Buying fashion - Where is my money going?

The price of a pair of jeans – who profits?

Thursday, 13 June 2013

IN_DEPTH_ Though often divided, retailers, brands, factories and suppliers are more often than not in complete agreement when it comes to the question of margins. There just seems to never be enough of a profit to cover even basic costs, let alone invest in things like better wages and improved worker safety. How can these essentials move from “nice to haves” to “must haves”? And what are the actual costs that go into producing a garment? Using the example of a pair of jeans, this next installment in our sourcing series breaks down the expenses at each step.

The excellent Bloomberg infographic “Ninety cents buys factory safety in Bangladesh on 22 dollar jeans” looks at a 14-pound (22.12 dollars) pair of George jeans, an Asda brand, a British Walmart subsidiary, manufactured by the Sepal Group in Bangladesh and shipped by Hong Kong-based trading group Li & Fung. Exactly 1.16 dollars is the factory’s share, leaving - as the title implies - merely 90 cents to cover all their operational expenses including wages and safety measures. The profit per jeans is 0.26 dollars or 22.4 percent of the manufacturer’s share.

Only 5 percent of the total is spent on manufacturing

If 1.16 dollars (or 5 percent of the total jeans price paid by the customer) are spent on manufacturing, what are the remaining 20.96 dollars for? The biggest chunk of 10.50 dollars (47 percent) is taken up by distribution and store costs, followed by the next biggest chunk of 4.33 dollars for shipping (20 percent). Fabric costs factor in at 3.94 dollars (18 percent), the trim at 1.05 dollars (5 percent) and other expenses for wash, commercial and freight charges at 1.13 dollars (5 percent), almost identical with the manufacturing costs.

To get an idea of the profits at each step, let’s break them further down. In distribution and store costs, the latter take up as big a chunk as value added tax - 3.86 dollars. That leaves 3.14 dollars for central costs (1.04 dollars), distribution (0.87 dollars), markdown (0.36 dollars) and the Asda stores profit at 0.87 dollars or 8 percent of the total costs allotted to this segment.

Shipping as a profit-rich segment

Shipping is an interesting segment as profits seem to hide here. But let’s look at costs first – shipping and port fees only make up 0.30 and 0.20 dollars, respectively; financing costs another 0.07 dollars, leaving 3.76 dollars or 87 percent of this segment for profits. That’s right, the Walmart profit totals 0.60 dollars and the Li & Fung gross profit a whopping 3.15 dollars.

The fabric segment is straightforward – 3.69 dollars spent on the primary fabric, 0.15 dollars and 0.10 dollars on embroidery and extra pocket material, respectively. No profits here. The trim segment is similar: 0.31 dollars for thread and other materials, 0.23 dollars for the hanger/stickers, 0.16 dollars for rivets, 0.15 dollars for the zipper, 0.12 dollars for garment labels, 0.06 dollars for the button and 0.02 dollars for the box end label. That’s it. Now let’s look at the profits by percentage of the total jeans price to consumer.

Profits, profits, profits – who gains most?

Li & Fung as the middleman stands out with 3.15 dollars or 14 percent. Next, we’ve got the Asda stores with a 0.87 dollars or 4 percent profit, followed by Walmart profits at 0.60 dollars or 3 percent. Last, and in this case least, is the factory with a measly 1 percent profit. On a pair of 22-dollar-jeans, that’s 4.88 dollars or, with 22 percent, a good fifth in profits. That certainly seems enough to factor in fair wages and worker safety – a shake-up in profits seems called for rather than passing the buck to the consumers. Given that one dollar on each garment could make a huge difference – if placed in the right hands – they may be more than willing to do so though.

There are different calculations out there of course and thankfully so but as an average calculation on a pair of jeans in the lower price range, the one used here is quite representative. Readers of the previous article in the series, “What to buy – can consumers make a difference?” will remember that we determined that “price alone is no indication that a bigger proportion [of margins] is spent on worker and building safety”. This break-up proves why. Don’t miss the next installment in this series on Thursday and do send us your feedback at news@fashionunited.com.

Simone Preuss

Image: A pair of George jeans for 14 pounds (22 dollars) / Asda

Dstysionist says, 'Now we know where the chunk of our money goes when we buy premium fashion!'

Bibliography

Reference Cited

THE PRICE OF A PAIR OF JEANS – WHO PROFITS? (2013) [Online] www.FashionUnited.info Available from: http://www.fashionunited.co.uk/fashion-news/fashion/the-price-of-a-pair-of-jeans-%E2%80%93-who-profits-2013061317845

[Accessed: 16 JAN 2013]