Business CRS INTERVIEW
Is the discount retail model sustainable and ethical?
By Simone Preuss
Jun. 29, 2020
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