Fast Fashion: Tackling the problem of low wages for garment workers
Olena Velychko, CFA, ESG Analyst at Nordea Asset Management
The growth of “fast fashion”, inexpensive clothing produced rapidly by mass-market retailers, has contributed to a doubling of global clothing production over the last 15 years, while at the same time the clothes’ utilization rate has decreased by 36%. This overconsumption of clothing is being driven by more collections and quicker turnaround as well as lower prices. The clothes lose their value quickly as new collections make them less fashionable and low prices, which have become the norm, make it easy for consumers to continuously replace clothing. The result is a buy-dispose cycle which is permeating the entire apparel industry with adverse consequences for workers.
To understand the cycle, we must first consider how these clothes can be produced so cheaply.The selling prices do not reflect the true environmental and labour costs of production. Fast fashion companies in search of cheap markets source their labour from countries like Bangladesh, Myanmar and Ethiopia, some of which allow for lower trade tariffs on apparel due to their least developed country (LCD) status. In recent years, apparel companies have been increasingly sourcing labour from Turkey and Mexico due to their proximity to Europe and the US as the benefits of speed to market outweigh increased production costs.
Apparel companies that have achieved tremendous success in scale have been pushing prices down for the consumer. Since the apparel supply chain can be characterized as a “buyer’s market”, i.e. where supply exceeds demand and purchasers have an advantage over sellers in negotiations, the brand owners are in a good position to demand lower pricing and shorter lead time from their suppliers.
“The growth of “fast fashion”, inexpensive clothing produced rapidly by mass-market retailers, has contributed to a doubling of global clothing production over the last 15 years.”
Low-cost production environments present a particular social rights challenge: there is a large low-skilled labour supply in these markets, but fewer formal work opportunities, which means that workers have less bargaining power relative to factories regarding wages.
Legal minimum wages are not enough to live on in many of these markets: the minimum income necessary for a worker to meet basic needs for a family unit, including modest discretionary income, is below acceptable levels 2 . There are both social and economic reasons for apparel companies to address this.
The social reason is that minimum wages may not be sufficient to support advancement toward Sustainable Development Goals. Companies that barely meet the minimum wage threshold do not contribute to societal well-being or economic growth. The issue of fair wages is closely linked to many of the Sustainable Development
Goals outlined by the United Nations, especially goal number 1: No poverty, number 2: Zero hunger, and number 8: Decent work and economic growth.
The economic rationale to address wages in low cost production environments relates to the fact that minimum wages have been increasing and continue to increase in key sourcing countries, e.g. up by 82% in Cambodia and 51% in Bangladesh since 20133. Through our calculations in this paper, we show that while this is starting from
very low levels, it is material for both workers and companies with small margins in volume businesses like apparel. Hence, it needs to be addressed with foresight.
Consumer awareness of sustainable garment choices is increasing … yet both the consumer picture and the regulatory picture are incomplete.
The Boston Consulting Group’s most recent consumer sentiment survey4 found that not only is consumer awareness of the sustainability outcomes from fast fashion growing, but it has an impact on consumer purchasing decisions. More than a third of the respondents reported they already have switched from their preferred brand to another due to the brand’s impact on sustainability, and more than half said they expect that their next purchase will be affected by the brand’s responsibility practices.