Why Boohoo’s Remarkable Run Came to a Crashing Halt

LONDON, United Kingdom — Boohoo has launched an independent investigation into its supply chain and pledged £10 million ($12.7 million) to eradicate malpractice in an effort to head off a mounting scandal that threatens to undo the company's ambitions to build its own fast fashion empire.

Until last week, Boohoo was on a hot streak, as one of the few apparel brands to see sales rise during the coronavirus pandemic. The ultra-fast fashion retailer known for Instagram-worthy pieces at ultra-low prices saw its revenue grow 45 percent in its first quarter, which ended on May 31: a period when most of the retailer's competitors were decimated by the fallout from the crisis. At the end of June, Boohoo's share price was up nearly 40 percent from the start of the year, solidifying its position as the most successful among a wave of digitally savvy e-commerce players to grow out of the North of England in recent years.

But in the last week, the company has been engulfed by allegations of abuses in factories located in the British city of Leicester, which make many of its clothes. Last week, garment workers' rights group Labour Behind the Label said conditions in the city's garment factories primarily producing for Boohoo were putting workers at risk of contracting the coronavirus. Over the weekend, The UK's Sunday Times issued an investigation that alleged workers at a Leicester factory making garments for the company's Nasty Gal brand were paid as little as £3.50 an hour (around $4.4). The minimum wage in the UK for those aged over 25 is £8.72 ($10.9).

The financial fallout was swift. Retailers including Next, Asos and Amazon said they would stop selling Boohoo clothes on their websites. Shares have plunged around 25 percent this week.

Boohoo has denied some of the allegations against it and has cut ties with two suppliers. The company said it takes all allegations of malpractice “extremely seriously” and has zero tolerance where it finds instances of abuse.

“We are shocked and appalled by the recent allegations that have been made and we are committed to doing everything in our power to rebuild the reputation of the textile manufacturing industry in Leicester,” the company said in a statement Wednesday.

Founded in Manchester in 2006, Boohoo expanded rapidly to become the frontrunner among a new cohort of disruptive online-only players that took fast fashion to a new cadence and an ultra-low price point. To ensure speed to market, the company relied heavily on garment factories in Leicester, and still produces around 40 percent of its products in the UK. This proved a hugely successful business model: the company’s turnover has increased from £140 million in 2015 to top £1 billion in its last fiscal year.

Boohoo appeared poised to emerge as one of the pandemic's few retail winners. Just last month, the company snapped up the online businesses of Oasis and Warehouse, taking advantage of the retail downturn to empire build. The move followed its acquisition last year of fashion chains Karen Millen and Coast. The ultimate goal, analysts say, is to build a portfolio of brands that can be scaled to rival fast-fashion groups Inditex and H&M.

The company has faced allegations of bad behaviour before. In 2018, The Financial Times published an in-depth investigation into Leicester's garment sector that uncovered issues at factories manufacturing for the Boohoo group. Last year, a UK parliamentary report called out the company and others for not doing enough to tackle "unsustainable" and "exploitative" industry practises. Those issues did little to slow Boohoo's rapid ascent. But fixing the company's damaged reputation may prove more difficult this time.

Beyond the renewed allegations of poor working conditions, Leicester’s garment sector has emerged as a hotspot in the UK’s latest coronavirus outbreak. The city has been placed under local lockdown amid a wave of infections, even as the rest of the country opens up. That makes the allegations levelled against Boohoo politically sensitive. Government authorities are investigating working conditions in Leicester’s factories. Consumers too, may prove more sensitive to allegations of workers rights abuses than in the past.

“This is definitely different from anything they’ve faced before,” said Bernstein analyst Aneesha Sherman. “The allegations are bigger, it’s on the back of the coronavirus crisis ... and right now the consumer awareness of things like inequality and racism is heightened.”

The decision by third-party retailers like Asos and Zalando to pull Boohoo clothing is more of a symptom of the brand's problems than a serious financial threat. Its wholesale business made up just 1.4 percent of overall sales in the first four months of its current fiscal year. But the fact that these retailers felt the need to take action shows just how deep of a hit Boohoo's reputation has taken.

The company's rapidly sinking share price is also a sign that investors are “pricing in a hit to consumer demand,” Barclays said in a note.

On Wednesday Boohoo announced a number of fresh initiatives to tackle problems in its supply chain, including an independent review and fresh investment in tackling malpractice. The online retailer also said it’s commissioned third-party auditors to conduct a comprehensive review of its UK suppliers and subcontractors, which started in May.

Analysts at Jefferies said the statement represented “a firm commitment … to transparency and accountability.” However, none of the company’s proposed actions will provide immediate resolutions. It will next update on the independent review of its supply chain in September. So far these efforts seem to have done little to reassure investors. The company’s share price is down around 15 percent since market open.

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