Retail’s Expensive New Problem: Sourcing When Tragedy Strikes
The death toll after the collapse of a garment factory in Bangladesh topped 500 Friday, and is still expected to climb.
While this is the deadliest industrial disaster in the country's history, it is just one of a string of tragedies over the past year. Five months ago, a fire in a factory producing clothes for Wal-Mart killed 112 workers.
Major retailers like Wal-Mart, J.C. Penney, Gap, Nike and Target are feeling a new degree of pressure to re-assess global sourcing strategies. The disaster's magnitude is hard to ignore, but this tragedy also comes in the midst of a transition in which consumers are becoming less tolerant of perceived complacency regarding workplace safety.
"These companies constantly assess their reputational risk," said Scott Nova, executive director of The Worker Rights Consortium (WRC) in Washington, D.C.," and they then balance that against the cost of making changes."
According to Nova, the frustration among consumers and activists could be starting to tip that balance, which may force retailers to make changes.
Walt Disney said in March it would no longer source from five countries, including Bangladesh, which did not meet safety standards outlined by the World Bank Governance indicators. This change preceded any direct consumer backlash, a company spokesperson told CNBC. The decision, she said, was based on robust internal discussions as well as consultation with external experts.
(Read More: Bangladesh Factory Building Collapse Kills Over 100)
Disney, meanwhile, has never been highly dependent on Bangladeshi labor. The company's consumer products business is based almost entirely on licensing its intellectual property, putting much of the pressure for enforcing standards for Disney-branded products on its licensees and vendors. Therefore, pulling out of Bangladesh is not expected to have any real effect on the company's bottom line.
But getting out of Bangladesh may not be feasible for the most heavily invested retailers, including Wal-Mart and J.C. Penney. Each has made sizable capital investments in the country's infrastructure. "The cost would be huge," said Nova. "Just think of the sunk costs coupled with the potential logistical costs of a supply chain shift of this size."
Doing nothing (or next to nothing), however, may no longer be an option. In recent years, labor advocacy groups and consumers have banded together to force retailers to adopt new codes of conduct related to labor rights. Just last week, after a two-year campaign by activists, students, and workers, Adidas agreed to pay legally mandated severance pay to Indonesian factory workers who lost their jobs in 2011. Details of the settlement were not disclosed, but the WRC says the company could ultimately pay "substantial sums."
(Read More: Some Retailers Rethink Roles in Bangladesh)
The Adidas settlement suggests we are now living in a world in which consumer backlash can force companies to take financial responsibility for labor violations. Perhaps acknowledging this reality, Joe Fresh founder Joe Mimran hopes to get in front of the recent disaster in Bangladesh. Speaking to the press Thursday, Mimran pledged compensation for victims and their families.
The tide is changing—and eventually, it appears major retailers will have to take real steps to address workplace safety in the challenged markets. Since they can't get out, this may mean doubling down and sinking larger sums of cash into improving conditions for workers.
"Brands and retailers must pay a price that makes it possible to do the work safely," Nova said. "The industry can afford it."
-By CNBC's Nikole Yinger. Follow her on Twitter @nikoleyinger