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H&m case study
University of Rhode Island
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H&M’s Global Supply Chain Management Sustainability:
Factories and Fast Fashion
case W93C February 8, 2014
Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan. ©2014 Marianna Kerppola, Ryan Moody, Likangjin Zheng, and Amaryllia Liu. This case was written under the supervision of Andrew Hoffman (Holcim Professor of Sustainable Enterprise at the Ross School of Business) at the University of Michigan by graduate students Marianna Kerppola, Ryan Moody, Likangjin Zheng, and Amaryllia Liu as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Helena Helmersson, head of sustainability at Hennes & Mauritz (H&M), was startled awake by a phone call at 5 a. A factory had collapsed in Savar, a suburb of Dhaka, the capital of Bangladesh. The building was Rana Plaza, owned by wealthy Mohammad Sohel Rana. 1 Helmersson’s informant assured her that H&M did not directly contract clothing manufacturing from the factories in Rana Plaza. However, given the complicated supply chains of the apparel industry, there was no guarantee that H&M garment manufacturing had not been indirectly subcontracted to the Rana Plaza factories.
Even if no H&M clothes were found in the ashes of the collapsed factory, Helmersson sensed that H&M would be put under a spotlight by consumers and labor rights groups as H&M was the largest exporter of clothing from Bangladesh. 2 There would certainly be a flood of media coverage on labor conditions in Bangladesh. While Helmersson felt confident that H&M was an industry leader in sustainability, she was concerned that the media would conflate the egregious working conditions of some Bangladeshi factories with the H&M brand.
At 7 a., she would meet with Karl-Johan Persson, CEO of H&M, to devise a response to the factory collapse. Fortunately, H&M already had a good track record of engaging with the Bangladeshi government, factories, and workers. In 2012, Persson had met with Sheikh Hasina, the prime minister of Bangladesh, to advocate for higher minimum wages, regular wage adjustments, and fire safety in the garment industry. 3 Additionally, H&M partnered with 18 other brands to provide 3 million workers in Bangladesh with additional fire safety training. 4 Yet beyond these facts, Helmersson still had some troubling issues to contend with: How should H&M respond to this catastrophe? Should the company be on the front lines in dealing with the aftermath of the factory collapse, or should it step to the side and let those companies implicated by the disaster deal with the situation? How should she advise Persson to respond to the media? How could H&M prove that the company took social and environmental issues seriously?
The Rise of Fast Fashion
Fast fashion, an operations strategy where fashion retailers quickly move designs from runway to stores, rose to prominence in the mid-2000s in companies such as Zara, H&M and Forever 21. By democratizing couture and bringing trendy, affordable items to the masses, fast fashion created an era where designs
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moved from catwalk to store within weeks to capture current trends in the market. Zara delivered new styles to stores twice a week, while H&M and Forever 21 received daily shipments of new styles, therein revolutionizing the cadence for fashion merchandising. 5
Before fast fashion transformed the industry, clothing retailers maintained a seasonal sales cycle where new trends were introduced only four times a year. 6 Over the course of a season, traditional retailers would mark down clothing to sell excess inventory. Traditional retailers might not be able to sell clothes with particularly poor design, thus entirely losing the sale.
Pioneers of fast fashion, such as Zara, recognized the seasonal sales model was sluggish and detached from consumer preferences. Instead of making large bets on styles, fast fashion retailers test new styles rapidly to determine which offerings customers favored with purchases. Donald Sull, Professor of Management Practice in Strategic and International Management at London Business School, and Stefano Turconi, Strategy Research Associate at London Business School, found that fast fashion retailers are “able to respond quickly when items sold better than expected and also to cut off production when demand for particular items fell.” 7 Moreover, fast fashion retailers easily incorporated “fresh information that might influence fashion, including everything from regional weather forecasts and international events, to the vagaries and whims of admired social figures.” 8 As a result, customers visited stores weekly or even daily to discover the latest trends and deals.
Fast fashion retailers also prided themselves on affordability. In 2010, H&M advertised a dress modeled after an Alexander Wang design for $4. 9 Jennifer Uglialoro, the company’s PR director, explained that “this season we’re focused even more on a lower price. We’re very cost-conscious; for fall you’ll be seeing trench coats for $20.” 10
Furthermore, fast fashion companies were immensely successful financially. A study by Bain & Company found that fast fashion retailers put only 15% of inventory on sale, whereas the industry average was 50%. 11 Further, fast fashion retailers enjoyed a profit margin of 16% while the typical specialty-apparel retailer earned a margin of 7%. 12 How did fast fashion retailers maintain low price and high margins? Uglialoro explained, “We have over 2,000 stores in 37 countries. This provides high volume and there is no middleman. We have our own team of over 100 in-house designers and we do all our own production.”13,
Since the mid-2000s, the fast fashion market segment grew to a record high of $262 billion in revenue for 2012, up 2% from 2011. 15 The fast fashion segment primarily targeted women and by virtue of its fashion know-how and its adeptness in anticipating trends, the fast fashion industry achieved popularity among consumers. As a result, fast fashion companies grew at a formidable rate despite overcrowding in the clothing market and, at times, sluggish consumer spending. As of 2012, the top five players in the market were: H&M, Zara, Uniqlo, Ralph Lauren and Calvin Klein (Please see Figure 1 ). 16
Environmental Concerns of Fast Fashion
According to the Natural Resources Defense Council, “textile-making is one of the most polluting industries in the world.” 17 One cotton T-shirt uses a third of a pound of synthetic fertilizers, four square meters of land, 25 kilowatts of electricity, and 50 to 75 liters of water (see Exhibit 1 ).18,19 Resource usage in the fashion industry posed a significant burden on the planet, considering that the industry produced 150 billion garments per year, approximately 20 garments per person. 20
Fast fashion retailers were criticized for creating disposable fashion that was worn only a handful of times before being thrown away. In the past, cost-conscious consumers opted to buy affordable clothes from thrift stores. However, with the rise of cheap clothing, cost-conscious consumers have flocked to fast fashion
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Figure 2
Tr e n d i n Te x t i l e W a s t e A c c o r d i n g t o t h e E PA , 1 9 6 0 – 2 0 11
*Generation before materials recovery or combustion. Source: EPA. “Municipal Solid Waste in the United States: 2011 Facts and Figures.” 2012. Accessed 7 Dec. 2013. epa/epawaste/nonhaz/municipal/pubs/ MSWcharacterization_fnl_060713_2_rpt.
Fast Fashion Labor Conditions
Critics of labor rights advocates such as WRC argue that “jobs in garment factories, no matter how low the wages or how difficult the conditions, benefit low-skilled workers because they provide better conditions and compensation than jobs in the informal and agricultural sectors of developing countries.” 32 These critics cite the apparel manufacturing industry in China, South Korea and Japan, which served as a stepping stone for those economies to support higher wage industries, such as electronics manufacturing (see Figure 5 ). 33
Apparel retailers are often implicated in wage and working condition issues despite code of conduct contracts. Retailers rarely own their own factories and contract their work out to manufacturing companies that are often in other countries. Some apparel brands perform audits of the factories where they contract their manufacturing, in which case these first tier factories usually meet the wage and working condition standards established by the code of conduct. 34 However, these first tier factories often overbook their operations and subcontract orders to non-compliant factories. Habib Hirji, managing director of the Bangladesh office of Synergies Worldwide, a buying house, explains “the biggest factories take orders based on subcontracting capacity. They may have a two million capacity and they’ll take orders for four million.” 35 Retailers typically have strict rules about subcontracting in their code of conduct, yet manufacturers often brush over these
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details because they do not have the time or incentive to disclose this information. 36 As a result, retailers may not know where their clothes are made or the subcontractor’s working conditions.
Figure 3
Price Development for Crude Oil, Cotton, Fine Wool and Food & Beverage
Source: Christiansen, A., K. Hvidsteen, and B. Haghshenas. “Fashioning Sustainability 2013.” Deloitte.
Saifur Rahman was a Bangladeshi factory owner who received subcontracted work from bigger factories that had been “vetted for safety.” 37 Rahman admitted his factory did not meet all safety standards. For example, “his cutting room has only one emergency exit where it should, by law, have two. His workers are also sitting too close together, according to Bangladeshi law, and an exterior escape staircase is several inches too narrow. During one recent visit, these steps were slippery with food scraps.” 38 Until recently, Rahman was not paying his employees minimum wage—especially for overtime work—nor was he giving employees sick days. 39 He explained that he had been spending the majority of his time trying to keep his business afloat. Later, after his factory was performing well, he improved worker conditions. Rahman typically received business from bigger factories that had overbooked or were in danger of missing a shipping deadline. Factories had to rush a late delivery by airfreight at their own expense, or be charged a 5% penalty, which might displace their entire profit margin. 40 As a result, apparel manufacturers often did whatever it took to deliver a shipment on time. 41
Hennes & Mauritz: Fashion and Quality at the Best Price
In 1947, Erling Persson visited the United States, where he was enthralled by the cheap post-war fashions. Upon returning to Sweden in 1952, he opened a shop called Hennes in a suburb of Stockholm, selling affordable clothing with the slogan “fashion and quality at the best price.” 42 Nearly 15 years later, Persson bought a hunting and fishing store, after which his stores began selling men’s and children’s clothing as well.
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Figure 5
Ta i l o r S h o p s t o t h e W o r l d
Notes: Inconsistent data available prior to 1980. Figures for the United Kingdom refer to textiles and clothing as a share of all exports (rather than manufacturing exports). Sources: For years 1980-2012: World Trade Organization. For prior years: Young-Il Park and Kym Anderson, “The Experience of Japan,” in Kym Anderson, Ed., New Silk Roads: East Asia and World Textile Markets, Cambridge University Press, 1992. Kym Anderson and Young-Il Park, “Effects of China’s Dramatic Reforms on Its Neighbors and on World Markets,” in Kym Anderson, New Silk Roads: East Asia and World Textile Markets, Cambridge University Press, 1992.
That said, H&M endured criticism from consumers and activists. For example, a spokesman for No Sweat, a labor rights lobbying group, argued:
The company wants low-priced clothes with a quick turnaround, and, unfortunately, that means you end up with low-paid workers, often having to do forced overtime in poor conditions. Customers should realize that these cheap fashions may not cost them much but people on the other side of the world do suffer as a result. 48
When asked why H&M did not demand that its suppliers pay higher wages, CEO Persson explained:
I would pay an H&M premium immediately. If a sustainable wage system were made and applied in the Bangladeshi textile industry, I would do it. But in practice, the situation is as follows: In any given factory, the people do perhaps 10% of their work for us and the remaining 90% for other companies. It would create problems if only we pay more for our part of the goods in order to facilitate higher wages. 49
On the environmental sustainability side, H&M was criticized as overexploiting resources and raw materials by promoting overconsumption in its fast fashion business model. 50 In its 2012 annual sustainability report, H&M boasted that it was the largest buyer of organic cotton. 51 The company also launched a clothing collection initiative, where it allowed customers to drop off clothing from any brand, which H&M would then reuse or recycle, in an effort to create a closed loop for textiles. 52 H&M also focused on the use phase
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of its clothing in its sustainability initiatives, providing consumers with instructions on how to reduce the environmental impact while caring for their clothes. 53
When asked whether overconsumption was a concern for the environment, Persson explained:
That is a philosophical question. Ninety-nine percent of everyday things are things we don’t need—that goes for regular visits to the hairdresser just as it does for clothing. What would it mean if we all consumed 20% less? I believe it would be catastrophic. It would mean 20% less jobs, 20% less taxes, 20% less money for schools, doctors, roads. The global economy would collapse. I’m firmly convinced that growth has made the world a better place today than it was 20 years ago. And it will be better in 20 years than it is today.” 54
In a separate interview, Helmersson, the company’s sustainability head, said: “We believe that improving conditions and creating a leaner supply chain that is more efficient, stable, and sustainable will give us competitive advantages in the long run, so this work is not incompatible with offering our customers the best price.” 55
Garment Industry in Bangladesh
The garment industry was introduced to Bangladesh in the 1970s. Abdul Majid Chowdhury and Noorul Quader were Bangladeshi businessmen who wanted to help their country recover from war and famine. 56 They had witnessed the surge of the South Korean economy as a result of its garment industry. As a result, they traveled to South Korea and persuaded Daewoo, a South Korean manufacturer, to establish a factory in Bangladesh.
The Bangladeshi garment industry did not take off until 2005, when the Multi-Fiber Arrangement expired, lifting the textile and garment quotas so that developing countries could export to developed countries. 57 Katie Quan, associate chair of the University of California, Berkeley, Center for Labor Research and Education, explained how “manufacturers saw that it was cheaper to manufacture in Bangladesh and places like Cambodia than China, especially to those manufacturers in Europe where transportation was cheaper than from China.” 58
In 2013, the Bangladesh garment industry was worth $20 billion, comprising 80% of its GDP. 59 The industry consisted of more than 5,000 garment factories and more than 3 million workers, most of whom were women. 60
Bangladeshi factories were often overbooked, thereby increasing subcontracting and middlemen, resulting in poor working conditions. 61 For example, Mahinur Akter was a 16-year-old factory worker whose right foot was sheared off by a machine during the Rana Plaza factory collapse. 62 Like many other Bangladeshi women, Akter moved to Dhaka, the capital of Bangladesh, from her rural hometown to help her family survive financially. 63 Akter would arrive at the factory at 8 a. and typically work until 9 or 10 p. Four to five times a month, to meet deadlines, she would work until 3 to 6 a. 64 She explained, “People my age should be in school, not at work. But because my family is poor, I need to have a job.” 65
Rana Plaza Factory Collapse in Bangladesh
Rana Plaza, a building housing five garment factories, collapsed at 9 a. on April 24, 2013, claiming 1,127 lives and injuring another 2,000 people. 66 Clothing from major Western brands like Walmart, The Children’s Place, and Mango were found at the facilities. 67 Investigators of the collapse discovered that the building had been authorized for six stories, yet building owner Sohel Rana built another four stories on top with subpar materials. 68
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Exhibits
Exhibit 1
Challenges in the Life of a T-shirt
Source: H&M. “2012 H&M Sustainability Report.” 13 Mar. 2013. Accessed 7 Dec. 2013. about.hm/content/dam/hm/about/documents/masterlanguage/CSR/reports/ Conscious%20Actions%20Sustainability%20Report%202012
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Endnotes
1 Mustafa, S., and S. Islam. “Profile: Rana Plaza owner Mohammad Sohel Rana.” BBC News Asia. 3 May 2013. Accessed 20 Jan. 2014. bbc.co/news/world-asia-22366454. 2 Greenhouse, S. “Major Retailers Join Bangladesh Safety Plan.” The New York Times. 14 May 2013. Accessed 11 Dec. 2013. http:// nytimes/2013/05/14/business/global/hm-agrees-to-bangladesh-safety-plan.html?_r=0. 3 H&M. “2012 H&M Sustainability Report.” 13 Mar. 2013. Accessed 7 Dec. 2013. about.hm/content/dam/hm/about/ documents/masterlanguage/CSR/reports/Conscious%20Actions%20Sustainability%20Report%202012. 4 H&M. “2012 H&M Sustainability Report.” 13 Mar. 2013. 5 Cline, E. Overdressed: The Shockingly High Cost of Cheap Fashion. New York: Penguin Group. 2012. p. 119. 6 Cline. 7 Sull, D., and S. Turconi. “Fast Fashion Lessons.” Business Strategy Review. 2008. 19(2): pp. 6-11. 8 Sull and Turconi. 9 Yaeger, L. “Do I Get a Coffee? A Snack? Or Something to Wear? The H&M $4 Dress.” Vogue Daily. 19 Aug. 2010. Accessed 7 Dec. 2013. vogue/vogue-daily/article/vd-do-i-get-a-coffee-a-snack-or-something-to-wear-the-h038m-495-dress/#1. 10 Yaeger. 11 Forhoohar, R. “A New Fashion Frontier: The arrival of fast fashion European giants is starting to shake up the American retail scene.” Newsweek. 20 Mar. 2006. 12 Forhoohar. 13 Yaeger. 14 Yaeger. 15 Fashionbi. “2012 Fast Fashion Market Research Report.” 2013. Accessed 7 Dec. 2013. fashionbi/market/fast-fashion/ all. 16 Fashionbi. 17 NRDC. “Green Fashion: Beautiful on the Inside.” Smarter Living. 2011. Accessed 7 Dec. 2013. nrdc/living/stuff/ green-fashion. 18 Laursen, S. E., et al. “EDIPTEX: Environmental assessment of textiles.” Danish Environmental Protection Agency. Working report 24. 2007. 19 Rupp, J. “Ecology and economy in textile finishing.” Textile World. 2008. textileworld/Articles/2008/ December_2008/Features/Ecology_And_Economy_In_Textile_Finishing. 20 Kirchain, R., et al. “Material patterns: Considering the economic, environmental, and social impacts of the global textiles industry.” Launch. 2013. Accessed 7 Dec. 2013. launch/sites/default/files/Material%20Patterns_042013.pdf. 21 Cline. 22 EPA. “Municipal Solid Waste in the United States: 2011 Facts and Figures.” 2012. Accessed 7 Dec. 2013. epa/ epawaste/nonhaz/municipal/pubs/MSWcharacterization_fnl_060713_2_rpt. 23 EPA. 24 Christiansen, A., K. Hvidsteen, and B. Haghshenas. “Fashioning Sustainability 2013.” Deloitte. 25 D’Innocenzio, A. “Do the Math: Prices on Fall Clothes Up, Despite Gimmicks.” The Washington Post. 20 Aug. 2011. 26 Passariello, C., T. Lahiri, and S. McLain. “Bangladesh: From Armani to Zara.” The Wall Street Journal. 1 June 2013. 27 Chu, K. “Tough Options for Apparel Retailers—Factory Tragedies Tar Bangladesh, but Similar Conditions Aren’t Unusual in Other Low-Cost Countries.” The Wall Street Journal. 8 May 2013. 28 McCune, M. “‘Our Industry Follows Poverty’: Success Threatens a T-Shirt Business.” NPR: All Things Considered , 4 Dec. 2013. Accessed 7 Dec. 2013. npr/blogs/money/2013/12/04/247360787/our-industry-follows-poverty-success- threatens-a-t-shirt-business. 29 Worker Rights Consortium. “Global Wage Trends for Apparel Workers, 2001–2011.” Center for American Progress. 11 July 2013. Accessed 7 Dec. 2013. americanprogress/issues/labor/report/2013/07/11/69255/global-wage-trends-for- apparel-workers-2001-2011/. 30 Worker Rights Consortium. 31 Worker Rights Consortium. 32 Worker Rights Consortium.
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69 “Update: Brands’ responses to Tazreen and Rana Plaza compensation demands.” Clean Clothes Campaign. 24 May 2013. http:// cleanclothes/news/2013/05/24/background-rana-plaza-tazreen. 70 Fairclough. 71 Fairclough. 72 Power, C., and A. Devnath. “Bangladesh’s Tazreen fire is followed by further garment factory blazes.” Business Week. 31 Dec. 2012. Accessed 8 Dec. 2013. search.proquest.com.proxy.lib.umich/docview/1270640227?accountid=14667. 73 Ali Manik and Yardley. 74 Manik, Julfikar, and Jim Yardley. “Garment workers stage angry protest after Bangladesh fire.” The New York Times. 27 Nov. 2012. Accessed 5 Dec. 2013. nytimes/2012/11/27/world/asia/garment-workers-stage-protest-in-bangladesh-after- deadly-fire?_r=1&.
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Notes
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H&m case study
University: University of Rhode Island
