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‘Alarming’ Discounts Crush Garment Suppliers: Report

The en-masse cancellations that occurred just as Covid-19 gripped the globe have dealt garment factories a body blow, and now labor researchers say that brands and retailers are “leveraging desperation” to demand steep discounts on new orders as buying begins to pick up again.

Indeed, buyers have asked suppliers to lower their prices for the same product by 12 percent compared with the year before, according to the Worker Rights Consortium (WRC) and the Center for Global Workers’ Rights (CGWR) at Penn State University.

In a survey of 75 factories in 15 countries, published Friday, 65 percent of suppliers reported that buyers have demanded price cuts on new orders that are bigger than the year-over-year reductions they usually ask for, which the organizations described as “alarming.” As a result, 56 percent of suppliers have been forced to accept some orders below cost, with the majority anticipating they’ll have to do so in the long term.

Suppliers now have to wait an average of 77 days after they complete and ship new orders before they receive payment, the survey found. Before the pandemic, the average time was 43 days, and only 34 percent of buyers took longer than 60 days. Now, one in four buyers have imposed payment terms of 120 days or more.

Factories feel like they have little choice than to be held hostage. “On most items, certain buyers looked to get discounts without a costing rationale, stating they suffered a loss of sales,” one supplier said. “If discounts were not given, they also advised future business was at risk, all the while holding back current payments due.”

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At the same time, most suppliers said they now handle less than half the order volume relative to the same period last year. If evaporated volumes, discounts and drawn-out payment terms continue, 57 percent said it is extremely or somewhat likely they will have to shut down business. Already, 75 percent of factories said they have had to reduce workers’ hours because of current buyer purchasing practices, with roughly a quarter of suppliers cutting working time by more than 25 percent. On average, suppliers have dismissed 10 percent of their workers, and they anticipate letting go another 35 percent if nothing changes.

“Drop in prices, forced discounts, drop in order volume, delays in payments: all these are happening with all the buyers,” one supplier said, before noting the lack of latitude from brands about speed to shipment.

“We had 55 days shutdown in India. After shutdown, all the buyers wanted their goods immediately or else they say they will cancel. It’s difficult to fulfill the orders with Covid social norms.”

Another complained about the inherent power differential that governs the supply chain. “There is no accountability of the brand on what they order. If they wish, they can cancel. This needs to change,” the supplier said. “Suppliers are forced to air [freight] goods if shipment deadlines are missed or subject to discount. But there is no law that prevails where the buyer is mandated to buy whatever they have ordered. Also, buyers do a due diligence on factory’s compliance, but there is no due diligence on buyers’ activities.”

A previous report from the WRC and CGWR found that U.S. and European Union brands likely refused to shell out for $16.1 billion worth of garment orders from April through May. In August, labor activists from the Clean Clothes Campaign estimated that garment workers lost up to $5.8 billion in wages for the months of March, April and May.

The suffocation of margins could get even worse. With so many suppliers in Asia facing diminished orders, there is now even “greater excess capacity” in the region, the report’s authors wrote. Since most garment workers barely made enough to cover their living expenses before the pandemic, these new sourcing dynamics could plunge them further into poverty and destitution.

“The expectation is that suppliers will have to compete with each other to get more limited new orders, which will allow buyers to drive down the price they pay suppliers even more,” they said. “At the same time, the company has no intention of passing this cost savings on to consumers. Rather, by lowering the prices that it is paying suppliers while also maintaining the prices it charges consumers, it expects its gross margins to grow in the spring of 2021. In all likelihood, other buyers have the same or similar strategies.”

If the current “sourcing squeeze” does not abate, the report added, it will “gravely exacerbate” a state of emergency that has already resulted in widespread factory closures and the loss of millions of garment jobs. The Clean Clothes Campaign, too, has warned that only a “wage assurance” that guarantees that all workers making and handling clothes in their supply chains receive the full wages they are owed, in accordance with labor laws and international standards, will mitigate the “deepening crisis.”

If these are not reasons enough for brands to rethink and revise such adverse “pandemic purchasing practices,” then they might want to consider the threat of their actions on their own survival, the authors wrote.

“Otherwise, the current short-term gains for brands of such practices will turn to long-term costs,” they said. “This is because the supply chains needed to sustain the industry will face such exorbitant stress that they may never fully recover.”