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Global clothing manufacturers unite to demand better terms from retailers

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DHAKA / LISBON: Garment manufacturers from nine countries in Asia, the Middle East and North Africa have united to demand better contractual terms from global clothing retailers, according to a draft document viewed by Reuters.

Suppliers hope their united front will prevent retailers from playing against each other in search of more lenient terms after suffering widespread cancellations and late payments at the start of the coronavirus pandemic.

Global retailers including Arcadia, Gap, Kohl’s and Primark canceled or paused orders with garment factories in Bangladesh worth nearly US $ 3.7 billion in March and April of the year latest, showed the results of a local investigation of the factories seen by Reuters.

While some, including Primark, H&M, Inditex and Gap, subsequently pledged to pay all canceled orders, the campaigning coalition PayUp estimates that $ 18 billion out of $ 40 billion in payments are still unpaid in the world.

Arcadia and Kohl’s did not respond to a Reuters request for comment.

Thirteen associations representing garment suppliers in China, Bangladesh, Myanmar, Cambodia, Vietnam, Pakistan, Turkey, Morocco and Indonesia have drafted minimum conditions they hope to present to customers, including a deadline 90-day maximum payment period and end of post-order discounts. put.

The draft document, to be finalized and published at the end of April, is a joint initiative of the Star Network, funded by the German international development agency GIZ and the International Clothing Federation.

“It has become very clear to manufacturers that their vulnerability has increased and that they need to play a greater role in setting standards for purchasing practices,” said a statement announcing the initiative released on Thursday. .

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Although the document is not legally enforceable, the aim is to promote purchasing practices that “do not cross the limit of the abuse of purchasing power to the obvious and avoidable detriment of the manufacturer,” according to the statement.

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A later phase of the initiative would also seek to develop means of enforcing the conditions, including an international arbitration mechanism for manufacturers to raise grievances with buyers.

“We tended to blindly trust our customers,” said Miran Ali, spokesperson for the Star Network. “If they say they want to buy 100,000 yards of fabric from us and send the order form in three weeks, we would go ahead and do it. That faith has been lost.”

Global retailers lost $ 1.2 trillion in sales in 2020, down 3.9%, according to research firm Forrester, as global lockdowns decimated demand and closed stores for months. Although some sales were picked up online, many clothing retailers were forced to impose steep discounts in an attempt to get rid of unsold inventory.

The Penn State Center for Global Workers’ Rights said in a report that trade data from the United States and the European Union showed a decline of US $ 16.2 billion in clothing imports from April to June 2020.

As clothing sales begin to recover from last year’s record losses, orders are still much smaller than before the pandemic, with shorter delivery times and longer payment windows, say the factory owners, sourcing agents and the retailers themselves.

‘NOT A HAPPY MESSAGE’

The draft document says retailers must pay suppliers within 90 days, with deferred payments incurring additional charges to cover interest and lost profit, while discounts cannot be claimed after issuance of a purchase order.

A letter from Marks & Spencer to its suppliers on April 7, 2020 stated that orders shipped after March 24 would be paid for up to 120 days from the date of receipt of the invoice, up from 75 days previously and nearly three times the 43-day pre-pandemic industry average. . Those terms remain in effect, a Marks & Spencer spokesperson said, declining to comment further.

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In anticipation of lower sales, other retailers have imposed discounts on orders already in production.

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A letter sent by Hong Kong-based sourcing agent Li & Fung to some American Eagle Outfitters suppliers in April last year and seen by Reuters said a 20% discount would be applied to affected orders. by the coronavirus.

“We know this is not a happy message … but … this is the crucial fact we are facing now because we all know chicken dies, not eggs,” the letter reads. “ONE PIECE OF CAKE CANNOT FEED EVERYTHING.”

Li & Fung did not respond to a request for comment. American Eagle Outfitters referred Reuters to its statement made last July when it said it had to make “immediate and difficult business decisions” and that it “negotiated a one-time discount on a small amount of unshipped orders in last April “.

‘FORCE MAJEURE’

The draft also includes limitations on the use of the “force majeure” clause which exempts retailers from costs and liability for events beyond their control.

A cancellation clause in a purchase order used by Kohl’s gives it the right to cancel an order in the event of natural disasters, disease outbreaks and government restrictions, among other events beyond its control, without being subject to “any liability, cost or charge of any kind. “.

A letter Arcadia sent to its suppliers advising them of its order cancellations due to the impact of COVID-19 stated, “We are able to cancel any order at any time. This includes both production orders and orders. in transit … we are not responsible for the cost of the goods “.

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Extracts from the order form used by Kohl’s and the Arcadia letter were published in a September 2020 report from the European Center for Constitutional and Human Rights. The companies did not respond to a request for comment on their communication with suppliers. Arcadia came under administration at the end of last year.

The European Center for Constitutional and Human Rights and the Consortium for Workers’ Rights questioned the use of force majeure by retailers during the pandemic in the report, saying parties invoking the clause should demonstrate that they have made all possible attempts to mitigate the effects of the unforeseen event.

Under US and UK law, they must demonstrate that taking delivery of orders would be “commercially impractical” – which may not be clear for brands with sufficient cash flow and strong e-commerce sales, according to the report. .

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Apparel suppliers hope to tip the scales in their favor, spreading the risk more evenly in the event of another unforeseen disruption in sales.

“The buyers are asking for drastic reductions and late payments … but if I refuse, they will go to another supplier,” said the owner of a garment factory in Dhaka who preferred to remain anonymous for fear of lose business.

“We really need a fair policy,” he said. “Or the clothing industry will not survive.”

(Reporting by Victoria Waldersee, Ruma Paul, Additional reporting by Aishwarya Venugopal; Editing by Kirsten Donovan and Carmel Crimmins)

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