Archive for month: June, 2017

This article was written by Christian Gerling and first appeared on BIZCOMMUNITY

I am often asked what it is that prevents clothing and textile manufacturers from breaking into the international market. There are several answers to that question, but perhaps one of the most important elements is that many do not meet social auditing requirements.
In short, the quality and pricing of their products may be on point, but they also need to be able to demonstrate that the working conditions they provide for their staff comply with local laws and international best practice. Almost all of the importers in Europe, the Middle East, Asia and Latin America, which are the areas in my portfolio, require that the businesses they deal with are independently audited for compliance with labour laws.

So, what exactly is a social audit? Simply put, it’s a means of measuring compliance with regulations and best practices when it comes to managing workforces, not only within a business but throughout its supply chain. Compliance in this area of operation is important to both investors and customers, and needs to be independently audited and certified. In fact, most importers have a zero tolerance approach to gaps in labour standards.

Compliance requirements

In order to be compliant, manufacturers in South Africa’s R12 billion-a-year clothing and textile industry need to be able to prove that they’re playing by the rules. These include the codes outlined in such laws as the Basic Conditions of Employment Act (No. 77 of 1997), the Labour Relations Act (No. 66 of 1995), the Occupational Health and Safety Act (No. 85 of 1993), the Employment Equity Act (No. 55 of 1998) and the Skills Development Act (No. 97 of 1998). Listed companies also have to comply with the King Codes on Corporate Governance (King III and King IV).

In terms of international best practice, companies can refer to such excellent sources as the document titled OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, recently published by the Organisation for Economic Cooperation and Development. Guidance documents are also available on the websites of UL affiliates such as Sedex, SAI, ICTI-CARE, BSCI and EICC.

Reputable social audit vital

This is, of course, complex territory, which is why importers require an independent and valid social audit report before they consider purchasing from local manufacturers. An audit report provided by an independent global safety science company with an established reputation proves compliance in a way that minimises the time taken to conclude transactions, reduces costs and improves profitability. This is because there is a quantifiable link between responsible business practices and quality, safety and efficiency.

When it comes to analysing the reasons why manufacturers commission UL to conduct social audits for their companies, demand for verification of ethical practice amongst consumers comes at the top of the list. Research commissioned by UL shows that 87% of global customers consider a manufacturer’s environmental and social performance before purchasing its products.

A valid audit report is often considered a licence to operate and is as important as the business licence itself. In the EU alone, legislation is evolving to require independent verification of due diligence at both EU level, through compliance with the Directive 2014/95/EU requirement for non-financial reporting, and, at the national level, with recent laws such as the UK’s Modern Slavery Act of 2015 and the upcoming Wet Zorgplicht Kinderarbeid, which is due to be adopted in the Netherlands in 2020.

Within this context, it is clear that if local clothing and textile manufacturers wish to enter into and be successful in the international market, an independent social audit is as important as a quality and safety audit and a financial audit.

Author : Christian Gerling .

By Adele Shevel for Business Live
When Mr Price posted its full-year results last week, its share price rose nearly 4% — and spiked to an even higher level in the course of the day. This was in spite of it posting a 12% drop in earnings.

The earnings decrease, its first in 16 years, marks a dismal milestone for the company, which has for years been the darling of apparel retailers.

The market appears to hold the view that Mr Price is in a turnaround phase and is focused on regaining market share from competitors. It’s not quite clear what this involves other than sourcing better products to appeal to more shoppers, but the increase in share price suggests buy-in.

The retailer has been fighting in a maelstrom of frenzied price discounts, as its traditional competitors have promoted these more heavily than before in a tough landscape. Consumers are under pressure, and international chains such as H&M, Cotton On and Zara continue to reshape the landscape, offering fast fashion.

Mr Price, which also sells homeware and furniture, maintained its full-year dividend, which has not declined in the past 31 years, at 667c/share. The final dividend was 438.8c/share, up 4.7% on the previous comparable period. Total revenue increased 0.7% to R19.8bn, with retail sales decreasing 0.5% to R18.6bn and comparable stores down 3.6%.

The apparel sales since the year end — combined with the identification of issues of the past year related to inventory, such as seasonal shifts and getting the fashion wrong — have given the market some confidence that there is a turnaround.

Ashburton Investments fund manager Wayne McCurrie says: “The true problem was that [Mr Price] got its fashion wrong in Mr Price Apparel. People didn’t like what it had on its shelves. It had lots of sales, but people didn’t want to come in and buy what it had.

“[That is] not unusual — it does happen.”

Sales volumes were heavily negative at Mr Price Apparel, including at Miladys.

Overall, sales volumes were down about 10% in volume terms.

However, “that unloved fashion is now out of the system. The new lot looks quite good,” says McCurrie.

Mr Price has changed its procurement policy. Competitors are doing less discounting and, says McCurrie, “it looks as if [Mr Price] is achieving a turnaround from the very poor year it had last year. It’s still early days, but the market has certainly liked what it’s seen.”

Mr Price has positioned itself to be differentiated, as it offers a wide range and low price. Competitors tend to offer either a small range, or a big range at higher price.

“It felt a lot of its competitors moved into its niche,” says McCurrie. This wasn’t helped by very weak economic growth last year.

“We believe it’s a turnaround story. It probably won’t get worse than it did last year, when there was an accumulation of mistakes: new competitors, higher than normal discounting and a very poor economy. And the company got the fashions wrong.”

Last week Mr Price was referred to the consumer tribunal after an investigation by the national credit regulator showed that the retailer charged consumers a club fee on credit agreements, which is not allowed by the National Credit Act. This could cost it up to 10% of its annual turnover.

The company says it will oppose the referral, as it does not agree with the view held by the regulator.

Other retailers have already been referred to the tribunal in this regard, including Edcon.

Jean Pierre Verster, portfolio manager at Fairtree Capital, says: “There seems to be a lot of noise, and a lot of retailers have fallen foul of technicalities of the act. We are waiting to see what happens there. Hopefully it won’t have a material impact.

“It does seem as if credit is increasingly a lever Mr Price wants to pull as well, a mechanism it wants to use to stimulate sales. It needs to play by the rules if it wants to use it to compete with more credit-based retailers such as Truworths, TFG and Edgars.”

Verster says the marked price difference between Mr Price and its competitors has shrunk to a point where it’s small enough for customers to go elsewhere.

“Whether this is a sustainable turnaround needs to be seen,” he says. “We’ll have a better idea at the interim stage.”

Not everyone buys into the idea of a turnaround. Senior equity analyst at Sasfin Securities Alec Abraham says: “The performance was bad. I think to say it’s a turnaround is to clutch at straws. I don’t think there’s much of an improvement in the economy. They say the turnover of Mr Price and Miladys is up a combined 10% this year, but one swallow does not a summer make.”

Abraham says the problem extends beyond Mr Price to all local apparel retailers. “They need to reinvent themselves for this new, structurally different clothing environment. In the old days it was very cushy — everybody had a place. Now there are other [players], and the SA retailers need to find their place in the new structure.”

Mr Price was largely unchallenged “in the old regime, but now, all of a sudden — partly through its own doing and also because both the international and the local companies are trying to up their game – the differentiation between everyone else and Mr Price has narrowed. The company needs to do something to cope with that.”

Mr Price says any improvement in the consumer environment is likely to be gradual. “The year proved to be exceptionally challenging for the retail sector. Consumer confidence remained low as a result of the poor state of the local economy and a lack of faith in the current political leadership’s ability to set high standards of governance and deliver inclusive growth.

“Cabinet reshuffles and downgrades by ratings agencies have caused further exchange rate volatility, which the consumer ultimately has to absorb. As a result, the retail environment has become more competitive, with any growth in a stagnant market coming from increased market share. This has led to retailers in our sector increasing their promotional activity to drive sales and manage stock levels.”

Finance group HSBC expects virtually no growth in apparel sector profits until 2019. According to Bloomberg, HSBC analysts Jeanine Womersley and Harshul Sharma said in a note that SA consumers are “unlikely to see a cyclical recovery in 2017, and even if this does materialise, it’s unlikely to be of the magnitude required to offset the structural headwinds we believe face the sector”.