Boohoo has shed more than £2bn of its market value this week as the online retailer faces a social media backlash, the suspension of its brands from fashion portals and threats of enforcement action

Boohoo’s chief executive insisted that his company had “nothing to hide” after fresh allegations about the treatment of workers who make its clothes. Some of the fast-fashion retailer’s biggest investors are betting he is right.

The company’s largest independent shareholder, Jupiter Asset Management, increased its holding on Monday, even though Boohoo’s share price went into freefall after the Sunday Times alleged that factories supplying Boohoo were paying as little as £3.50 an hour.

The fund manager raised its Boohoo stake, acquired through its recent takeover of Merian Global Investors, from 9.6 to 10.1 per cent “following conversations with management about its strategy”.

Another top-25 shareholder said that while it was “fully aware” of recent concerns and would be raising them with management, “this kind of supply chain issue is not new and one we have identified and discussed as a significant business risk for Boohoo and many other retailers in the fast-fashion industry”. 

The support from investors provided some relief to Boohoo in an otherwise crushing week that had seen more than £2bn wiped off the retailer’s £5bn market value between Monday and Wednesday, and left it battling a backlash on social media, the suspension of its brands from several fashion websites and threats of enforcement action.

Boohoo has shrugged off previous revelations about suppliers in Leicester, including an investigation in 2018 by the Financial Times that found unsafe working conditions, unauthorised subcontracting and underpayment of wages.

But a suggestion that the city’s cramped, low-tech factories contributed to a spike in Covid-19 cases, and threats from cabinet ministers to shut down those not practising social distancing, mean this time it may be harder to bounce back.

Line chart of Share price (pence) showing Boohoo out of fashion

Boohoo came out fighting on Wednesday, appointing a senior QC to investigate its supply chain and promising to strengthen its own compliance auditing processes and invest in improving conditions in Leicester — at a total cost of £10m.

“We want consumers to believe in our brand,” said chief executive John Lyttle.

Its share price recovered some of its losses on Thursday morning, jumping 30 per cent.

Many Boohoo products are made by large suppliers in the world’s garment manufacturing hubs such as Bangladesh, China and Morocco.

But about two-fifths are made in the UK, mostly in Leicester. Factories there can copy designs worn by celebrities and produce them in small batches quickly. If they sell well, Boohoo can scale up its orders.

Boohoo’s margins are higher than those of online rivals, partly because it sells only its own products and outsources much of its IT © AFP via Getty Images

Mahmud Kamani and Carol Kane, the company’s co-founders, spent decades in the clothing supply industry and are personally acquainted with many factory owners. One of the companies mentioned in the Sunday Times report is controlled by a director who has business interests with Mr Kamani’s elder brother.

Carry Somers, founder of the industry campaign group, Fashion Revolution, said her main concerns about Boohoo’s supply chain were that she could not learn anything about it.

“They say [the factory allegedly paying low wages] is not one of their authorised suppliers, but how do shareholders know that if they don’t publish a list of suppliers?”

Boohoo ranks near the bottom of Fashion Revolution’s supply chain transparency index of the world's 250 largest fashion brands. It still fared better than some, but Ms Somers said most of the retailer's points came from having published the policies that its suppliers needed to abide by.

“Policies are one thing, but what’s really important is how these are carried out,” she said.

Fiona Lambert, a sourcing expert who has worked for Next and River Island, said labour abuse in Leicester had gone on unchecked for years, partially because better wages would lead to many buyers moving work abroad.

Chart showing how BooHoo scores poorly across the board on a range of measures in the Fashion Transparency Index

“Anyone doing the right thing should know what the lowest possible price [a manufacturer can produce at] and my concern is that some clothing prices just don’t add up.”

Mr Lyttle said suppliers should only subcontract to companies that are approved by Boohoo and comply with its code of conduct, which includes provisions about wages and working conditions. But he planned to expand the company’s existing presence in Leicester so it could “look at all premises, not just those on our lists”.

A longstanding problem for Boohoo is that production of its clothes may be outsourced from trusted suppliers into a network of more than 1,000 tiny outfits that typically employ less than 10 staff each and move around the city.

But some analysts are sanguine about the costs that could come from a clean-up of the industry.

John Stevenson at Peel Hunt has made no changes to his profit forecasts for Boohoo because he does not think its profitability is under threat.

“The company operates on a cost-plus model. If costs rise they will increase prices,” he said. “If a £7 dress suddenly costs £8, will demand disappear? I doubt it.”

John Lyttle, Boohoo chief executive: “We want consumers to believe in our brand. We have nothing to hide” © Marco Kesseler/FT

Boohoo’s profit margins are higher than those of online rivals such as Asos and Zalando, although this is partly because Boohoo sells only its own products and outsources much of its IT. Gross margins, which reflect only the difference between the cost of goods and their sale price, are comparable with other retailers, said Mr Stevenson. “They don’t appear to be making supernormal profits on the back of Leicester.”

There have been suggestions that social media influencers, a key conduit between Boohoo and its young customer base, might now become more wary of the brand.

“If you are an influencer and you were to promote Boohoo right now you would lose a huge number of followers,” said Sara McCorquodale, founder of Corq, an analysis agency. “The influencer business is about popularity . . . influencers ignore this at their peril.” 

But there is little evidence that unsavoury conduct revelations have a significant impact on consumers, especially at the budget end of the industry. “Values tend to wash out at the till,” was the wry observation of one prominent fashion industry executive.

Boohoo's rapid growth

The removal of Boohoo brands from third-party platforms including Asos, Next Label, Zalando and Very.co.uk is also unlikely to be costly in financial terms. Boohoo said that such wholesale revenue accounted for less than 4 per cent of the total in its latest financial year.

Ms Somers of Fashion Revolution said more forceful government intervention was needed to stamp out labour abuses. “We know that some of these brands will only respond to legislation.”

In the longer term, Boohoo’s growth and diversification — it has acquired other brands such as Karen Millen and Oasis to widen its appeal — will dilute the influence of Leicester.

The city’s factories produce only simple designs and its limited capacity means its overall share of the mix will shrink. It has already fallen from 71 per cent of Boohoo’s production in 2014 to about 40 per cent now.

Even so, the latest revelations could still have a cost beyond the £10m set aside by the company for better enforcement. Elevated scrutiny of the company is likely to continue, as will pressure to join groups such as the Ethical Trading Initiative.

Boohoo cherishes its entrepreneurial spirit and reputation as a disrupter. But as investors including Jupiter demand closer engagement with the company over labour issues, Mr Lyttle faces the challenge of not just expanding the company — but helping it to grow up.

Additional reporting by Alex Barker

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