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Abusive Purchasing Practices Create ‘Vicious Cycle’ and ‘No Profit’

“Brands want the products very quickly and very cheap.”

So complained the manager of a Bulgarian garment factory in a new report about fashion production in the European Union, where small, speedy and low-cost orders, hatched under mercurial buying conditions, are characteristic of the “risky and unbalanced” trade relations between brands and manufacturers on the continent.

Published by the Fair Trade Advocacy Office and based on field research undertaken by Clean Clothes Campaign Europe, the study uses interviews with suppliers, experts and trade union representatives in Bulgaria, Romania, Croatia, the Czech Republic, Italy and Germany to “paint a clear picture” of a general trend of lowering prices, shortening lead times, lengthening payment terms and increasing “hidden” costs, such as initial sample production, being pushed onto garment manufacturers. This, the report said, puts suppliers in financial peril as they are unable to make investments or pay wages.

Written contracts between suppliers and buyers, the research found, are rare in the examined clusters, and where they exist they tend to heavily favor brands and retailers. “The contract with Moncler was like a book, they protected their brand so much that if they thought they had lost a piece, you could find yourself offering enough compensation to go bankrupt,” one Romanian supplier groused. A manufacturer from Italy said that the contracts proposed by brands “never include a commitment on quantities to be produced or even a commitment on prices. The ‘contracts’ for the brands are to say that the supplier must respect quality, and delivery times because if he doesn’t, penalties are triggered.”

The pandemic only exacerbated the power imbalance, the report said. The manager of a facility in Romania, which had made clothing for Asos for more than a decade, said that the British e-tailer ignored a five-year contract to cancel orders, declaring, “We have no work to offer, look for something else.” Another factory owner, also in Romania, reported that other U.K. brands “refused” to renegotiate contracts for better pricing after Brexit devalued the pound. In cases of contract breaches, brands often slap suppliers with legal action, yet the reverse happens rarely, if at all. One buyer described it as such: “When there are problems, the buyer is more influential.”

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A bone of contention within the subject of unfair trading practices is price setting. Purchasing prices are often proposed by buyers or through e-auctions with predetermined thresholds. They usually start with establishing how much a product needs to cost to be both accessible and profitable. The cost of raw materials, labor, electricity and logistics, even compliance, can sometimes be afterthoughts, the study said. The result is often gaps between what suppliers are paid for labor and what is needed to cover the employers’ costs, including mandatory social security contributions and taxes. One interviewee said that the standard labor cost per sewing minute of 0.30-0.40 euros (33-44 cents) for Italian suppliers is too low because it only pays them 18 euros ($19.98) per hour, whereas employers’ gross labor costs, including mandatory social contributions and taxes, come up to at least 24 euros ($26.63).

In some cases, suppliers acquiesce to low prices in order to maintain business, even though this can lead to no profit. A Bulgarian supplier has taken orders “only for prestige, for fame, not for profits—well there are some profits, but very low, just to survive.” The Asos supplier from Romania said that “many times you end up with no profit.” Another Bulgarian producer griped that the “further down the chain you are, the more you have to lower your head, just to have a job. Because if you say no, your work stops, your orders stop, you get a bad name, they say, ‘These guys refused to do it, we are not going to work with them anymore.’ It’s a vicious circle.”

Then there’s the fact that surprise costs can spring onto suppliers after delivery, the report said. They might include repairing returned deliveries or compensating the brand for alleged repairs or fines. There might be refused payments for what brands and retailers deem quality issues. Buyers sometimes try to return unsold goods to manufacturers—“the product we do not sell, we will give back to you,” as one Italian producer put it. A Bulgarian supplier said that “even after a few months, if quality problems are identified, you can be penalized. And the penalties were decided by the brand, according to their evaluation of the so-called flaws.”

Payment terms are another pain point. Several brands are increasingly using payment timing to regulate their cash flow, surveyed suppliers said, with delays of as much as 120 days after the receipt of goods. A Bulgarian manager said that “sometimes brands only pay when they had successful promotion campaigns, i.e., high cash flows.” He added that brands “used to pay us only when they made big turnovers with their sales promotions. They paid with huge delays.”

Pushing back is difficult, if not outright impossible, respondents said. “Germans sent us a letter concerning the rapid changes in cotton prices. They said the price of cotton has dropped,” a Bulgarian manufacturer recounted. “But when we ordered the fabrics, the price was much higher. And they start pushing us and if we bend… very often we lower the prices too. We try to resist, but often we lower our heads.”

All of the exchanges described deviate from good business conduct, begetting stressed suppliers, low wages and labor rights abuses, the Fair Trade Advocacy Office and Clean Clothes Campaign Europe said. Responsible purchasing practices, they said, should at minimum pay for orders within 60 days, cover production costs and guarantee living wages for workers, compensate modifications in orders and have a clear definition of the terms of risk and ownership of goods.

The organizations also urged the European Union to adopt a directive that outlaws unfair trading practices in the garment sector such as unreasonably late payments and prices below the cost of production. Such a directive, they said, should ensure not only effective enforcement but also provide extensive guidance on how buyers can ensure and promote freedom of association, collective bargaining and living wages at the furthest nodes of their supply chains.

“While brands and retailers can take immediate action by committing to adopt fair practices in their buying policies, legislative action at EU level is needed to set a level playing field,” the report said.

An Asos spokesperson said that it’s difficult to respond to specific claims because the retailer doesn’t have any details beyond what’s in the report. Asos’s commercial teams receive purchasing practices training and commodity reports that outline the costs of various raw materials, ensuring that they understand the impact of their buying practices on worker wages and “negotiate consciously,” the representative said. Moncler did not respond to a request for comment.