A report published by research firm Verdict last month, The Future of Ethical Sourcing, said more than half of retailers anticipate that ethical sourcing will drive up sourcing costs by at least 5%. They are likely to worry not just about the welfare of workers producing the goods, but also the environmental impact of what they sell in-store. The concern is that as the UK economy slows down, retailers could face a battle on two fronts, with a consumer downturn causing flagging sales and rising costs threatening margins.
So much for their fears, but what about the reality? Some retailers can point to specific examples of the cost impact of ethical trading. After last month's national press expose of poor conditions in the Bangladeshi clothing factories that supply some UK high street chains, Primark paid for an immediate re-audit of all of its factories there, using two organisations that work for the company on a continuing basis. A spokesman for Primark owner Associated British Foods says the retailer bears these costs itself instead of passing them back to the supplier.
Primark has also pledged to replace plastic carrier bags with paper ones before the end of this year, as part of a government initiative to reduce the amount of plastic bags used by retailers. While this is not a sourcing expense, it will cost a "six-figure sum", says the spokesman, which will also be borne by Primark.
One sourcing executive in the value sector says the costs accrued are closely related to how thoroughly a retailer enforces its ethical practices. "We have a decent ethical code in place, which we police as tightly as possible. For example, we discovered one of our factories was using child labour, so we gave them a warning in an attempt to raise standards. The same thing happened again, so we changed factories, which meant we lost money on a repeat order. We absorb these costs.
"The only way to truly avoid situations like these is to have someone on the ground all the time, but this isn't possible right now," she says.
She is surprised at Verdict's prediction of a 5% increase in sourcing costs, saying it is too great. "We haven't seen a drop of 5% in our profit margins and prices haven't increased by the same amount," she claims.
New Look set up an ethical trading policy in 1998 and has been a member of the Ethical Trading Initiative since 2004. The retailer's corporate social responsibility director, Janet Biggs, agrees that costs have increased due to ethical sourcing, but says it has managed to maintain its price position since starting the process.
"There is good work that can be done at relatively low cost," she says. "It's just a matter of working more closely with your suppliers and giving them time to achieve those standards. We are constantly monitoring our activities - sometimes even delisting suppliers that have failed to make necessary changes over time."
Several retailers agree that after an initial period of adjustment, the cost effects of ethical sourcing will be minimal or even nonexistent. George at Asda sourcing and development director Jon Wragg questions the idea that ethical sourcing could drive up production costs. "In the short term we do incur additional costs, but they are substantially less than 5%. In the long term it doesn't really affect the supply chain," he explains.
Wragg says short-term problems include building maintenance work in factories and middle management training for factory owners. "Once you've sorted these out, you become more efficient at ethical sourcing, which ultimately drives costs down," he says. "We incur minimal costs when we work with a new supplier for about two seasons, which we absorb. But we can easily offset these costs by working efficiently."
As might be expected, the Ethical Trading Initiative, a non-governmental organisation that promotes ethical codes of practice, is keen to downplay the cost impact of being a member. ETI director Dan Rees says there is no hard evidence that it has increased retailer's overall costs. "ETI's main concern is improving working conditions and this can mean increasing labour costs, particularly where wages are unacceptably low," he admits. However, this does not necessarily mean rising production costs. Labour can represent a small part of production costs and rises in wages can be offset by productivity increases. Rees adds: "Some of ETI's members are starting to realise there are opportunities - for example, improving the efficiency of their own internal processes, developing longer-term relationships with fewer suppliers, and helping them to make improvements. Instead of asking: 'how much is this all going to cost?', they are starting to ask 'how can I turn this into a business opportunity?'"
Even those in the City, whose job is scrutinising retailers' margins and profit performance, deny seeing any cost impact due to ethical compliance. Pali International analyst Nick Bubb says: "The most important effect will be on people's perceptions, because they will think certain value retailers can't be that cheap unless they source from Asian sweatshops. This may be unfair, but the perceptions are often more important than the facts."
The bottom line for retailers' adoption of ethical and environmental standards has to be whether their customers care, and the evidence here is not totally reassuring (see box). Biggs says ethically sourced products are not a top priority for New Look customers because the offer is mainly value driven - but an ongoing research project is expected to find out the reasons why.
The buying director of one value chain says: "Research says 90% of respondents think Marks & Spencer is one of the most innovative retailers in its approach to ethical sourcing. But our focus groups show consumers don't recognise its work in this field. They don't know what the ethical and environmental Plan A is."
SHOPPERS' ETHICAL THOUGHTS
- 31% of consumers think ethical and environmental issues are important, but they have not changed what they buy or how they shop
- 19% of shoppers look for low prices and don't really think about workers' conditions
- 48% say clothing retailers should make it clear whether garments have been produced to a recognised ethical production standard that safeguards working conditions in emerging countries
- Most consumers, apart from teenagers, are more concerned about environmental issues now than they were in 1990
- Most consumers aged under 50 are less worried about ethical matters now than they were in 1990
- While 48% of consumers worry about child labour, only 36% are concerned about more general exploitation of workers in developing countries
Source: Mintel, Ethical and Green Retailing, June 2007, and Green and Ethical Consumers, January 2007
ETHICAL TRADING INITIATIVE
What it requires:
- Staff must not be forced to work against their will
- Employers must respect the right to freedom of association and the right to collective bargaining
- Working conditions must be safe and hygienic
- Child labour shall not be used
- Employers must pay living wages
- Working hours must not be excessive
- Discrimination is not permitted
- Regular employment must be provided
- No harsh or inhumane treatment.