Why does the price of the garment not change even when the cost of raw material goes up?

The question to be asked should be how much respect is there for fair wages in “Respect” of a hoodie sold by a Brand XX?

No Brand or retailer disclose wages or purchase prices, but to answer the above question, we put together our detailed estimate of the breakdown of the price of a Hoodie, based on workings and assumptions.

In a nutshell: Brand appears to make more profit selling one hoodie than all the workers involved in its production put together. And yet there are alternatives.

We all know a lot of work goes into producing an item of clothing. But how are these efforts remunerated? How much of the retail price of a piece of clothing goes to the workers, and how much do companies make in profit?

This question always troubles all of us!

Having spent long years in Sourcing and understanding the roots of the trade, I will try to explain simply by taking the example of a Hoodie.

We will call our garment “Respect “Hoodie.

One of my French customers placed a decent order for Hoodies and this order was produced by us in Izmir, Turkey. Since it was our overseas production, finances had to be worked properly factoring in all probabilities. Thus, my office started to search for clues – and we started to analyze dozens of financial reports, trading data, and further sources, and spoke to experts. We used our findings as a basis to produce detailed estimates on how the costs of the ‘Respect’ hoodie are distributed throughout the supply chain – and who earns how much at each stage.
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My customer was well known for its unique, centralized supply chain: items of clothing are designed and commissioned in its headquarters in France, then produced in a range of countries before being shipped, driven, or flown to France, where they are sold online and distributed to branches and shipping centers.

The retail price of the clothing varies significantly from one country to another. In France, the price of the hoodie we examined was 25.95 euros, in Austria and Germany it was slightly more expensive at 29.95 euros – and significantly more expensive in Switzerland: CHF 45.90 (39.57 euros).

And since June, the customer sold the hoodie at a roughly 50% discount, and finally, the remaining hoodies (likely only a few) were sold in branches in Zurich for only CHF 12.95 (11.19 euros). This is what we learned during our talks with the customer.

The difference in prices is in part due to different VAT rates, and varying retail and online retail costs. More significantly, however, it seems that prices were linked to consumer expectations and purchasing power.

While in France, the customer positions itself as a mainstream, affordable brand, in Switzerland it is positioned as a more glamorous, mid-range brand. We took account of the different prices and discounts in our calculations, and we also factored in different VAT rates. Markets with high prices such as Switzerland featured less significantly in our calculations because other markets, like customer’s home market France and large EU countries like Spain, account for more revenue. Using this basis, we estimated that the average retail price that customer charges per hoodie are 22.22 euros (before VAT).

The question remained how much did the customer itself pay per hoodie?

No matter how many bottles of wine we drank but the customer did not answer this question, so being a typical Indian we worked it out for ourselves. We found that the approx. 20,000 Respect hoodies were ordered to be sewn and printed in Turkey. We also found that the customer did not commission the production of the hoodies itself; the role of our sourcing agency, like ours, was used.

The customer paid us 7.76 euros per hoodie. To come up with this estimate, we took comparable offers from other Turkish companies, asked experts, and compared the data with our calculations for the cost of materials and processing. Our estimated production price was approx. 25% lower than the comparable offer we received from our other customers for the same product. Means other customers were ready to pay about 25% higher than our French customer for the same product. This seemed realistic given that my customers had a strong purchasing power. Soon we realized that my customer was one of the largest buyers of clothing produced in Turkey.

As we did our calculations of producing the hoodies in Turkey our estimate was that out of CHF 7.76 euros, the profit will be 21 cents and it will take 49 cents to cover other costs.
My customer assured me that the purchase prices he is paying are high enough.

Now for the processes of cutting the material, sewing, packing, and attaching the labels, the factory in charge was paid nine Turkish lira (1.53 euros).

As you know production is split into numerous individual steps; the hoodie makes its way through many hands and machines. For your information, in total, it takes some 30 minutes of work to produce a single hoodie in Izmir.

The factory worker wages of 2,000 – 2,500 Turkish lira (310 – 387 euros), which is the statutory minimum wage or just over. So, for a net monthly wage of 387 euros the factory would have to calculate a gross hourly wage of at least 2.44 euros, i.e. 1.22 euros for 30 minutes. By way of comparison: for workers to receive a living wage according to the Clean Clothes Campaign Turkey’s estimate, they would need to receive a gross hourly wage of 6.19 euros, or CHF 3.10 for 30 minutes.

But the factory is only being paid 1.53 euros – from which, in addition to salaries, it must pay the operating costs of maintaining the buildings and machines, electricity costs and management salaries – it does not take long to realize that it is going to be more than tight. Based on our calculations, we assume that the factory had to pay 1.10 euros per hoodie in the form of wage costs, leaving only 43 cents to purchase necessary trims, cover the factory’s operating costs, and if possible, to make some profit, which is of course what the factory owners want. The workers who make the “Respect” hoodie do not make anything near a living wage.

There is a print too on the hoodie which cost just half a lira, so approx. 9 cents, have gone to the printing factory for each print. 

The two prints which were needed – one for the front and one for the back – we estimated the printing costs at 17 cents per hoodie, half of that for salaries. This sum is also so low that little would be left over after production, even if workers are only paid the minimum wage. 

Now with margins like these, there is a high risk that labor costs come under even further pressure: for instance, from higher performance requirements (fewer seconds for each step of the process), underpaid or unpaid overtime, or the use of day laborers.

My customer had also nominated the fabric which was about 5.35 euros per hoodie. Once again, we looked at comparable offers, and we estimated that due to its dominant market position, my customer was able to negotiate the price down by 10% compared to the offer we received for a smaller and not-so-known customer.

We grew curious after seeing the fabric rate hence investigated a bit more than just the labor costs of producing the hoodies, so we also analyzed the production of the fabric. 

The consumption was worked out was some 1.7m2 for each hoodie. 

The fabric was a blend of French Terry with a brushed backside; the fabric has a density of 260 grams per m2. The label states that it is 84% cotton, which my customer states are organic. 

We knew the raw cotton is processed in India. We estimated that the cotton farmer was paid around 26 cents for the quantity of raw cotton required to produce one hoodie. To which we deducted 5 cents for seeds, irrigation, and further inputs, a total of 21 cents is leftover to pay the laborer and the farmer. But we know very well that around three times this amount would be needed to pay the laborers a living wage in India.

Cotton is usually processed from raw cotton to cotton lint, yarn, and finally the fabric is highly mechanized processes and in large quantities. Therefore, the labor costs of these steps of the process are low. The profit margins at these steps are also low, we estimated these to be 28 cents per hoodie. Hence mills are likely to make this commercially viable based on quantity rather than margins.

As an interim conclusion we can state that, according to our estimates, from cotton field to printing, the total cost of earnings and salaries for each hoodie is 2.08 euros. My customer paid 7.76 euros per hoodie. 

The hoodie must get to the shops and be sold. The freight cost was about 41 cents by container ship and then by lorry to the warehouse. 

My customer had told me that the margin on the hoodie was around 63% hence we used this basis to apply the average cost and profit shares to our hoodie.

We estimated that for each hoodie, 3.92 euros goes on staffing costs (primarily at the point of sale) and 5.93 euros on store rents, amortization, and further operating costs. Some money went to the copyright holder for using the print.

So, what is left over? According to our estimates, each hoodie generates 4.20 euros in profit – more than double the amount that goes to all the workers involved in the production process. After-tax, a net profit of CHF 3.27 remains.

This is the business model of all brands/retailers which is geared towards maximizing profit: a return on sales target of over 15% and shapes relationships in the supply chain. 

Are there other ways? What if fair wages were paid from cotton field workers to textile factories, to the shops?

To increase wages in Turkey and India to living wages, they would have to be raised by a multiple of between 1.9 and 3.0 at each step of the production process. And yet the difference in price per hoodie would be just 3.62 euros, slightly less than the customer itself earns from each item. 

If each of the companies in the supply chain gave up part of their profits, the room for maneuver would be even greater. If the customer had the will, it would be possible to pay living wages without this automatically increasing the retail price. 

Utopian? 

It might seem so today. 

Possible? 

Absolutely.

For us, ‘Respect’ in the fashion industry means that everyone involved in producing the raw materials, making the fabric, or sewing the garments can live properly from their wages – and that those who control the supply chain do not abuse their power to drive down prices. The distribution of power and profit within the supply chain needs to be challenged, re-negotiated and if necessary, strikes in favor of better wages and producer prices must be held.

In addition, people need to show solidarity and break out of their role as passive consumers. They need to make it clear that respecting the human right to a living wage cannot be a question of perspective – it must be respected.

RELATED TOPICS:#Apparel,Sanjay Lal