Wal-Mart Stores, Inc. (WMT), The Walt Disney Company (DIS): Change Is Gonna Come

The death toll from a devastating fire in a clothing factory in Bangladesh 17 days ago surpassed 1,000 souls Friday, all because of suppliers’ complete disregard for corporate requirements around building safety and workplace conditions. The implications for major retailers and apparel manufacturers are significant. While companies are responding in various ways, one thing is certain: This is an important issue for consumers and investors to monitor going forward.

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On April 24, the eight-story Rana Plaza complex of clothing factories near Dhaka, Bangladesh, collapsed. More than a thousand lives were snuffed out in the service of a murky global supply chain of cheap textiles that generally goes completely unnoticed. Perhaps that’s about to change.

Clothing retailers rightly worry about brand damage when something like this happens. In the ashes of a similar fire that killed at least 117 people less than six months ago, sweatshirts emblazoned with Disney characters bound for Wal-Mart Stores, Inc. (NYSE:WMT) turned up. Since then, Wal-Mart Stores, Inc. (NYSE:WMT) has introduced stricter fire-safety audits and a zero-tolerance policy toward contractors’ use of unauthorized factories.

The Walt Disney Company (NYSE:DIS) told licensees in March that Bangladesh was no longer an approved manufacturing location for The Walt Disney Company (NYSE:DIS)-branded merchandise. The change in policy was part of a larger effort to move The Walt Disney Company (NYSE:DIS)-branded goods production out of countries with poor factory and worker safety records, including Bangladesh, Pakistan, and Venezuela.

Factories within multi-use buildings in Bangladesh are at particularly high risk of fire, and J.C. Penney Company, Inc. (NYSE:JCP) plans to have phased out their use by the end of this month. Sears Holdings Corp (NASDAQ:SHLD) is also re-examining the dangers of multilevel factories operated by multiple owners, which could prove to be a real blow to the Bangladeshi textile industry as a whole.

NIKE, Inc. (NYSE:NKE) knows all too well how damaging such scandals can be. It’s joined the Sustainable Apparel Coalition, along with such big names as Wal-Mart Stores, Inc. (NYSE:WMT), Gap, J.C. Penney Company, Inc. (NYSE:JCP), and Target Corporation (NYSE:TGT). The coalition started an index last year with environmental goals, but the new version expected this fall will include social and labor measurements. The index is currently restricted to internal company use, but the aim is eventually to release the information to shoppers.

Proceed with caution
They’ll have to proceed cautiously with the coalition approach, though. The Rana Plaza disaster has shown that brands can’t hide behind industry initiatives. In early reactions after the fire, some brands tried to duck the issue by citing their involvement with groups like the Ethical Trading Initiative. Such initiatives can achieve great outcomes, but they don’t absolve a company of its responsibility to understand and manage its own supply chain.

Another lesson is that corporate codes of conduct are not working. Most brands have supply-chain codes of conduct that require protection, proper pay, and good treatment for workers in outsourced factories. Clearly these have failed, and factory inspections have not uncovered unsafe working practices and illegal building structures.