Apparel Sourcing Intelligence - Worldwide

“Muckraking” cost analysis attempts demonstrate intractability of pricing

According to Bloomberg, Li& Fung makes twice as much on a pair of jeans made in Bangladesh and sold in Asda as Walmart does.  Walmart’s comments to Li & Fung on this claim are unrecorded.

 

Bloomberg, like most of the world’s media, is convinced that the effect of higher wages in Bangladesh would be trivial on brands’ sales. This view coincides with Tipu Munshi’s, proprietor of the Sepal Group, who would make factories safer if only buyers paid him more, and that would add little to the retail cost of the clothes he makes.

munshi cost breakdown

Munshi has provided what he says are costings for a pair of jeans retailed in Asda for £14 ($22.10), including VAT. His numbers seem not to not add up.

His total costs, fob Chittagong, he says are  $7.02, and his margin $0.26: after what he claims are third-party costs like fabric and trim, the factory costs him $0.90 to run. Li & Fung pay him $7.28. L&F disburse $0.50 in shipping and finance to get the jeans to an Asda depot in the  UK, and take $10.93 from Asda, leaving L&F with a gross profit of $3.15. Walmart’s total value added, including Asda and Walmart central profit, VAT and markdown, is $11.17

 

This would mean L&F are taking 29% of their sale price as gross profit: their audited annual report, however, says gross margin in their trading division is just 9%. It also means that Walmart’s central $0.60 plus Asda’s $0.87 pre-tax profit add up to just 7.9% of their ex-VAT  retail price: a number broadly in line with the 5.3% on net sales Walmart makes overall (in a food-dominated business)  or Gap’s 12.4%.

 

The quoted Walmart income numbers look believable: the L&F numbers are not. L&F obviously makes more with some clients than others: but it cannot have margins on its largest client three times its average.

 

Assuming Sepal’s claims about his own costs are accurate, L&F’s accounts are properly audited and this jean order typical, almost a quarter of the price charged to Asda is inexplicable. Cyberspace is now awash with the belief that L&F are the real profiteers in all this.

 

Sepal is almost certainly spinning the numbers to make his own case: nowhere is it mentioned that “washing” is done by a separate Sepal-owned facility, and that $0.75 is far greater than the cost to the facility of an average wash. None of this explains the question Clothesource has been repeatedly asked by the world’s press: given the huge gap between ex-factory costs and retail prices, why would an extra $0.10 in wages add much more than $0.10 to the end price of a pair of jeans? The industry  has failed to provide a convincing answer to this question: just one of many self-induced wounds – and one that, with its tiny net retail margins, it has nothing to hide about.

 

If we cannot even explain the split of income between L&F and Walmart (the biggest single trading relationship in our industry, how can the industry get its case across?