Knights Apparel is paying its workers in the Dominican Republic three and half times the going rate. Can they thrive when their shirts cost 20% more to produce than everyone else?
- Investing in better working conditions and worker salaries in Dominican Republic so that product costs are higher than the competition… are they crazy?
- Why it can work… applying marketing principles to counter the drive to lower prices and commoditize the product
- How “doing good” can be good business
One of my roles is marketing professor at a great college in Boston. A foundation of all of my courses is to have students comb traditional and online media to find and share marketing-related stories in each and every class. There are a number of reasons for this including the fact that business is dynamic and literally evolving on a minute by minute basis sometimes, a fact that no textbook, at least in the print format, can ever keep up with.
What this means for me as a teacher is that I have to “eat the dog food” as well, if I am to keep up, let alone lead such a research-based activity in a classroom.
So it is that earlier this summer I came across an article in the New York Times last month by Steven Greenhouse, Factory Defies Sweatshop Label, but Can It Thrive?
I was very excited when I read the article and have not been able to get it out of my mind since. This is because contrary to the implication that “doing good” cannot lead to business success as implied by the question “Can It Thrive?” in the headline, when looked at it through a marketing strategy and positioning lens, we can easily see it is very likely this business can and will survive, thrive and perhaps be a model that other more well known consumer brands can and should adopt.
Lowering Costs Drives Business, Doesn’t It?
No, I am not trying to buck the research that typically asserts doing good for its own sake does not necessarily move customers or prospects to act and buy a product or service. There was much discussion a few years back about “green” business initiatives and would customers pay extra for them, and if so how much. Was Green enough on it’s own to drive a marketing program and deliver results?
We may have, want and maybe even expect a “green sensibility”, but we see again and again that when it gets to the pocketbook, we don’t want to pay more, at least too much more. We may penalize a product for say a lack of “green-ness” but we don’t necessarily reward them for it either.
In this mindset, the negativity implied in “Can It Thrive?” may make some sense.
The answer however, is far different from a strategic marketing perspective when doing good is positioned as added value.
First a little background.
Introducing Knights Apparel
The company in question is Knights Apparel, based in Spartanburg, South Carolina. Knights is, according to the article, “the leading supplier of college-logo apparel to American universities, according to the Collegiate Licensing Company.” The factory discussed in the article is in the Dominican Republic and produces high quality, college/university logo’d t-shirts for sale under the Alta Gracia label in campus bookstores across the US. The cost of the actual shirt is $4.80 with a wholesale price of $8 and retail cost of up to $18.
What is unusual here is that Knights pays workers a living wage. Where other factories may pay workers $147 a month in often harsh working conditions, the lucky workers at this factory earn $500 a month, up to 3 and a half times more. Not only this, workers are allowed to unionize and work in a clean, friendly, modern and safe environment, which is unheard of at most factory locations.
Shirts of this quality which may cost others $4 to produce, costs Knights $4.80, a 20% premium, so there is an added cost.
Sounds crazy, doesn’t it? Whereas in today’s globalized manufacturing world companies are on a constant quest for countries and workers where they can pay ever lower wages and cut overhead costs in order to maximize profits and value to investors, here is a company bucking the trend and going in the opposite direction.
Plus if the research is to be believed, what customer in their right mind will pay a higher price for a commodity item like a T-shirt?
We do, and we do it all the time.
Positioning Can Be Used to Support Different Business Strategies
It comes down to positioning, brands and value. Using the product adoption lifecycle for a model, we can see the following:
The Early Majority supports leadership and works like a herd… if my friends and peers do it, so will I. And not only that, this audience will pay a premium for a leading product, for its perceived value. This is where brands come in and why they can be very successful. If my friends see value in Nike, so will I. And yes, we all know that cool little swoosh will cost me more, sometimes much more.
To the Late Majority, a t-shirt, is a t-shirt, is a t-shirt. Lowest price wins their purchase. And if we can get a branded shirt at a lowest price in say a discount store, we are not fools, we will buy it. But if it costs more, forget it. Cost, lowest cost is more important to here.
The game here is added value. If Alta Gracia shirts were focusing distribution on say Wal-Mart or other discount channel, the strategy would fail. Pennies matter to the cost of the product, and the higher production cost would not be able to play out in this arena.
But as we read, Knights strategy is to not play in that space. In fact, they are reverse positioning themselves to play in the Early Majority segment, and quite cleverly.
Reverse Positioning For Added Value
1. The shirt is a high quality shirt. The facility is not manufacturing a commodity quality, no label generic t-shirt.
This alone is not enough.
2. Alta Gracia has not yet built awareness and value for itself as a stand-alone brand, although apparently there will be point of sale merchandising in college bookstores to raise awareness.
However, by providing the academic market with college/university branded product, they in effect are partnering with colleges and univerisites to offer a high quality, high value, co-branded product.
3. Students (and therefore their parents) are known to care about social concerns and they do support with their wallets.
These customers will pay a premium for products that they consider to fair traded, if the value is clear and the cost is in line.
Have you checked out the price for a Nike T-Shirt lately? Alta Garcia’s wholesale and retail pricing is well in line with other high value branded t-shirt products that can often cost $20 or more.
Add it all up and Knights has done its work to strategically position this product right where it needs to be, so it can, and I will argue almost certainly will meet its social and business objectives.
Does “Doing Good” Make Sense?
Are there lessons here for the Nike and Reebok’s of the world, whose logos have high brand value in their own right?
It seems like they have a choice.
A few years ago, Nike and others (remember Kathy Lee Gifford’s clothing line?) were slammed by the media, and customers for simply the appearance of allowing sweatshop conditions in some of their out-sourced, off-shore factory operations. They felt the pain of lost sales and as a result developed and imposed higher standards and better working conditions over time since then.
Left to balancing the quest for higher profits against the public’s expectation of social responsibility, it seems likely this kind of back and forth may continue. Companies will try to cut costs all they can, and consumers will respond if it appears they have crossed some ill-defined line and gone too far. At what is too far?
Is there a business value to a more pro-active posture like the one taken by Knights?
Costco Thinks So
As it turns out, there is a best practice we can look at here as well courtesy of Costco, the leader in the warehouse store category, outlined in a 2005 article in the New York Times, How Costco Became the Anti Wal-Mart.
For many years Costco has been a leader in the retail industry paying its workers “liveable” salaries well in excess of those paid by another leader, Wal Mart (and others) where associate salaries are pegged to the Minimum Wage.
At the same time Costco’s management has been under pressure to lower employee costs, something that Costco’s management has resisted. As noted in the article, one analyst even complained that with Costco “it is better to be an employee or a customer than a shareholder.”
Why then does Costco resist this pressure?
Costco has found that fairly compensated employees are loyal, honest and stay with the company longer. Churn is down, retention high, training costs reduced, and productivity enhanced. Throw in that Costco’s affluent customer base appreciates that lower costs do not come at employee expense, well we get the idea, there is a monetary benefit.
As Costco’s CEO Jim Sinegal put it, “This is not altruistic, this is good business.”
Our marketing model shows that companies can do good, quantify its value, serve customers and in the deliver more value to customers, if they live in the right place on the Product Adoption Lifecycle.
The Marketing Lesson of the Product Lifecycle… You Can Choose Where You Live
Then think of the transformative impact this has on the actual workers. One of the workers at Alta Gracia put it this way, “We never had the opportunity to make wages like this before. I feel blessed.” Feel good now?
Here is the recipe that adds value and re- or reverse positions Alta Gracia T-Shirts from a commodity to value product:
1. The higher quality of the product itself
2. “Borrowed” Brand Value that leverages the affinity of the College/University
3. Added Value of a Good Deed that in fact is also doing “Good Business”
4. Opportunity to build Alta Gracia as a stand alone brand recognized by students
5. Natural brand extensions to other intersecting markets (parents, etc)
6. Other affinities, such as sports, music and others can build on model
Add it all up and it means higher value, the kind of higher value customers are willing to pay a premium for.
Tags: Alta Gracia, best-practice, consumer, Costco, early adopter, Early Majority, Green, International Business, Jim Sinegal, Knights Apparel, Living Wages, Low Wages, Nike, Product Adoption Lifecycle, Reebok, Sweatshop Conditions, Wages