Can Boohoo really create an online equivalent of Inditex?
It was back in May 2020, just two months into the pandemic, that online fast-fashion group Boohoo started laying the groundwork for its recent spending spree. The Manchester based business raised £198m in a share placing, leaving the company with around £500m in cash.
Since then it has hoovered up the Debenhams brand and website for £55m and Arcadia Group’s remaining cast-offs - Burton, Dorothy Perkins, Wallis - for £25.2m. That leaves plenty of change to pick up any more brands that might come on to the market (indeed before its fundraise it has already landed the collapsed Oasis and Warehouse brands).
Following these recent buys, the Boohoo Group looks back on a firm footing after an investigation by The Sunday Times, in July 2020, found a factory in Leicester displaying the sign "Jaswal Fashions" was still operating during the city’s localised lockdown without social distancing measures in place. The report said an undercover journalist who worked at the factory for two days was told to expect pay of just £3.50 an hour, well below the UK minimum wage for workers aged 25 and over. Boohoo clothing was seen on the premises though the business maintained it was not a direct supplier.
The allegations came after Priti Patel, the Home Secretary, asked the National Crime Agency (NCA) to investigate claims of modern slavery in clothing factories in the city.
Boohoo's shares crashed by nearly a third with the revelations and, as a result, the company said that it planned to initially invest £10m towards "eradicating malpractice" across its supply chain. The company said in a statement that the board was "shocked and appalled by the recent allegations" and was committed to working to rebuild the reputation of textile manufacturing in Leicester.
What came as the biggest shock to many of its shoppers, apart from the obvious employment abuses, was that Boohoo even made clothes in the UK in the first place. Much criticised for its 8p Black Friday dresses, many people just presumed it was all made overseas.
Boohoo subsequently launched a high-profile, independent external investigation - Alison Levitt QC conducted a detailed independent, internal review of 287 Leicester suppliers and manufacturing units - severed links with many suppliers found flouting rules and promised to build its own manufacturing hub in Leicester.
This new factory is set to be the phoenix rising from the flames of Boohoo’s ambitions of manufacturing large scale in the UK. And while this positive announcement could simply be an expensive deflection, it does present the hope that, quite possibly, Boohoo could grow a sizeable manufacturing UK hub. If Boohoo can effectively be fully integrated from manufacturing to distribution, it would be quite a thing.
When you factor in more expensive Boohoo brands, such as Karen Millen and Coast, and their higher margins, then this could be a real possibility.
In fashion terms, the most obvious model for this is Zara-owner Inditex (indeed Boohoo CEO John Lyttle has cited Inditex and Swedish giant H&M as inspiration for his global strategy - but without the stores). Inditex is well known for keeping a sizeable chunk of its manufacturing near its headquarters in La Coruña in Spain. This enables Zara to be faster and more relevant than its rivals and is considered to be key to its stunning global success.
Inditex HQ at Arteixo
Inditex is located in Arteixo, a small town on the northwest coast of Spain. There it employs 5,000 people across various departments and the site is home to 10 of Zara’s factories and its largest distribution centre, which is responsible for shipping the retailer's clothing to 96 different countries around the world. The group turns over nearly €30bn a year.
Inditex’s sprawling, 860,000-square-foot campus manufactures Zara's most fashion-forward items of clothing, the products that need more speed and attention. These factories are connected to the distribution centre through a network of underground tunnels. But to put it into context, Turkey has overtaken Spain as Inditex’s biggest near-sourcing hub, according its last annual report. China is its largest supplier, with 449 partners in 2018. The company totals 1,866 suppliers and 7,232 factories all over the world.
Zara was founded in 1975 (though Inditex began as a manufacturer in 1963), while Boohoo was created in Manchester in 2006 by former fashion suppliers. Inditex is over 20 times the size of Boohoo Group on turnover, but with the acquisition of Debenhams and the Arcadia brands it won’t be long before Boohoo hits the £2bn turnover mark. Furthermore its management team are heavily incentivised (through a generous bonus scheme) to grow the business quickly and they have plenty of cash to spend.
So, is it really fantastical to believe that that Boohoo could create the equivalent of La Coruña in Leicester?
Factfile: Boohoo vs Inditex
Boohoo Group
Founded: in Manchester in 2006 by former high street suppliers in Manchester
Founders: Mahmud Kamani and Carol Kane
CEO: John Lyttle
Turnover: £1.23bn (to end February 2020)
Brands: Boohoo, BoohooMAN, PrettyLittleThing, Nasty Gal, Miss Pap, Karen Millen, Coast, Dorothy Perkins, Wallis, Burton, Debenhams.com
Global stores: 0
Global reach: More than 100 countries via its digital platform
Manufacturing: About to open its own factory in Leicester; some 40% of its clothing is currently made by third-party suppliers in the city
Founded: 1963 as a manufacturer; Zara launched in 1975. Based in La Coruña, Northern Spain
Founder: Armancio Ortega
Chairman: Pablo Isla
Turnover: €28.2bn (2019)
Brands: Zara, Zara Home, Massimo Dutti, Bershka, Pull & Bear, Oysho, Uterque
Global stores: 7,000 in 96 countries
Global reach: 202 countries via its digital platform
Manufacturing: its most important 10 factories for Zara are based in La Coruña but Turkey is now its most important near-sourcing market. Supplied by 1,866 suppliers and 7,232 factories all over the world.
The Boohoo "Centre of Excellence"
Billed by the company as the "Leicester Centre of Excellence", and scheduled to open in 2021, details of Boohoo’s new factory emerged in December 2020. Boohoo’s UK compliance team would be based there, on the site of a former Vauxhall car showroom at Thurmaston Lane, Leicester with up to 250 new jobs created as part of a joint venture with an existing clothing manufacturer. It would have the capability to manufacture up to 50,000 units a week and is expected to go live in early 2021.
Boohoo's operations director and newly appointed director of responsible sourcing, Andrew Reaney, told the House of Commons Environmental Audit Committee in December 2020: ”At this point, we have applied for planning permission. The factory itself will be huge. We are talking about potentially 60 machinists, which is equivalent to 85, 90 workers.
"That is 90 more jobs in Leicester, and we are going to move our own sourcing and ethical and technical compliance team into the same building as well.
"That is part of our commitment to Leicester and part of us wanting to demonstrate to the industry that this is what a model for best practice looks like" he said.
Reaney also revealed that the company had cut ties with 64 suppliers in Leicester in recent months. Reaney told MPs that work to improve conditions at the Leicester factories it used is underway. He said: "We have undertaken 400 audits alone this year in Leicester, and have eight auditors on the ground, plus our team. I am on the ground every week in those factories with the team. All of the factory visits are unannounced.”
Speaking at the hearing Mahmud Kamani, chairman and founder of Boohoo, added: "It is very easy for us to take all of our production offshore, for us to move out of Leicester. We are still here - you see the headlines, but we are still here.
"Lots of people in the fashion industry have moved offshore, but we are here and sometimes it feels we are getting punished for it, just sometimes.”
So why are Boohoo so committed to UK manufacturing? The answer is speed. In Boohoo’s recent financial statement it said UK sourcing is more expensive, but faster. Manufacturing overseas is cheaper and approximately 8% of Boohoo’s dresses sold are £5 or under, at no margin. Boohoo is in the fast fashion business and want to quickly repeat best sellers (using its famous "Test and Repeat" model) and this is where UK manufacturing comes in.
Boohoo said its UK supply base will see some consolidation and the top 50 will account for the significant majority of volumes. Its approach is to work collaboratively with suppliers and expect Leicester to remain a significant part of its manufacturing base going forwards.
Leicester has a proud heritage of textile manufacturing, particularly in hosiery and knitwear, and to see a major brand group commit to sourcing there will be welcomed given the British high street largely abandoned Leicester in the great "race to the bottom" (i.e. cheap factories in the Far East) in the 90s and 00s.
Mahmud Kamani
Kamani admitted that as his business grew so quickly, its processes had not been as robust as they could have been: "Our business has been growing at between 50% to 100% each year. Processes do fall away. What we are guilty of, if anything, is we didn’t put processes in fast enough.
“We have made some mistakes, but over the last 14 years we have got more right than wrong.”
Reaney added: “One of the key things that we are going to do as an initiative [within the factory] is we are going to make sure that all of the buying, merchandising and design teams within the Boohoo Group get to spend time on the factory floor, and understand how a factory works from A to Z, all of the processes, everything, capacity, fabric consumption, fabric ratings, how to build a cost price and how a factory runs.
“That is part of our commitment to Leicester. Part of us wanting to demonstrate to the industry this is what a model of best practice looks like.” he said.
Boohoo knows the industry, MPs, investors and customers are watching them. It could have quite easily moved everything overseas, but clearly Leicester offers something it can’t find elsewhere. And staying in the UK seems integral to its Inditer-like ambitions.
UK manufacturing for fast fashion is tough, but Boohoo does have the potential to scale.
If Boohoo can show it works, at the speed they need, then there’s hope for Leicester’s garment workers under far better pay and conditions.
Let’s just hope it can pull off its grand plan and maybe, by doing so, it will encourage other British brands to return to Leicester too.
