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Could a Factory Licensing Scheme or a Manufacturing Move Overseas Save Boohoo?

As allegations of malpractice by Boohoo’s suppliers continue to be a flash point in a larger reckoning over worker exploitation in the U.K. fashion industry, the ultra-fast-fashion e-tailer has written to Britain’s home secretary to extend its support for a licensing scheme that would compel all garment factories to honor their legal obligations to their employees.

In a letter to Priti Patel delivered Friday, Boohoo chief executive John Lyttle said a “joint effort between industry and government” was necessary to reset the U.K. garment industry and “provide an incentive for retailers and brands to invest.”

The company, which traffics in cheap and trendy outfits popular with the Instagram and TikTok crowd, has come under intense scrutiny over the past few weeks for allegedly hiring factories in Leicester, England, that did not provide protective personal equipment for workers or enforce adequate social distancing despite a government-mandated lockdown meant to slow the spread of the coronavirus ravaging the globe. Workers were also reportedly paid as little as 3.50 pounds ($4.46) an hour, in breach of the national 8.72-pound ($10.99) minimum wage for those aged 25 and above.

The company, which manufactures roughly 40 percent of its products in the United Kingdom, said in the letter that it was “proud to support U.K. manufacturing and the British fashion industry.”

“We firmly believe that ‘Made in Britain’ should be a label of pride for those wearing our clothes and badge of honor for those who make them,” said Boohoo, which also owns the Nasty Gal, Oasis, PrettyLittleThing, Karen Millen and Warehouse brands.

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Boohoo’s letter echoes a call by the British Retail Consortium, the All-Party Parliamentary Group (APPG) for Fashion and Textiles and the APPG on Ethics and Sustainability for the Government last week to implement a “fit to trade” licensing scheme that would—at minimum—protect workers from forced labor, debt bondage and mistreatment, promote health and safety, and ensure payment of the national minimum wage, national insurance, value-added and Pay as You Earn taxes and holiday bonuses.

Such measures, the groups said, would raise tax revenues for the treasury and “create a barrier that prevents rogue businesses from accessing the market and undercutting legitimate fashion manufacturing companies.”

This second letter, which was also sent to Patel, was backed by more than 90 signatories, including ministers of parliament, brands and retailers such as George at Asda, Asos, Marks & Spencer, Matalan, New Look, Next, River Island and The Very Group—but not Boohoo—and organizations such as the U.K. Fashion & Textile Association and the Ethical Trading Initiative.

“The public wants to know that the clothes they buy have been made by workers who are respected, valued and protected by the law,” Helen Dickinson, chief executive of the British Retail Consortium, said in a statement. “Recent reports in the media demonstrate the urgent need for action before more workers are needlessly taken advantage of. While there is no silver bullet, licensing is a critical step toward resolving this issue.”

On Friday, financial services firm Credit Suisse predicted that Boohoo would have to shift 40 percent of its manufacturing base from the United Kingdom to rehabilitate its reputation and save its sinking stock, which has ceded roughly 2 billion pounds ($2.5 billion) in value since the allegations emerged.

Analyst Szilvia Bor said in a note to clients that if her predictions were right, Boohoo could wipe out 30 percent of its profits by 2022 with an overseas move, which would make it slower to respond to the rapidly changing fashion zeitgeist.

Boohoo has refuted Bor’s prognostications, telling the Evening Standard through a spokesperson that it remains “firmly committed to U.K. manufacturing and enforcing the highest standards of ethics, compliance and transparency for the benefit of all garment workers.”

Bors also suggested that a minority of Boohoo’s customers, representing roughly 5 percent of its sales, would abandon the label because of the scandal, which has prompted the company to commission a third-party investigation of its U.K. supply chain and put aside 10 million pounds ($12.7 million) of its reserves to eradicate “supply chain malpractice” amid news that retailers such as Amazon, Asos and Next were temporarily dropping the brand and its subsidiaries.

A Morgan Stanley report from earlier this month noted, however, that most larger Asian manufacturers would likely have “little interest” in Boohoo’s small product quantities. Boohoo, it explained, typically places an initial “test” order of just 250 units, split across multiple sizes, but even its repeat orders tend toward the low end, making up 1,000 units at most. The majority of items, it added, never get re-ordered at all.

“Over the course of last year, Boohoo stocked around 1 million different SKUs, implying that it was selling less than 100 items of each size of each product that it offered,” the investment bank’s analysts wrote. “So most of the orders it is placing with suppliers are tiny.”

The analysts also doubted that air-freighting product from Asia “makes much sense” at Boohoo’s bottom-of-the-barrel price points. “Air freight rates are based on weight, not selling price, so we would have thought that, given its low selling prices, Boohoo would find air freighting products back to Europe even more difficult to justify, economically, than its more expensively priced peers,” they wrote.

And it appears that Boohoo was planning to double down on Leicester before it was embroiled in the current scandal. The Sunday Times reported over the weekend that the company purchased a disused 2-acre car dealership in the city’s northeastern corner with ambitions to build a “state-of-the-art” automated factory that would set the standard for U.K. garment production.