Despite the ethical backlash that has befallen brands in recent weeks as they backed out of placed orders with their suppliers as the coronavirus pandemic paralyzes them, Arcadia Group has focused on its “right to cancel.”
In a letter to suppliers Thursday, Ian Grabiner, CEO of the company that operates the Topshop, Topman, Miss Selfridge, Burton and Evans brands, said, in short, that the company is entitled to cancel “any order” at any stage of production.
Walking its vendors through a clause in its contract, following a letter in late March notifying them that the company would be cancelling its orders, Grabiner said: “You will note that we are able to cancel any order at any stage. This includes orders in production and orders in transit. Where we cancel an order, we are not responsible for the cost of the Goods, the cost of any fabric, or any other cost at all, including the cost of any trim or component.”
The letter, posted on LinkedIn by Mostafiz Uddin, owner and managing director of Denim Expert Ltd., a denim factory in Bangladesh, went on to explain its “need to cancel,” citing the closure of stores in the midst of COVID-19 and its inability to use the goods it had paid to produce for an “unclear” period of time.
“Even when our stores and our partners’ stores eventually re-open, we will be hindered from using the Goods for a number of reasons including, for example:
- Depending on how long the restrictions last, we are likely to face serious seasonal challenges—customers will not be willing to buy Spring Summer Goods out of season.
- All stores will already be full of goods. We, and our partners, will not be able to bring in any new orders before the inventory in the stores has been sold.
- When we have sold the inventory in stores, we will still have a plentiful supply of goods in our distribution centers.”
Grabiner said the goods couldn’t be sold through its e-commerce sites either, because its distribution centers are full, and Arcadia itself is fielding order cancellations from its partners.
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“We simply have no space for more Goods,” he said.
What the letter omitted was any seeming concern for the serious challenges Arcadia’s cancellations would pose for factories lacking the cash flow to sustain themselves over a prolonged zero revenue period—and worse, to be able to pay already low-wage workers. In Sourcing Journal’s new ‘On the Ground’ video series, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) president Rubana Huq said cancellations at factories in the country have already ballooned beyond $3 billion, but factoring in already-paid-for raw materials and labor, the liability, she said, “is probably going to be running up to almost $10 billion.”
That’s where factories are being hit the hardest, as retail orders aren’t typically paid for until goods are shipped, though the factory foots the bill for materials to make the goods at the outset.
“All manufacturers work with very tight & sharp cost price where around 75% is the cost of raw material & balance is for worker wages & salaries, all operation overhead,” Uddin said in his post. “Under such scenario, a 30% discount will just remove the wages & all operational expenses out of the cost sheet plus a significant shortage for paying raw material cost which means the suppliers of the raw materials will come to the same situation where they are not going to coverup their own raw material cost and payments of wages for their workers.”
But little of this appears a concern for Arcadia, which told suppliers it would also be cancelling goods in transit (those that “have received an MDA number and have been properly handed over to a Nominated Carrier or Freight Forwarder”), unless they are amenable to its new consideration.
“We appreciate that you may have difficulty in arranging recovery of the Goods in the current circumstances. In recognition of this, our relationship and despite the challenges we will face in dealing with these Goods, we have worked hard to find, and now have, an alternative solution,” Grabiner said. “For any order that is in transit or was in transit on 17th March 2020, we are prepared to bring in the order at a 30% discount. Our teams will be reaching out to you over the next week to see if you want to accept this proposal instead of us cancelling the order. If you do not wish to accept the proposal, the order will be cancelled.”
For the few things Arcadia Group is willing to pay for, it has alerted suppliers of a 30-day extension to its payment terms, taking the new terms to 90 days.
Order cancellations have hit factories across Bangladesh, Pakistan, India, Myanmar and China, but the outsize ramifications the withdrawals could spell for suppliers and garment workers has spurred some brands—including H&M, Inditex, Marks & Spencer, Kiabi, PVH Corp. and Target thus far—to at least commit to paying for in-work orders. Primark said last week that it would cover the wage component of its orders, though that’s subject to how much suppliers and workers are getting from government support packages.
Arcadia Group could not immediately be reached for comment on its letter to suppliers.