report: facilitating the formation of a long-term, independent, multi-stakeholder group. Known as the Ethical Denim Council, or EDC, it will provide support for suppliers wrestling with badly behaving suppliers and unethical contractual terms.
“Once we are further down the line with the fundraising, we will be able to start arbitrating cases,” Olah told Sourcing Journal. “You have to absolutely start out in a positive manner. A positive manner in unethical behavior means arbitration or mediation. It has to be your No. 1 [assumption] that people are good at their basic levels.”
Brands may not realize that what they’re asking for is unethical, he said, and so they need to be given the opportunity to “come round and change their behavior.” And if they won’t, then their actions will be published on an EDC website to hold them accountable.
The Transformers Foundation has a list of eight “ethical principles” for purchasing jeans that can serve as a buyer code of conduct. Honesty and transparency are at the top, followed by empathy, trustworthiness, loyalty, fairness, reputation and morale, accountability and respect. Olah has called it the “10 commandments of buying product.”
Something clothing brands need to realize is that poor purchasing practices have a domino effect, said Nandita Shivakumar, campaigns and global partnerships coordinator at the Asia Floor Wage Alliance, a workers’ rights group.
“The entire burden is being pushed on suppliers who are then pushing it out on workers,” she said. “We just got out of a pandemic. We’ve already seen the wage theft. Nobody has the capacity to go through another round of crisis.”
Shivakumar said that workers, particularly those in the global South, are often made to feel like their lives are disposable. The failure of the garment supply chain to bring any kind of stability to its lowest-paid employees, whose wages have largely remained stagnant, is an indictment of the current “exploitative and extractive” business model, she said.
Then there’s the fact that discounts and held orders are only part of the problem when the global economy is in turmoil. The cost of everything—electricity, fuel, supplies—is rising precipitously, Mohammad said. If the minimum wage goes up in Bangladesh, as workers fighting to make ends meet are pushing for, he doesn’t know if his factory will survive. The monthly floor wage of an entry-level garment worker was last fixed at 8,000 taka ($75.21) in 2018. Unions are asking for 23,000 taka ($216).
“Buyers have to pay us more otherwise there’s no way out,” Mohammad said.
This isn’t conjecture, either. Manufacturers across the global South are struggling because of sluggish demand. Just last week, a factory in the Indonesian capital of Jakarta that makes products for brands like Puma laid off 1,163 workers as it declared bankruptcy ahead of Eid al-Fitr. (A Puma spokesperson said that the shoemaker will be transferring its orders to PT Tuntex Garment’s sister factory in Central Java.) Radio Free Asia reported last month that more than 50,000 garment workers recently lost their jobs in Cambodia due to declining orders. In Vietnam, apparel manufacturers saw exports tumble 17.4 percent to $7.2 billion in the first quarter from a year earlier. At least three suppliers laid off roughly 2,000 workers this year, according to the Dong Nai Labor Confederation.
Even Bangladesh, the world’s second-largest exporter of clothing after China, experienced a year-over-year decline of 16 percent in the value of garment shipments to the United States, which totaled $1.98 billion, over the past three months, according to the Bangladesh Garment Manufacturers and Exporters Association. Orders in the country have collapsed by 20 to 35 percent, said Faruque Hassan, the trade group’s president.
“We are worried about what is going to happen,” he told Sourcing Journal. “Inflation has gone up, the commodity prices have gone up. Gas prices have gone up. And the central bank has raised the interest rate, which means mortgages have gone up.”
With the price of raw materials, containers and diesel also surging at a breakneck pace, production costs have jumped 40 percent, Hassan said.
“As we all know, Bangladesh‘s RMG industry is going through a green revolution at this moment; our strides towards sustainability is undeniable,” he said. “However, in order to sustain this momentum of excellence, we need our brands as well to reconsider the business terms in an encouraging way so that we can reach the pinnacle of success, together holding hands.”
“We are expecting better prices, ethical prices, fair prices—and that is still lacking,” Hassan added.
On Wednesday, the NYU Stern Center for Business and Human Rights published a report urging greater attention to the “failure” of major apparel purveyors to take responsibility for the effects poor purchasing practices have on garment workers. Brands, it said, must end “unreasonable” price reductions and “excessive” discounting practices, halt the practice of delaying order deliveries and commit to payment timelines that take raw material purchases into account. They also need to recognize supplier projections as “firm commitments,” boost their transparency and communication with sourcing agents, and, as the industry commemorates the 10th anniversary of the collapse of Rana Plaza, align their dedication to factory safety and worker wellbeing with their commercial commitments.
Stern Center director Michael Posner has seen corporate social responsibility move through different phases. The first occurred in the early ’90s when Levi’s was linked to a garment factory in Saipan that U.S. government officials accused of failing to pay overtime to Chinese workers. The furor led the red tab firm to create the industry’s first code of conduct. Then, when codes of conduct became more commonplace and brands needed to ensure they were being adhered to, companies started sending in auditors.
“What this report is about—and it follows things we’ve worked on the last several years—is to try to take the discussion to a third stage,” Posner, who served as Assistant Secretary of State for the Bureau of Democracy, Human Rights and Labor during the Obama administration, told Sourcing Journal. “And that stage is a reassessment of buyers, supplier relations, purchasing practices, and to try to come up with more of a partnership between the big global companies and the and the factories around the world that are producing their products.”
Not only is there a need here for a “recalibration” of the buyer-supplier relationship should be, he said, but there also needs to be a “real conversation” between buyers and suppliers about what the “rules of the road ought to be.”
For Derek, fashion brands asking suppliers for discounts is akin to haggling over the price of steak at a high-end restaurant after you’ve sat down. That is to say, it shouldn’t be happening.
“If you think the price is too high, you don’t have to go there, right?” he said. “I mean, you can go to McDonald’s.”