Supply Chain Council of European Union | Scceu.org
Freight

Is the discount retail model sustainable and ethical?

German textiles
discounter KiK operates almost 3,700 stores in Europe and generates two
billion euros in sales annually. Among the 20,000 articles in its range are
the often-criticised 1-euro-t-shirts. Most of the production takes place in
Bangladesh. Are a discount model, sustainability and fair production per se
mutually exclusive? FashionUnited wanted to find out and talked to someone
who should know: Ansgar Lohmann, head of KiK’s CSR department, spoke about
KiK’s business model, sourcing in Asia and sustainability innovations that
will be introduced in the next two months.

The CSR head joined KiK in June 2013, just two months after the collapse
of the Rana Plaza building, as companies understood the need to communicate
their production practices and supply chain transparency. He coordinates
his activities in close consultation with the departments such as
purchasing, quality management and sales, with whom internal audits are
also regularly conducted. In addition, environmental working groups and
strategy meetings are held at the beginning of each season.

As a textile discounter, KiK’s focus is understandably on value for
money and on offering a consistent basic wardrobe at a reasonable price.
How important is sustainability for KiK customers?

The price-performance ratio is virtually the DNA of the business model,
then the fit, then the year-round availability of items. In a recent survey
of KiK customers, when asked about sustainability, they answered: “But
production takes place abroad” as if this excludes sustainability. This
would certainly require some customer education. Sustainability is not
visibly on the agenda of KiK customers, but what does ‘visible’ mean here?
Customers don’t necessarily want a label because they believe that they
will pay more and they don’t want that.

Does that mean that KiK does not do anything?

No, we are doing something, both in social and environmental terms. I
would even say that discount is sustainable per se. There are several
reasons for this: One is demand. Customer purchases are need-based, which
means they only buy what they need. Then there is supply: procurement at
Kik is not particularly costly: 70 percent of our NOS (“never out of
stock”) articles are basic articles and only 30 percent are more
fashionable articles.

Furthermore, our logistics are lean; we use sea freight from Bangladesh
and also in Turkey. In addition, the in-store presentation is kept simple,
which we also see in full-range stores. What is also important, there is no
overproduction. It is not like in other companies that we “hope” that an
article will sell better and will therefore buy more of it. If this is not
the case, ‘remainders’ quickly pile up and they do not exist at KiK.

We also have a large amount of historical data, for example how often a
black, blue and red t-shirt sells. We can basically predict this and have
access to data since the company was founded, namely for a good 25 years.
But this does not mean that nothing has changed in terms of product range.
However, we can reconcile the sales data with the procurement data. Our
suppliers also know what we need and can purchase the raw materials
accordingly. This is a very profitable business relationship for both
sides, as orders and quantities are predictable.

What about trends?

We are not that fashionable and even our more fashionable styles in the
range repeat themselves. Of course, competitors in the fast fashion segment
come out with articles that are also attractive for KiK and KiK will then
produce modified versions, but that is rather a rarity. Our business model
and our success prove us right; it is extremely market-friendly. One can
see which model works and there is no selling at a loss.

How is the Corona crisis affecting KiK at the moment?

At the moment it is having a positive effect, in any case better than
expected. May went well for KiK. There is a multiplier effect here, which
makes customers look for a certain price-performance ratio. In addition,
our store size works: KiK falls under the 800 square metre rule and some
customers do not want to shop in large stores at present. Our stores are
also located in peripheral locations, which is an advantage for customers
who currently avoid city centres.

In April, KiK was hard hit, no doubt, as shops were not open, but
fortunately this was only the case for a month. In terms of sales, we
expect a minus for the whole year, but not such a large minus. June will be
an indicator of the way forward, but at the moment things are looking
positive.

Keyword production: did KiK have to cancel orders like many other
clothing companies?

We only cancelled very few orders; less than 1 percent. This is due to
the fact that April 20th came around early enough. That saved us from
cancelling orders. However, many orders were postponed by five to six
months, but this was done by mutual agreement. We have nothing to gain by
taking our suppliers by surprise, since we want to work with them again
after all.

Are you still able to pay orders in advance, as is often the case with
the year-round discount model?

Here, like many buyers, we make use of bank credits with our suppliers.
These are payment promises between two banks. This means that the
equivalent value can be pre-financed and thus suppliers can buy raw
materials and pay for other costs incurred in production. In some cases,
factories have their own capital, but not in Bangladesh, where margins are
very thin.

KiK has its own service unit in Dhaka. Could you explain what its
function is and who works there?

These are local employees whose job it is to permanently screen
factories, not only for production in Bangladesh, but also in India
(especially Tamil Nadu), Cambodia and Myanmar. Country managers from
Germany also join them, creating a “healthy mix”; in addition, sourcing
agencies also send people, so that various parties are involved.

What about surprise visits in factories?

There are a few surprise visits, but these provide only a snapshot. It
is about training employees, “capacity building” and training in topics
that come up in audits time and again, such as compliance with legal
working hours, etc. Each country has its own training programme. A certain
number of points has to be scored from an audit (between 0-100) and one
year after the training, the percentage points should have moved upwards.
This shows whether the training effort was worthwhile.

I would like to add that audits at KiK are always paid for by KiK
itself, never by the supplier (as is the case with BSCI audits, for
example), in order to prevent bribery. Furthermore, the result is then sent
directly to KiK. There is also the auditor’s liability, which goes beyond
normal audits, with the audit company guaranteeing for 90 days that the
conditions are actually as stated. If they are not, there is the threat of
a contractual penalty. This is not intended to annoy the service providers,
but to ensure that the same rules apply to everyone.

Will KiK continue the sustainable efforts mentioned in the current
sustainability report? These include increasing the proportion of organic
cotton, transport by sea, resource-saving packaging and avoiding the use of
plastic, and the durability of products.

Yes, certainly, all the sustainability efforts mentioned will be
continued, either by KiK alone or as a member of a multi-stakeholder
initiative. We are even going one step further and are planning some
innovations that will be implemented in the next two months. For example,
KiK will start with Blockchain. Identities that are not disclosed in the
deeper supply chain will now be made public, and auditing processes can
also be managed with it. This is currently a top priority.

We will also enter into a partnership with EcoVadis, a company that
produces sustainability ratings for companies. In a pilot project, we want
to create and publicise supplier ratings.

Then we are part of the Smart Myanmar Project, which was launched by the
German Association for International Cooperation (GiZ). This project
promotes a dialogue between employees and employers and also includes
environmental aspects such as waste and water management.

KiK has also joined the Call to Action of the International Labour
Organization (ILO). This is about companies as a larger group requesting
support and development aid from governments. As you can see, we have not
been idle during the crisis.

Photos: courtesy of KiK – 1) Ansgar Lohmann while checking the
structure of a garment factory in Karachi, Pakistan; 2) Ansgar Lohmann; 3)
partner factory in Yangoon, Myanmar; 4) a first meeting with factory owners
in Karachi

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