Ethics of outsourcing: not just Tesco's problem

In "Keep ethical trading in fashion", a letter to The Guardian newspaper, veteran radical lawyer Benedict Birnberg raises concerns regarding leading UK retailer Tesco's plan to launch its own-label online clothing store, as reported in Drapers. While recognising the attraction of this proposal for Tesco customers he writes:

"My concern, however, is with its outsourced garment workers in the developing world. Following War on Want's Fashion Victims report in December 2006, based on research in Bangladesh, and with the publicity generated by your publication of a letter from me, as a Tesco shareholder I was able to move a resolution at its 2007 AGM mandating the company to pay its workers a living wage; 20% of shareholders either voted for the resolution or abstained".

After citing some chilling figures drawn from a fresh War on Want investigation, he continues

"... the culture of fast fashion changes and aggressive buying practices of UK retailers put extreme pressure on suppliers, and hence workers, to produce more garments in less time; not surprisingly, War on Want found that Bangladeshi workers work up to 80 hours a week and most worked 10 to 14 hours a day, six days a week, well in excess of the official standard working week.

In the global downturn, UK retailers who maintain employment in the developing world are to be congratulated. But not if the price paid means such gross exploitation of their workers. I challenge Tesco to abide by its Ethical Trading Initiative obligations to pay its outsourced employees a living wage".

Fashionista notes that the ethics of outsourcing, like the economics of the fashion industry itself, have a global dimension to them. While Tesco competes with other retail and online fashion traders in the UK and its other market, poverty-stricken Bangladesh competes with other economically disadvantaged nations for the right to secure the outsourced work; within Bangladesh itself the garment workers' employers fight to secure the right to supply the Tescos of this world, knowing that harsh local employment conditions and a vast pool of available labour will help ensure that even the meanest contract remains profitable for them. While Tesco and its shareholders recognise the problem, and War on Want describes the reality which results from it, the solution requires more focused attention and more resolve than any one trader can bring to bear.

Will the latest “pre-pack” trend continue despite the recently introduced SIP 16?

The biggest business trend at the moment within the fashion sector is the “pre-packaged” sale. This is the process where a buyer is lined up for a struggling business before it actually goes into administration. Since pre-packs generally don’t require approval of either the courts or creditors, the deals can be put together quickly, often taking creditors by surprise. This has led to a growing tide of criticism against the use of “pre-packs”, particularly where the buyer is the former owner of the insolvent business.

As the Independent reported, the Business and Enterprise Regulatory Reform Committee will be grilling Stephen Speed, head of the Insolvency Service (the industry regulator) this week on 27 January. The Committee chairman, Tory MP, Peter Lull explained “There are growing concerns about the way some businessmen are using pre-packaged administrations as a way of getting out of their debts and other obligations”.

As reported in Drapers before Christmas, the concern that creditors’ interests are being over-looked has led to the introduction of new rules that apply from 1 January 2009. The new practice statement (SIP 16) must be read in conjunction with the new Insolvency Code of Ethics which places a duty of objectivity on insolvency practitioners (IPs). In summary, SIP 16 does two things. First it reminds IPs of the duties which they owe to all parties affected by a pre-pack sale and second, it introduces a new formal requirement to disclose detailed information to creditors, including a justification of why a pre-pack sale was undertaken. Whilst this was previously best practice in any event, the formalisation of the information requirements may help to focus an insolvency practitioner when considering the benefit of the pre-pack to all of the company's stakeholders.

IPs are reminded that while they don’t require prior consent from creditors, they are vulnerable to claims if their conduct falls below the standard required of them in the Insolvency Act 1986. The statement focuses on the IPs duties and obligations in the pre-appointment period and states that IPs must be clear about the nature and extent of their role and their relationship with directors. It highlights the importance of the directors seeking independent advice where the IP is advising the company, particularly where the directors are looking to purchase assets through the sale.

In terms of the new disclosure requirements, SIP 16 places an obligation on administrators to provide creditors with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that the creditors can be satisfied that the administrator has acted with due regard to their interest. Some have suggested that this is a pyrrhic victory for creditors, since, by the time they receive the report, the deal will already be complete. However, certain key information must now be disclosed to creditors in the first notification informing them that an IP has been appointed. This includes:

· the source of the administrator's initial introduction and extent of involvement prior to the appointment;
· any valuations obtained of the business or the underlying assets;
· the alternative courses of action that were considered, together with an explanation of possible financial outcomes and any connection between the purchaser and the directors, shareholders or secured creditors of the company; and
· whether efforts were made to consult with major creditors.

Fashionista is interested to see whether SIP 16 in fact results in IPs being less willing to sell struggling businesses using a pre-pack or whether disgruntled unsecured creditors will use the more detailed information provided to question whether the IP appointed acted with due regard to their interests. While Fashionista welcomes the new transparency that SIP 16 should bring, in the current economic climate, the limited availability of funding is more likely to slow the rate of pre-packs than the new SIP 16.

India's Fashionistas

Despite the global downturn which is hampering India's ambition to reach double digit growth, consumers' appetite for shopping is still clearly visible in the shiny newly built shopping malls spreading across the country. While organised retail is a relatively new phenomenon in India, the FT reports some commentators predicting that the Indian retail sector to grow to £450 billion within 6 years, putting it on a par with Italy. McKinsey predict that 300m shoppers per year will visit shopping malls within a similar time frame.

Although India is not for the fainthearted and there are still a number of restrictions that hinder foreign investment in retail in India - not least the requirement for any foreign investment to be in single brand - if the shine has come off retail in the UK for the foreseeable future, Fashionista suggests that retailers with global ambitions could do worse than look to India as a new growth market.

The development of India's dynamic and consumer retail sector and export opportunites for UK companies are the subject of UK Trade & Investment's event held on 27th January 2009 at which their report "The Retail Opportnunities in India" 2009 will be launched. See here for more information.

When should a trouser be quilted?

Milan Fashion Week was launched into controversy over the weekend. As reported in the Guardian today and on Radio 4's Today programme, Giorgio Armani has alleged that Dolce & Gabbano's latest collection (unveiled on Friday) contains a pair of quilted trousers (see image) that were a copy of his design from a previous season.


Armani is quoted as saying, "Now they are copying, later they will learn". For their part, D&G deny any copying and said that "Stylistically the Armani style is not and has never been, an inspiration source for us and we stopped seeing his fashion shows years ago". While clearly Giorgio Armani feels taken advantage of, Donatella Versace seems to adopt a more relaxed approach - she was reported as saying, " It's an honour to be copied".

There has always been a fine line between plagiarism and inspiration and the fashion industry is prone to disputes concerning the originality of designs. Menswear is arguably more vulnerable to these types of claims than others given the relatively limited design freedom in standard pieces such as mens tailoring.

Whether Armani is sufficiently vexed to instruct lawyers remains to be seen. While he may or may not feel morally wronged, the question of whether he has a legal case is tricky. If Armani's earlier design is less than 3 years old, it may be protected by Community unregistered design right. If that is the case, as well as proving copying, Armani's lawyers would also have to show that D&G's quilted trousers produce on the so-called "informed user" (so a snappy dresser) the same overall impression as that produced by Armani's earlier design.

While the Community unregistered design right has been successfully relied upon by a number of fashion houses in court cases filed against high street retailers, Fashionista is not aware of any cases between named designers.

Just an idea

Writing in The Independent, an article by Susannah Frankel ("Elasticated waist bands - the last word in fashion credibility") runs with the strapline "Ready to Wear: Prada proposes we wear her elasticated waist bands with just a bra on top".

Fashionista has her own views on the sartorial dimensions of this proposition, but she's happy to share her thoughts on one issue -- getting the credit for starting a fashion. While designers can often assert their moral right to be identified by name in respect of specific copyright-protected designs, there's no legal mechanism for claiming the credit for a new fashion craze.

The Icelandic effect shows no signs of thawing

Fashionista has been pondering how the fate of one retailer in particular could change the face of the UK high street more dramatically than any other. As is evident from the recent administrations of a number of Icelandic backed retailers, including Blooming Marvellous, Hardy Amies and Ghost (all owned by Icelandic investor Arev) and from reports that Icelandic fund Kcaj (which owns Jones the Bootmaker, Mountain Warehouse and Aspinalls of London) is also facing administration, those retailers with an Icelandic connection seem to be struggling to find the cash they need to push them through the current challenging trading conditions.

So given this background Mosaic Fashions, which owns the Warehouse, Coast, Shoe Studio, Oasis, Karen Millen and Principles brands, amongst others, and is part-owned by Icelandic bank Kaupthing and Icelandic investor Baugur (also backed by Kaupthing), surely has cause for concern. Recent reports of lower sales and falling profits within the group, not to mention the fact that the group has called in an emergency restructuring team from Deloitte, also indicate that the Icelandic effect may be about to strike at the heart of the UK high street yet again.

Due to its Icelandic connections, the group has been squeezed considerably over the past few months by the withdrawal of credit insurance and reports that suppliers are only prepared to supply stock to Mosaic stores on a cash on delivery basis. In addition, the collapse of Kaupthing has meant Mosaic has lost its key foreign exchange hedge which diluted its profits this year and is likely to have an even more dramatic impact next year.

On the bright side, Mosaic has managed to persuade 85% of its landlords to accept monthly (rather than quarterly) rents, and is in talks with lenders to secure additional working capital. It has also been granted a waiver on interest payments in relation to the £400m debt it owes to Kaupthing. Fashionista worries about the effect it may have on the business if it has to resume payment of those interest payments.

Clearly Fashionista is concerned about the possibility of losing some of her favourite high street brands, but also worries about the impact that this could have on the larger department stores such as Debenhams and House of Fraser, where Mosaic concessions make up a large part of their fashion offering. Despite the doom and gloom, Mosaic says its sales remain above £1bn a year and there is no risk of administration. Fashionista hopes that this is the case -- but only time will tell.

Is patriotism the answer to recession?

Since Christmas the headlines have been filled with daily news of fashion retailers going bust. 2009 heralded a slew of administrations involving well-known names including Viyella, Emma Somerset, The Officer's Club, Morgan and Kate Kuba.

In order to support UK retailers in these troubled times, Retail Week has this week launched its "Backing UK Retail" campaign. Alongside supportive quotes from the great and the good including the Prime Minister and Phil Wrigley (New Look), Retail Week poses its readers the challenge, "They're backing UK Retail - are you?

But is a patriotic campaign such as that being promoted by Retail Week really going to make a difference? This issue was debated on Radio 4's Today programme this morning. Tim Harford, a columist for the Financial Times, recalled a previous "Back Britain" campaign launched in 1968 and endorsed by Bruce Forsyth as well as the then PM Harold Wilson (see badge from the 1968 campaign above).

While there is obvious appeal to such campaigns, Harford argues that we need to continue buying foreign goods so that they continue to buy British goods. With sterling at a record low, British made goods are already getting a welcome boost so Harford argues that a specific campaign encouraging consumers to shun foreign goods is unnecessary and ultimately unhelpful.

While a number of fashion labels are created by British designers, very few source their product here, more often product is sourced in Asia and purchased in US dollars. As a result, Fashionista reflects that in practice British labels are unlikey to get much help from patriotic campaigns or the strong pound.

Primark's luck

If you're a 140-shop high-street fashion chain and the media have just been making allegations that you've been sourcing your products from a supplier employing near-slave labour, it really helps when the bad news is hidden beneath the big story of the day -- the shock horror revelation that Prince Harry used the P*** word when referring to a Pakistani comrade. This was Primark's good fortune on a day when it might otherwise have hogged the headlines itself.

According to the BBC, The Observer newspaper reported that Primark supplier, Manchester-based firm TNS Knitwear, was paying illegal workers  -- including Pakistani, Afghan and Indian illegal immigrants -- less than the minimum wage. Some workers were reputedly receiving just £3 an hour. Primark immediately expressed itself "extremely concerned" by the allegations, which TNS Knitwear has denied, and agreed to remove references to the Ethical Trade Initiative from its 140 shop fronts.

Fashionista reminds her readers that, however serious the economic climate for the fashion industry, the employment laws are there to be complied with. On a more flippant note, it occurs to her that, at £3 an hour, there aren't many places apart from Primark where you can do your clothes shopping.

Economic Hope?

In the current economic climate, landlords and shopkeepers are adapting to harsh realities. House of Fraser has recently negotiated with landlords throughout the UK to pay rent on a monthly basis. It is believed that it has successfully done so on 15 of its 63 stores including Lakeside and Medowhall shopping centre. There have been calls from the likes of Philip Green to push landlords to agree to monthly rental payments to assist the cashflow of high street traders.

Regardless of the economic position, a precedent may be set for the future for retailers to pay on this basis even in a growing market. The length of commercial leases has been considerably shortened over the last decade, there are fewer 25 year leases, with shorter leases of 5 to 10 years now being favoured.

In this period of low activity, with landlords desperate to fill space, tenants are gaining the benefit of further incentives, such as longer rent free periods from 6 months to between 8 and 12 months. Further, as there appears to be a relocation of head offices into the wider West End area with Marks & Spencer moving to Baker Street and Burberry to Victoria, the prediction is that there will be a re-adjustment of rental expectations by landlords.There was promise in the fashion market earlier this year with 15 new Burberry stores opening and 33 Laura Ashley stores planned. There will be opportunities for those with expansion plans to grow in this market, with stores such as Whittard with 127 vacant units and the Officers Club's 160 stores and various other retailers in decline; JJB Sports, Jessops, Zavvi, Adams and Land of Leather and more recently Marks & Spencer, which has announced that two main chain stores are to close and Viyella, with 107 shops and concessions including a flagship store on Regent Street. Experian, the financial consultancy, has predicted that at least one shop in ten would lie empty in 2009.

You thought we wouldn't notice ...

Fashionista is not one to spend her precious time online when she can be surfing her boudoir mirror instead. However, she just has to tell you how much she enjoyed her little flirtation with You thought we wouldn't notice ... , an open weblog that brings you a delightful collection of copied ideas. Categories of posts include clothing, design, and for those who prefer to venture a little further down-market, retail.

Fur flies as PETA takes on Lagerfeld

Chanel designer Karl Lagerfeld has stirred fresh controversy over the morality of wearing fur -- a practice targeted by animal rights groups and legislative lobbyists in many countries. Said the veteran designer in an interview on BBC's Radio 4 last Friday, it's childish to dispute the practice of wearing fur in a world where it is acceptable to eat meat. He added that the "beasts" from which the fur is taken would "kill us if they could." He added that the animals should be killed "nicely" if possible.

A spokesperson for PETA (People for the Ethical Treatment of Animals) called Lagerfeld a "dinosaur" for what she considers his outdated view, stating:

"The vast majority of fur these days comes not from hunters as he suggests, but from Chinese fur farms, where no law protects the millions of animals who are routinely beaten and skinned alive".

Fashionista wonders whether there is any significance in the fact that she first discovered this item on Fox News.