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Takeaway: The latest factory tragedy in Bangladesh -- the 5th largest apparel producer -- highlights continued looming labor cost pressure.

The building collapse in Bangladesh on April 24 that killed over 400 people was a horrible event in itself. That goes without saying.  But it also has negative implications for US apparel retailers and brands.  While Bangladesh accounts for a mere 0.2% of Global GDP (about the size of Utah), it is the fourth largest producer after China, accounts for nearly 5% of US apparel imports and is more significant than Honduras, Thailand and the Philippines. Apparel accounts for 80% of total exports for Bangladesh, making it more dependent on apparel than any other country in the world. Similarly, approximately 10% of the members of parliament have ownership interest the apparel factories, which clearly skews their allegiance. For example, there are only 18 inspectors overseeing the 100,000 factories in the Dhaka district (largest manufacturing hub), which employ 3 million people. This has allowed Bangladesh to be incredibly price competitive – below China in many categories – which was in part passed through to customers (and ultimately, to us).  The compromise has been safety, and the consequences have been tragic.

Our sense is that this latest tragedy will be the straw that breakes the camel’s back. We’re likely to see either higher wages, or more compliant working conditions – which costs money. If the Bangladesh government does not impose better standards on its factories, it’s customers might do it for them.  That’s especially the case as US companies are getting more conscious about their reputation on the world stage.  Ultimately, even though Bangladesh only accounts for 5% of our consumption, any change in wage in wage structure or working conditions are likely to have impacts beyond its borders as other countries follow its lead.

The bottom line is that this is not enough for us to take down earnings estimates for the group. But with margins at peak we need to be conscious of every little factor that could cause margin pressure.

Apparel Cost Pressures: Impact of Bangladesh - otexa1