Online fast fashion retailer Boohoo has updated on the independent review of its UK supply chain amid the news it has completed the purchase of a 2.5-acre manufacturing site in Leicester – which it says signals a new stage in the company’s commitment to UK manufacturing.

Boohoo owns the PrettyLittleThing and Nasty Gal brands and last year acquired Oasis and Warehouse as well as Karen Millen. It hit headlines earlier this month after one of its UK supplier factories – also located in Leicester – was alleged to be paying its workers as little as GBP3 (US$3.86) an hour. 

The new Leicester factory, which Boohoo confirmed to just-style would be owned and operated by the group, will employ 250 people, according to a report published by The Guardian.

The article, citing comments from the group’s CEO John Lyttle, added the factory will allow Boooo to demonstrate best practice and speed up time-to-market.

If the factory is not up and running by September, Boohoo will lease a temporary site in Leicester in the meantime, it claims. Lyttle was also cited as saying the firm was looking at opening another factory elsewhere in the UK. Boohoo did not comment on this when probed by just-style.

A spokesperson for the group did, however, say: “This is an exciting new stage in the company’s commitment to UK manufacturing, owning and operating a centre of excellence that celebrates the skills available in the UK and once again makes a Made in Britain label, something we can all be proud of.

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“Plans for the site are still in development and we will work with the local officials and the local community to create a something that shines a light on manufacturing excellence in Leicester.”

Boohoo’s share price slumped earlier this month as a number of retailers ditched the group’s brands from their websites over claims of exploitation and unsafe conditions at one of its UK supplier factories.

The allegations prompted an immediate independent review of its UK supply chain and a warning it would cut ties with factories found to be breaching its supplier code. Two suppliers have reportedly been axed including Morefray and Revolution Clothing. 

Last week, Boohoo said it has written to the Home Secretary and offered its support for a licensing scheme that ensures all garment factories are meeting their legal obligations to their employees.

Independent review

Meanwhile, the group shared an update on the terms of reference of its independent review this morning (28 July) with a view to delivering the full report on 30 September alongside its half-year results.

The purpose of the review, led by Alison Levitt QC, is to consider the group’s obligations and relevant duties of care in relation to the workforce in its Leicester supply chain. 

“The group will act decisively on the independent review’s findings and look to embed its recommendations into its strategic planning to help restore confidence in the Leicester garment industry and increase transparency for all of our stakeholders,” Boohoo said in a stock exchange filing.

The four core objectives of the review are as follows:

  • To investigate the allegations made in relation to the Leicester supply chain and determine whether they are well-founded;
  • If they are, to consider the extent to which the Boohoo Group monitored its Leicester supply chain and had knowledge of the allegations;
  • To consider the Boohoo Group’s compliance with the relevant law; and
  • To make recommendations for the future in response to those findings.

Brian Small, deputy chairman and senior independent director, said: “We are pleased to share the terms of reference for the upcoming independent review into our Leicester supply chain. We believe this demonstrates how seriously we, as a board, are treating the recent allegations into our supply chain. The group is committed to delivering the highest standards of ethics, compliance and transparency.”

Brand equity damage can be “reasonably expected”

Greg Lawless, analyst at Shore Capital, notes Boohoo announced on 8 July that it would publish the terms of reference and it has duly done so.

“In our view, the external investigation looks comprehensive in its scope and we believe that investors will welcome the timing of the report by the external QC alongside the interim results in late September. Today’s update is the next staging post in the journey that Boohoo is now set on.”

Clive Black, also at Shore Capital, adds: “The exposing of seemingly illegal practices in the Leicester apparel trade – potentially modern slavery, benefit fraud, illegal immigration and the authorities turning a blind eye – brings to the fore the question of how is a garment produced in the UK to be sold for, say, GBP10 with the capability to achieve a, say, 10% trading margin. This is especially relevant in the pure-play fast-fashion channel where returns may be as high as 40%, if sourcing has to move overseas, while the costs of labour may be a fraction of the UK, then shipping costs and the lack of pace will serve to also make such fast-fashion garments less profitable at the same price.

“As such, for fast fashion businesses, such as Boohoo and Quiz, we can only see a) the COGS rising, or b) freight costs replacing unsustainable UK sourcing, and so either prices rising, which would mean reduced competitiveness and potentially lower volumes, or lower margins; high compliance costs could also be notable. All this assumes no brand damage, which could be penal, especially if the agents of influencers, and licensees, of labels take flight.

“We do not see this story going away anytime soon, and this highlights two issues, as we see them: Potential brand equity damage; fundamental adjustments to business behaviour and operating models.

“In terms of brand equity, it is hard to quantify the effect, but the longer this story around alleged illegal working practices runs, then the more synonymous Boohoo in particular and Leicester are with a market failure, meaning more potential brand damage may be reasonably expected.

“We must await the full fallout of the Leicester situation. The headlines, however, are not yet diminishing and there are notable events to come from the public and potentially parliamentary authorities, whilst in the case of Boohoo there is its own investigation to emerge.

“If the dust settles quickly then the brand equity damage may be potentially manageable, and the fallout perhaps limited. However, if the scrutiny is sustained and Leicester’s labour process and Boohoo in particular become synonymous, then major, maybe mortal, brand damage could potentially ensue. It would be dangerous, to us, to assume the young ladies of the UK and wider world are wholly blind to allegations of modern slavery.

“As to the post-Leicester business model for Boohoo and the like? Well, if the COGS for a meaningful amount of product was moved away from Leicester and assuming no return to the 350p per hour syndrome, then UK-sourced product is likely to cost a lot more, which will either depress the Group’s gross margin or lead to price rises that could impact price competitiveness, and so sales.

“Should the likes of Boohoo go further afield for its goods then COGS may also go down but we would expect operating expenses to notably rise whilst the fast pace of fashion could be notably decelerated, so diluting the strong flexibility of segments of its business model.”

Bernstein’s Anisha Sherman added: “The key new information in the release was the date of the final report: Rather than being published in January 2021 as originally stated, the final report will now be ready by 15 September, 2020. The results will be shared with investors along with the company’s H1 results on 30 September, nearly four months earlier than the initially guided timeline. 

“We wrote earlier this month that while the range of financial impact of the Leicester fallout is likely to be small, we expected the ESG overhang on the stock to remain for several months as the investigation is pending. Bringing the date forward by four months is a positive for shareholders, creating a faster path towards getting some clarity and certainty on the magnitude of the problem, as well as outlining the steps that will be taken to resolve it. We expect a quicker route to shedding the “ESG discount” that is currently suppressing the multiple.”