How low can you go?

The news that Lidl, the German discount retailer, recently launched a range of denim clothing, with such a diverse range of items as denim-inspired knickers (£3.99) and a pair of jeans for the eye-watering price of £5.99, set me thinking.

The obvious question is how can you sell a pair of jeans for such a low price? We will try to answer that. More philosophically you might argue that there must be something “fishy” or unethical about such a price: particularly in terms of how Lidl sources such products at such low cost. We will cast our eye over that as well in the following paragraphs.

A helpful article that was published in the UK newspaper: the Guardian (13 / 3/ 2016) sheds some light on how Lidl might arrive at such a price. The author: Gethin Chamberlain asserts that it might be more accurate to consider the jeans that are on sale for £7.99 in Lidl’s “I love denim” campaign. The £5.99 jeans are more accurately described as “jeggings”.

Upon examination of the £7.99 jeans it revealed that it had four pockets plus six belt loops, three buttons and an YKK zip. It was made of 100 per cent cotton (the most expensive item of the material so far). These items, he estimates, takes he cost of one pair of such jeans to be between £2.30 to £2.50.

You can then add on the cost of thread (for stitching purposes): roughly 19p. The finished pair will also need to be washed. The estimated cost so far pans out at around £3.90.

The average Bangladeshi worker gets paid around 23p per hour. After some calculations, based on the average number of jeans produced in an eight-hour day (six days) and based on some studies undertaken by the Institute for Global Labour and Human rights, he estimates that they get paid roughly between 2p and 9p for each pair of jeans.

This takes us up to roughly £4.50 per pair. If you also factor in shipping, customs and warehouse costs, this increases to £4.80. Then they need to be taken from the port to the store. This generates a cost of £5.30. In the UK, we need to add on VAT. The author reckons that the overall cost pans out at around £6.36. This (on the pair of £7.99 jeans) would generate a profit of £1.63 per pair.

To be more realistic we also need to consider the role played by middlemen in the supply chain. They also will take a cut. It is difficult to estimate how much this might be. It could be of the order of £1.50-£2 per pair. While this ostensibly would eliminate all of the profit identified in the preceding paragraph, it does not take into account the purchasing power of Lidl. Placing such large orders provides the retailer with the opportunity to squeeze the best possible deal from the various players (manufacturers and middlemen) in the supply chain.

What are we to make of this strategy? Chamberlain argues that ultimately such a business model is based on the ability of one player (in this case Lidl) to exploit their dominant position in such relationships and take advantage of more vulnerable companies such as the Bangladeshi manufacturer to generate such as price. It can also be argued that it creates a “domino effect” in that the latter also exploit loose or non-existent labour legislation to pay people very low wages.

What do customers want? Do they know or (more fundamentally) care about the machinations used by retailers like Lidl to offer items such as the denim collection at such low prices?

Lidl argue that their buying power allows them to pass on the savings generated by bulk buying deals to its customers. This may be true at first glance. However it might be argued that it conveniently skirts around the more thorny issue of the pressure they put on suppliers in the process.

An interesting study carried out for Marketing Week (2014) revealed that only 15 per cent of shoppers stated that they were influenced by ethical concerns when making purchases. While this was based on a survey of 2,000 shoppers in the United Kingdom, and thus has to be treated with caution when trying to make generalisations across different geographic regions, it never the less provides some tentative indicators of the depth of feeling (or lack of) about this issue.

Overall 70 per cent of the respondents were classified as “cost-conscious” shoppers.

The study also shows that the ethical shopper tribe is divided evenly between men and women but with a stronger weighting towards older people. While 31 per cent of ethical shoppers fall into the 55 plus age bracket, only 12 per cent are aged 18-24.

The reality is that many shoppers in the UK either do not care about the ways in which retailers sources their products and generate such prices or selectively screen out such concerns when evaluating their purchase options.

From time to time retailers are called to account by the media in the form of exposes on sharp practices in such areas as exploitation, child labour, dangerous working conditions and so on. To be fair, many have responded by instigating practices that seek to address such problems. Codes of behaviour, the auditing of production facilities and visits to such plants are high on the list for many.

However in a quest to further reduce costs from the supply chain, I suppose it is unavoidable that some retailers will push the boundaries and take advantage of their dominance. In my view this will continue with the same certainty as “night follows day”. What do you think?

References

Bacon, Jonathan. (2014) Ethical issues a minor consideration for shoppers. Marketing Week (March 12)

Chamberlain, Gethin. (2016) How can you sell jeans for £5.99? Easy…pay people 23p per hour to make them. The Observer (March 13)

 

 

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