A workers' rights group says Boohoo's cut-price business model only turns a profit if workers are paid criminally low wages. Analysts disagree.

• Boohoo's business practices have come under scrutiny after a Sunday Times investigation found that workers at one of its suppliers' factories were being paid as little as £3.50 ($4.41) an hour.
• A workers' rights group said that Boohoo's purchasing practices and its fast-fashion business model rely on illegal wages to be profitable.
• This idea has been disputed by analysts this week.

Boohoo's business model and supply chain came under the microscope on July 5 when a Sunday Times investigation revealed workers at a factory making the retailer's clothes were paid as little as £3.50 ($4.41) an hour — less than half the UK national minimum wage for over 25-year-olds. The report provoked uproar: UK authorities have launched a modern slavery investigation and several of Boohoo's retail partners have dropped the company.

Boohoo plans to launch its own investigation into its supply chain. Critics say that won't get to the root of the problem. They say these issues stem from Boohoo's purchasing practices, and that its fast-fashion, cut-price business model only turns a profit if workers are exploited — but analysts disagree.

'There is no way that clothes can be produced at such low costs without exploitation'

Boohoo said the factory in the Sunday Times report had been subcontracted by one of its suppliers. It has now cut ties with this supplier, and said it will invest £10 million ($12.6 million) "to eradicate supply chain malpractice."

"It doesn't attack the whole problem," Meg Lewis, a campaign manager at Labour Behind the Label (LBL), told Business Insider. "They need to look at the purchasing practices that are driving this whole problem."

LBL is a workers' rights group that released a report last month on working conditions at Boohoo's suppliers' factories during the pandemic. In the report, LBL said that the fast fashion model used by Boohoo and the prices they demand for products make it is "impossible" for suppliers to pay workers the national minimum wage.

"The problems that we are seeing in Leicester also exist in many other producing countries and these are international brands that are driving the purchasing practices that rely on workers to be exploited. There is no way that clothes can be produced at such low costs without exploitation," Lewis said.

Analysts say this statement is not necessarily true.

"It's one that is hard to unpack," Bernstein analyst Aneesh Sherman said in a recent call with Business Insider. "It is not like you have a single worker that makes a garment end to end and it takes them an hour and so you can figure how many they are making in a day ... it is very hard to think about what the [labor] cost of producing one shirt is because it doesn't come from one person.

"Labour Behind the Label is making this statement but they haven't done the math to prove that out, but neither has Boohoo said: 'This is how we make our money.'

"There is murkiness on both sides."

In its report, LBL said that small-batch orders with a quick turnaround — common requests from fast-fashion brands such as Boohoo — encourage unauthorized subcontracting as suppliers race to meet deadlines. This, in turn, "encourages the exploitation of workers and noncompliance in terms of working conditions and standard," it said.

A study commissioned by the Ethical Trading Initiative in 2015, which was written by a team of professors led by Nikolaus Hammer, an associate professor in work and employment at the University of Leicester, found that this model of ordering in smaller quantities and requesting a fast turnaround does have a knock-on effect on workers' conditions.

"A relatively stable workflow is crucial for suppliers and manufacturers in order to cover their fixed costs and plan beyond them. However, intense competition and the logic of the production system within fast fashion militate against that," Hammer and his team wrote in the 2015 study.

They continued: "Suppliers and manufacturers highlighted that lead firms' commercial arrangements still undermine their ability to improve working conditions. Production path management, terms and conditions in the buyer-supplier relationship, sourcing and merchandising all affect how suppliers manage their production, workforce, and working conditions."

LBL also says that Boohoo is guilty of pitting suppliers against each other to drive down costs. "Low prices for suppliers mean that illegally low wages, forced overtime and irregular working hours are more likely to emerge in supply chains," it said.

Financial Times journalist Sarah O'Connor raised this issue in her 2018 investigation into Leicester's garment factories. She quoted one supplier who described Boohoo's meetings with suppliers as being like a "cattle market."

"Say I'm the buyer, and [you've] just given me the price of this [dress] for £5. I will literally hold it up to the next table and say, 'How much for that?' and he'll tell you £4. It's ruthless," this supplier told O'Connor.

Boohoo's cofounder Carol Kane later confirmed that negotiations would be carried out in front of suppliers but denied that they are played off against each other.

Business Insider reached out to Boohoo for comment for this article. A company spokesperson referred us to a recent statement from Boohoo's CEO John Lyttle announcing its supply chain review and to a press release from the UK's Gangmasters and Labour Abuse Authority (GLAA), which said that it has not yet found any evidence of modern slavery offenses at Leicester factories in its early investigations.

Boohoo cuts costs elsewhere

Anne Critchlow, an analyst at Societe Generale, in a note to clients on Wednesday explored the question of whether Boohoo's business model and margins rely on illegal wages. She concluded that they did not.

Instead, Critchlow said that the company's ability to offer low prices to consumers and create relatively high margins is explained by other factors.

First, Boohoo benefits from being 100% own-brand, which leads to higher margins than rivals such as ASOS or Zalando, which stock a mix of external brands.

Second, brands under the Boohoo Group umbrella sell clothes at different price points, which means that most of its prices aren't "ultra low," she said.

And third, Boohoo's "test and repeat" model of committing to items in batches of between 300 and 500 pieces and only reordering if these items sell well means it has very little inventory that is vulnerable to markdowns, which prevents erosion of margins.

"Our Clothing Price Survey regularly shows that while Boohoo's lowest prices are lower than Primark's [a low-cost fast-fashion chain], its typical and highest prices are higher than Primark's. For example, Primark's lowest price dress costs £6 [$7.50] this summer, whereas Boohoo undercuts this at £5 [$6.31]. However, Primark's most frequently seen dress price is £10 [$12.62], whereas for Boohoo it is double the price, at £20 [$25.25]. At Pretty Little Thing it is £18 [$22.87] and at both Nasty Gal and MissPap, it is £30 [$37.88]," Critchlow said.

In summary, "we do not think the connection between some low prices and a reasonably good margin is routine abuse of workers in the supply chain," she added.