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Nike Balks at Buying in Bangladesh Despite Margin Pressure

As brands battle between low-cost and compliance when deciding where to source, some have pulled out of Bangladesh and some are pressing on in the country struggling to shore up its garment sector.

Nike has been in and out of the limelight for its involvement in substandard manufacturing over the years but the retailer has made the decision to cut back on sourcing in Bangladesh.

In an article last month, The Wall Street Journal looked at Nike’s struggle between keeping competitive costs and ensuring worker safety in factories producing for the company.

Nike had been aware of the dangers of manufacturing in Bangladesh, and upon visiting its suppliers in the country last year, the retailer decided to cut ties with Lyric Industries after finding the factory in an unsafe state. There was excess fabric lying around that could catch fire and barred windows that could be hazardous in an emergency. The decision to cease partnership with Lyric came just before the Rana Plaza building collapse killed 1,100 people in the country’s worst industrial disaster to date.

“Our competitors were moving fast into Bangladesh and the pressure was getting bigger and bigger,” Nike chief operating officer Eric Sprunk told WSJ. “We needed a strong point of view to say, ‘Are we going to increase our source base there or not?'”

And the athletic wear retailer decided not produce in the country in any meaningful way. After the final production orders from Lyric were filled last July, Nike decided it would manufacture in just four factories in modern buildings located in Bangladesh’s export-processing zones, according to WSJ, because guaranteeing adequate working conditions in the country would have proved difficult.

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“Did we pass up on margin because of that?” Hannah Jones, Nike’s head of sustainable business told WSJ. “Absolutely.”

Nike’s gross margins fell to 43.6% last fiscal year, down from 46.4% three years prior, and came in below those of competitors like Adidas.

As retailers increasingly face price pressure, most are forced to make a decision much like Nike’s: to source or cease producing in the country. Some have erred on the side of safety, and some have continued producing in the country in partnership with initiatives like the Accord on Fire and Building Safety in Bangladesh and the Alliance for Bangladesh Worker Safety, which have been closely monitoring the sector.

The Walt Disney Company announced last month that it would discontinue all production of branded merchandise in Bangladesh citing issues of factory safety and compliance. Only 1 percent of Disney’s factories are located in Bangladesh, but the decision drew much attention, as the retailer was the first to completely pull out of the country because of safety concerns.

“We have decided to consolidate production of Disney-branded products in a more limited number of Permitted Sourcing Countries and have instructed our licensees and vendors to transition the production of Disney-branded goods out of the highest-risk countries,” a company statement noted. In total, Disney pulled out of 44 countries it considers to be “high risk.”

Disney has said it would consider returning production to Bangladesh, or any of the other risky countries, if they agree to work directly with the International Labour Organization’s Better Work program, which holds clients to high standards of performance in labor and working conditions.

Bangladesh’s $22 billion garment industry has been under intense pressure to improve, but those factories exhibiting compliant safety standards have seen a recent growth in orders.

According to Bangladesh’s Financial Express, new orders to compliant factories have increased 15 percent in recent months. The country’s ready-made garment industry accounted for $21.5 billion of its exports in the 2012-2013 fiscal year and experts expect that number to reach $24.1 billion this fiscal year.

Some brands like Walmart, Gap, J.C. Penney, Macy’s and Target have continued sourcing in the country and have signed on to the Alliance for Bangladesh Worker Safety, a five-year undertaking to maintain supply chain transparency and ensure results for improving safety in Bangladeshi ready-made garment factories. The Alliance is not structured as a legally binding agreement, and so decisions regarding compliance and funding have to be voluntarily accepted by each member, irrespective of majority determination.

Others, like Inditex, H&M, Adidas, Fast Retailing and PVH have joined the Accord on Fire and Building Safety in Bangladesh, a legally binding independent agreement designed to make all garment factories in Bangladesh safer. It includes independent safety inspections at factories and public reporting of the results of these inspections.

Nike hasn’t signed on to either initiative.

The WSJ article noted, “Nike hasn’t participated in those efforts, drawing criticism for not signing a binding safety agreement. Ms. Jones says Bangladesh isn’t the company’s fight. Nike, which posted $25.3 billion in sales in the year ended May 31 and contracts with 744 factories world-wide, says it can better use its resources in countries where it has a bigger footprint.”