Abstract- In this report I will write about the impact of the ethical sourcing of garments. Overview of ethical sourcing policy, specifically on Primark, where including explanation of the economic functioning of the market, demand pattern, possible causes of shifts in demand and supply, explanation a possible types of market failures and government intervention on it.
Introduction- Different operations, companies running a businesses. They all have one goal is to make their profit larger, they will use different strategies to lower their expenses to production cost therefore make more profit. Nowadays these companies do not consider important facts where they can make profit but lead to failure. Bad image and reputation is one of this main facts. In this report Primark ethical sources and unethical cases will be discussed within economic explanations.
Primark is UK retailer, it has been found in Dublin, Ireland in 1969, Primark has a different name at the beginning of its growth called “Penneys”. Primark is part of Associate British Food (ABF), a diversified international food, ingredients and retail group. At the start Primark only had 38 stores but it grew dramatically and now Primark has almost 200 stores across Ireland, the UK, Spain, Netherlands, Germany, Belgium and Portugal.
Primark is well known for its low prices on market, Primark doesn’t spend money on the advertising but customers are still attracted by prices. It has a big volumes of production with very low markups that is the reason why economy of scale works well in this case. Economy of scale is when price of each unit of production goes down when output increases (Staff,2003). Primark uses streamlined strategy of production, they choose to produce their garments in countries where It is cheaper to produce. Primark target customers is fashion-conscious and wants value for money. Also Primark can offer value for money by:
• sourcing products efficiently
• making clothes with simpler designs
• focusing on the most popular sizes
• Buying in volume.
Price mechanism is an independence between prices and supple also between price and demand, when demand exceeds supply, shortage of goods rises, hence price will grow up. On the other hand when supply is actually bigger than demand there will be surplus in this market which will pull price down, in the other words we can say that price mechanism is to adjust the price to the marked in order to achieve equilibrium.
Elasticity of Demand.
Demand can be either elastic or inelastic, when there is a big response in demand when price changes this mean that demand is elastic. When the demand stays stable due to the price, demand is inelastic. Primark goods are consider to be inelastic inferior goods, clothes is a primary need so if price will change ,people still will be buy general clothes regardless to the price.
(WrightsLandofEconomics 2012)
Income elasticity of Demand.
In the case of income elasticity is different when people’s income increase, the demand is likely to fall, because it is know that when people get more income they are willing to spend more money on goods and get products with higher quality. Eventually people with high income not likely to purchase goods in Primark.
( wikieducador 16 April 2012)
Market Equilibrium.
Market Equilibrium is when demand curve crosses supply curve on the graph, the point between demand and supply is equilibrium, Primark already on this stage, e.g. if Primark supply 5000 shirts per week they will sell them all . (Wizznotes.com © 2011)
Price equilibrium .
Price equilibrium often coming when the price is very suitable with costumers, they are happy with the price and are willing to purchase the goods for this price. If suppliers can decrease the price that means that more people will be able to buy the goods from them, due to the price is fell so the profit from each unit will be lower but quantity will be higher. Primark using this strategy as their price are very low therefore they will get more income from volume.
Demographic demand pattern.
Demographic factors are factors to determine demand, age of population, their sex and the area of demand, religion, income level and more. People need to know all these facts before running a business in particular area. For example Primark will not get any profits if they will open a store in Monaco or other cities where people getting very high income as those people will not buy their goods, they will prefer luxury goods, and Primark will not get any profit on women clothing in the countries like Saud Arabia, because women in these countries wearing paranja due to their religion. If Primark would like to open a store in a small town, they should have a research on age level of population to identify what kind of good they should better to sale in this area, if they have high population of old people maybe they should sell more comfortable and cheap goods, instead of high heels and cosmetics.
Possible changes in demand and supply.
Demand and supply garments are affected by unforeseen circumstance, Primark had this type of circumstance in Rana Plaza collapse, Primark was one of the companies where they had product there in Bangladesh on 24th of April 2013, the production of it stopped therefore they couldn’t get products. (BBX News, 2015)
Inflation is one of the common reason of demand decreasing, inflation is when genera prices increases, therefore people need to save more and spend less money. The other reason is Economic crisis also can effect on people’s ability to spend money. Competitors are the general effect on the company’s profit as there are many other companies which can offer more fashion and beauty.
(BYU IDAHO 2012)
Ethics.
Business always has a responsibility to society. Business ethics are rules of principles and patterns of behavior in business dealings that involve responsibility. Part of this responsibility is to look after the wider community involved in the business process, including employees, across the globe. It can affect as a brand image if you are not doing ‘right thing’. Primark has been involved in situation with a factory collapse in Bangladesh. Rana Plaza collapsed and sue to that 1137 people were dead. It caused by illegally built 4 floors in 8 floor building, where eventually whole building collapsed (Neville 2013). In 2009 in Manchester there also were found illegal employees who produces goods for Primark. The facilities were awful, employees were illegal whose visa expired 8 years ago and waged were much more below than nation’s minimum wage (News.bbc.co.uk 2009)
Comparison with rivals.
Primark is in oligopolistic market. They are lots of other brands who compare with Primark, Zara, H&M, River Island and more. If we choose Zara for instance it may provide mush fashionable clothes, however it at least two times more expensive than Primark, Zara get renewed clothes every 2 weeks which means they are keeping up with fashion, but Primark can keep same goods months. Zara can offer various of products lots of brunches such as (Zara Home), Primark operates mostly in European market but Zara has gone globally to the North America and Asia and Australia, so how then Primark can still be competitor with such a big company where Zara operates almost 8 times more stores than Primark (1671 vs 242 (figures from 2011)). It is fact that Primark keeps it price low but how?
1) Supply Chain:” Zara delivers fashions while Primark deliver clothing”. Primark delivers clothes as a commodity so they do straightforward designs with cheap materials. They do not have repeated collections. What they have in stock it’s what they sell. This reduces stocks costs.
2) Low Running Costs: Primark stores are usually located in the outskirts (with some exceptions like Barcelona Lilla store) so the local rent they pay is relatively low.
3) Low advertising costs: No commercials, no TV, no magazines. They save money. Don’t worry they just work with the word of mouth.
4) Human resources: lots of unexpansive workers that are usually tidying up the clothes tables and on cashiers. They do not need a lot of management.
5) Huge stores: in Europe where all the sizes are smaller than in the US, Primark stores are noticeably bigger than their competitors. They can earn more money through volume more than by margin.
6) Supermarket techniques: like loss leader. They have products by almost nothing. By the sum of those cheap articles plus some others that are not that inexpensive is how Primark do business.
7) Quality/price not bad at all. Stores are usually full of non-resident families.
8) Customer deal perception: with 20£ you can buy many items that really look great. The client’s feeling after purchasing at Primark is usually as follows
Possible reasons for market failure.
Market failure usually happens when free market mechanism fails to achieve economic deficient. For Instance Rana Plaza collapse made market failure to happen, that’s all because health and safety regulations, unrespectable minimum wage and information failure. BBC wrote a report about this situation: according to Primark website, they deliver fast fashion with ethical values and without exploiting people, but actually they do not. Workers have been working in very bad conditions (no heating, unisex toilet……). Some of the workers were working illegally, Employ people even without asking their name on the very low wage which was lower nation’s minimum wage, therefor people have been working for 12 hours every day without weekends. By the information failure Primark did not accept to tell the details in Rana Plaza collapsed these are all fact that happened with Primark, it broke their image and market.