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Alta Gracia: Work With Salario Digno Progress Report

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Alta Gracia: Changing Lives One Shirt At A Time

Alta Gracia: Changing Lives One Shirt At A Time

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  • 1. Research Progress ReportAlta Gracia: Work with a Salario Digno John M. Kline Edward Soule Reflective Engagement Initiative Georgetown University December 5, 2011
  • 2. ii Research Progress ReportAlta Gracia: Work with a Salario Digno John M. Kline Edward Soule Reflective Engagement Initiative Georgetown University December 5, 2011
  • 3. iii Copyright © 2011 John Kline and Edward Soule. All rights reserved. Material in this Report may be quoted with appropriate citation. Permission is granted to use the Report, unmodified, through electronic link or download, for any usual educational purpose.Electronic copies available at http://ibd.georgetown.edu/236606.html
  • 4. iv Executive SummaryA bold enterprise commenced operations in April of 2010. The place was a factory in VillaAltagracia, a small town in the Dominican Republic. The product was licensed collegiateapparel. But in sharp contrast to the typical “sweatshop,” owners of this factory made a blanketcommitment to humane employment practices. Employees would receive a “living wage,” theirrights to associate freely and bargain collectively would be respected, and their workplace wouldbe subject to exemplary health and safety standards. To ensure that these were not emptypromises, an independent organization was authorized to monitor operations and verifycompliance. Production would be marketed under the brand name Alta Gracia, and carry thetagline “Changing Lives One Shirt at a Time.”The purpose of this report is to chronicle the Alta Gracia enterprise after eighteen months ofproduction. Following are our key findings. Alta Gracia is transforming the lives of its employees and their families. Some representative vignettes are provided to illustrate the nature and extent of the change. Although evidence is incomplete, there are good reasons to believe that the enterprise is having salutary ripple effects on the wellbeing of the community. Evidence suggests that some higher costs of Alta Gracia’s employment arrangement will be recovered through operating efficiencies. Employees assume responsibility for their productivity and quality of work, thereby eliminating at least one layer of supervision and reducing costs of waste and defective merchandise. Turnover has been exceptionally low, as has absenteeism, thereby reducing costs of training and backup labor. Consumers have responded favorably to Alta Gracia merchandise. Available in over 400 college bookstores nationally, the garments are of equal or better quality as the most popular established brands and priced comparably. Bookstores report that Alta Gracia merchandise sells as briskly as competing brands and the margins on sales are equivalent. Although bookstore access has been achieved, purchase volumes have not met expectations. Many bookstores stock a token amount of merchandise and fewer than ten genuinely championed the brand. Enterprise viability depends on increasing the number of stores willing to devote at least 5% of apparel floor space to Alta Gracia products. University administrations can encourage bookstores to allocate more space to displays of apparel meeting higher labor standards. Many collegiate licensing codes already call for payment of a “living wage” or a wage that meets a family’s “basic needs.” These codes have lain dormant because licensees asserted such standards were impractical and uncompetitive. For universities with such code requirements, support for Alta Gracia as the only brand to meet their standards would seem to be a minimum required action.
  • 5. vThe Alta Gracia enterprise is a model of humane employment practices in the global apparelindustry. As such, it warrants the attention of anyone concerned about “sweatshop” labor—frompolicymakers, activists and academics to leaders of firms and unions alike. We do not suggestthat lessons learned in Villa Altagracia are robust enough to support a call for a universal “livingwage.” However, there is considerable distance between a “living wage” and the wage and otherlabor standards that dominate the apparel industry. Reducing this gap requires novel thinking inmultiple domains. Alta Gracia is important because it challenges the status quo and points theway to alternative production models.We describe the Alta Gracia enterprise as “bold” because the track record for such projects is notencouraging. Alta Gracia stands a better chance of succeeding because of its sponsor, KnightsApparel. As the leading producer of collegiate apparel, Knights has the critical ingredients ofcapital and expertise, along with a management team personally committed to its success. Thecompany has joined a private multi-stakeholder approach that draws together business, labor andnon-governmental organizations (NGOs) in a new workplace model for the apparel sector –offering “Work with a Salario Digno” and a sustainable pathway out of poverty for workers andtheir families.
  • 6. vi TABLE OF CONTENTSPreface.........................................................................................................................1Dedication ...................................................................................................................2Introduction .................................................................................................................3Background and Start-up Period .................................................................................5First-Year Standards, Implementation and Verification ...........................................10What Does Salario Digno Mean? .............................................................................12Impacts: Workers, Families and Community ..........................................................13Individual Worker Stories .........................................................................................15Financial and Operational Analysis ..........................................................................22 Production Profile: Burdens and Benefits............................................................22 Business Model: Initial Performance and Challenges Ahead ..............................25Issues: Jobs, Development and Competitive Markets ..............................................27The Near-Term Challenge ........................................................................................29Wider Implications of Alta Gracia ............................................................................30About the Authors .....................................................................................................33
  • 7. vii
  • 8. 1 PrefaceThis Research Progress Report covers developments at the Alta Gracia apparel factory in theDominican Republic since the August 30, 2010 publication of the initial Research Report on AltaGracia: Branding Decent Work Conditions. That first Report traced the factory’s start-up periodin early 2010, contrasting its unique practices of paying a “living wage,” respecting labor rightsand offering exceptional workplace conditions against the industry’s all-too-typical “sweatshop”environment. To further distinguish this factory from the norm, it is monitored and its practicesare verified by the Workers Rights Consortium. Alta Gracia is owned and operated by KnightsApparel Inc., the leading supplier of collegiate branded apparel. Findings from this researchraise challenges to assertions that international cost competition requires the suppression ofworker rights and wages in foreign factories.This second-stage research updates and expands on the initial Report. The implementation ofAlta Gracia’s unusually high labor standards is assessed along with the brand’s productpenetration of the collegiate apparel market. For this new study, Professor Edward Soule of theMcDonough School of Business has joined Professor John Kline of the Walsh School of ForeignService, adding in-depth analysis of the Alta Gracia business model and the financial andmarketing challenges it faces. This Report also contains more extensive examples of the wayAlta Gracia’s factory affects people’s lives. Interviews with workers and their families providegeneral descriptions while a series of individual vignettes detail the real-world impact of AltaGracia’s slogan: “Changing Lives One Shirt at a Time.”Much has been accomplished over the first year and a half of Alta Gracia’s existence:implementing innovative labor policies, forging a cooperative labor-management partnership,establishing a high quality production process, and introducing a new apparel brand to over 400college bookstores. Where Alta Gracia products have gained adequate floor display space, theapparel is selling well at the same or slightly lower price as similar high quality merchandise.However, total sales are not yet sufficient to match the factory’s production capacity, much lesssupport future expansion to hire more workers. The next 18 months will be crucial to build onthe initial momentum to assure the factory’s viability. Such success would not only benefitcurrent and future workers at Alta Gracia; it would challenge traditional beliefs by offering acompetitive labor-management model that respects labor rights and offers employees “Workwith a Salario Digno.”The research and publication of this Report was funded by a grant from Georgetown University’sReflective Engagement Initiative. This program supports public scholarship, i.e., academicresearch that contributes to a major public issue. Further work on Alta Gracia is being supportedby a new University program on Complex Moral Problems that can fund the continuation ofresearch on such issues. The authors gratefully acknowledge this financial support andappreciate Georgetown University’s commitment to academic research with public policyapplications.
  • 9. 2 DedicationLaMarr Q. Billups was Assistant Vice President for Business Policy Planning at GeorgetownUniversity. Beginning with his prior position at the University of Wisconsin-Madison, LaMarrworked to adopt and implement university codes that would prohibit the “sweatshop” conditionshe witnessed on overseas trips. At Georgetown University and through his service on the Boardof the Worker Rights Consortium, he was an early supporter of the Alta Gracia project. As theChair of Georgetown’s Licensing Oversight Committee, LaMarr worked closely and easily withstudents, faculty and other administrators, displaying dedication, candor and his own personalstyle of gracious goodwill. Taken by illness from his family and colleagues on November 11,2011, LaMarr is sorely missed. This Report is dedicated to his ongoing memory.. LaMarr Q. Billups shared a panel with Alta Gracia employees Elba Nurys and Maritza Vargas during a Georgetown University symposium in September, 2011. He was an early supporter of the Alta Gracia project. He is deeply missed by all who knew him.
  • 10. 3 Research Progress Report 1 Alta Gracia: Work with a Salario DignoIntroductionAlta Gracia is a new unique brand of clothing from Knights Apparel that provides workers inVilla Altagracia, the Dominican Republic, with a pathway out of poverty and hope for a betterfuture. Beginning operations in April, 2010, the Alta Gracia factory produces t-shirts andhooded sweatshirts for colleges and universities throughout the United States. The enterprisesupports over 130 jobs in a community devastated by the 2007 closure of its last major employer.The factory is an important source of income for the community and a model for how companiescan treat workers fairly, with respect and dignity.Every worker at Alta Gracia is paid a “living wage” that enables them to provide adequate food,clean water, clothing, shelter, health care, childcare and education for themselves and theirfamilies. This wage is more than three times the minimum wage for apparel workers in theDominican Republic.The Spanish translation of “living wage” is salario digno -- a wage with dignity -- which bettercaptures the Alta Gracia concept. In addition to this salary, the company respects its employees’rights as workers and as human beings, including the right to a safe and healthy workplace, theright to be treated with dignity and respect on the job, and the right to form a union, which hasalready been organized and approved.A respected independent organization, the Worker Rights Consortium (WRC), verifies AltaGracia’s compliance with these standards through intensive on-the-ground monitoring of thefactory. Every Alta Gracia product carries a WRC tag confirming the product was sewn byworkers who are paid a living wage, have a union to represent them, and are treated fairly whenthey come to work. Alta Gracia is the only clothing brand in the developing world known toachieve these standards.The living wage puts Knights Apparel at a competitive disadvantage. As other companies in theglobal apparel industry look for the bottom rung on the cost ladder, Alta Gracia is perched at ornear the top. Management hopes to offset some of the additional costs through increased workerproductivity. However, productivity gains alone cannot sustain the operation. Alta Gracia mustalso establish its competitive presence at a quality and price level against already well-entrenched brands, without bearing the requisite marketing costs generally required to establishand maintain a new fashion brand.1 This report summarizes findings from recent research that updates progress since an initial Research Report byJohn M. Kline, Alta Gracia: Branding Decent Work Conditions, 30 August 2010, accessible online at:http://ibd.georgetown.edu/117448.html.
  • 11. 4In the meantime, management of Knights Apparel is sacrificing a nontrivial portion of thecompany’s earnings in order to get the project off the ground. Rare indeed are comparableinstances where the managers of an apparel manufacturing facility in the developing worldprioritize the welfare of its workers over short-term profit maximization.Key to Knight’s strategy is the ability to penetrate university bookstores. As distributionchannels go, this one has formidable barriers to entry. For one thing, it is a tiny sliver of theapparel marketplace. 2 Yet it is highly sought-after: powerful global brands vie for placement onextremely constrained floor spaces. Worse yet, these brands have long-standing relationshipswith the bookstores, over 1,200 of which are reportedly managed by two companies. 3 The Duke University bookstore actively promotes the Alta Gracia brand, providing information on the factory’s policies and devoting extensive floor space to attractive displays. The bookstore has sold over 20,000 units of Alta Gracia apparel, reaching one-half million dollars in sales.2 According to the National Association of College Stores, university bookstores recorded sales of $10 billion in2010, including all categories of merchandise. http://www.nacs.org/about.aspx3 James Koch, “An Economic Analysis of Textbook Pricing and Textbook Markets,” ACSFA College TextbookCost Study Plan Proposal, p.6. online, available at: http://www2.ed.gov/about/bdscomm/list/acsfa/kochreport.pdf(accessed August 31, 2011)
  • 12. 5And yet Alta Gracia garments offer consumers a compelling proposition: equal or better qualityas compared to the most recognizable brands at an equivalent or slightly lower price. On top ofthat, point of purchase signage highlights the human dimension of the Alta Gracia brand. It isnot surprising that the merchandise has sold at the same pace as established brands andcommensurate with the floor space allocated to it.After its first year of operation, Alta Garcia remains a work in progress and its viability is anopen question. On the one hand, a major hurdle has been cleared. One year ago a majorunknown was whether enough consumers would forego recognizable brands and purchase AltaGracia garments. Although the exact size of the consumer base cannot be determined, it is nottrivial. The experience of the Duke University bookstore is telling: allocated considerable floorspace, sales of Alta Gracia products reached one-half million dollars in November, 2011 withoutdeterioration in overall apparel sales. That is the good news. Another bit of good news is thatnearly 400 bookstores now carry Alta Gracia products. The main difficulty is that, with ahandful of exceptions, bookstores have not devoted enough display space. Orders are running atan unsustainable level—making the next year a critical time for this bold and important venture.Background and Start-up Period 4The Alta Gracia concept is rooted in the anti-sweatshop campaign of the 1990s, sparked byrevelations that many expensive, brand-name apparel products were made in developing countryfactories under horrible work conditions that included child labor, forced overtime, unsafeequipment, sub-poverty wages, worker abuse and anti-union violence. Organized protests sooncentered on college campuses where students demanded that administrators require labor codesof conduct for any licensed collegiate apparel that would carry the university logo. Following awave of demonstrations that included widely-reported sit-ins, most universities adopted laborcodes contractually committing licensees to assure that their collegiate apparel were not made infactories with “sweatshop” conditions.The next challenge was monitoring implementation of these codes. Most brand apparelcompanies do not produce anything. Rather they subcontract with literally thousands of“contract manufacturers” around the world, using their purchasing power and ability to pitproducer against producer to achieve the lowest possible costs. As revelations of continued laborabuses emerged, student pressure, coordinated by United Students Against Sweatshops (USAS),led to a grudging agreement by apparel companies to disclose the location of factories producingcollegiate apparel. With the locations in hand, oversight organizations were finally in positionsto monitor code compliance. One such organization, the Fair Labor Association (FLA), includedindustry and university membership while another group, the WRC, was formed with onlyuniversity and student representation.4 This section is adapted from Kline, 2010.
  • 13. 6Notwithstanding the oversight mechanism, abusive practices continued to emerge, centeringaround two issues. The sheer number of globally-scattered contract manufacturers producingcollegiate apparel proved a formidable obstacle to effective monitoring. In practice, themonitoring organizations have responded to complaints from foreign workers that were aware ofthe code standards, knew how to contact monitoring groups, and were willing to risk firing oreven violence for reporting the violations. Remediation of violations proved slow, frustratingand sometimes futile. Apparel companies resisted taking responsibility for the losses andhardships workers suffered at contract manufacturing plants that had been found in violation ofuniversity codes.The second issue relates to the variable content of university code standards and, in particular,the relative strength of their wage and freedom of association provisions. Several model codesand guidelines exist, including the Collegiate Licensing Company (CLC) Special AgreementRegarding Labor Codes of Conduct, the FLA Workplace Code of Conduct, and the WRC ModelCode for Universities. The CLC Code Agreement provides a type of baseline framework toencompass the codes of member universities. The FLA Code provides more specific standardswith compliance benchmarks while the WRC Model Code generally proposes the highest laborstandards.Individual university codes of conduct for apparel licensees vary quite widely in the level andspecificity of their provisions. The baseline standard on compensation recognizes that employeewages are essential to meet basic needs but requires only that employers pay the higher of thelegal minimum or prevailing industry wage. Stronger codes define a “living wage” standardcalculated to meet a specific list of essential needs for workers and their families. Codes alsovary from simply stating worker rights to freedom of association and collective bargaining tomore specific standards of conduct and treatment in how management relates to workers seekingto form a union to negotiate on their behalf.One proposal to address these two issues is a Designated Supplier Program (DSP) where theproduction of licensed collegiate apparel would be consolidated into a relatively small group offactories that could be monitored and certified to meet code standards. Core standards wouldinclude the payment of a “living wage” and full respect for labor rights, including freedom ofassociation. Licensees would be required to follow pricing policies that would enable theDesignated Suppliers to implement the standards. Opponents to the DSP cite the added costs aswell as logistical impediments. Advocates of the proposal have not secured enough universityendorsements of the DSP to support its adoption.Against this background, conversations between the WRC and Knights Apparel led to a projectthat offers a possible bridge to a new model, particularly on labor-management relations andpayment of a “living wage.” Knights proposed to establish a factory that would producecollegiate apparel using the type of high labor standards proposed in the DSP and market themerchandise under its own line of licensed collegiate apparel. To understand management’s
  • 14. 7rationale, note that Knights does not own a recognizable brand. Rather, its merchandise carriesthe brand of other organizations (e.g. the NCAA and the NFL) and is distributed primarilythrough mass market retailers (e.g. Walmart and Target). By producing goods in a plant meetingexemplary labor standards, Knights would gain entrée to university bookstores – a very highvalue distribution channel – without the costs of licensing another brand. If successful, Knightsstood to develop a recognizable brand of its own without the marketing costs typically required.To further demonstrate its commitment, management agreed to locate the factory in VillaAltagracia’s free trade zone (FTZ), a decision that can only be understood from an historicalperspective. The factory that houses Alta Gracia had been occupied by a Korean-owned contractmanufacturer, BJ&B, for the production of hats. At its zenith, BJ&B had employed as many as3,000 workers. University code violations, including harsh treatment and the dismissal ofworkers who were thought to support organizing a union, led to significant protests by USASand university licensees. Facing substantial sustained pressure, BJ&B finally recognized arepresentative union and reached the first collective bargaining agreement in a DominicanRepublic FTZ that included a wage increase.This signature achievement in the anti-sweatshop movement soon turned sour as the brandsshifted their orders to other factories, causing BJ&B to lay off workers and, eventually, toabandon the facility in 2007. To make matters worse, the company refused to meet its severancepay obligations, precipitating another battle. A handful of workers from the company’s formerunion held firm against unfair partial settlement offers. With the continued support of universitystudents, these workers finally received overdue payments. But they were without jobs. And noother significant company established operations in the FTZ, perhaps because of the unionsuccess at BJ&B, leaving Villa Altagracia to endure desperate economic conditions. The Free Trade Zone in Villa Altagracia was left nearly empty after BJ&B closed in 2007, until the Alta Gracia apparel factory began production in April, 2010.
  • 15. 8Knights Apparel agreed in advance to respect freedom of association in its new factory so theunion history of former BJ&B workers was not a deterrent whereas their experience in apparelproduction was an attraction. In fact, several former workers in the union leadership wereincluded in discussions between Knights Apparel and the WRC that led to the creation of theAlta Gracia factory. This initial pattern of cooperative, fair discussions reflecting a respect forbasic labor rights laid the foundation for a different style of labor-management relations – onebased on trust that grew from experience as agreed upon standards were actually followed duringthe initial phase of the Alta Gracia’s startup. Leaders from the former BJ&B union explain labor rights to new Alta Gracia workers at a meeting held on the factory floor. Alta Gracia management raised no objections to the union and has worked cooperatively with its leaders.Central among the key labor standards was the guarantee of a “living wage” – the notion that afull-time worker should earn enough to pay for the basic necessities of life. Conceptually similarto a legal minimum wage, this voluntary “floor” for worker pay is advocated because the legalminimum wage in most developing countries does not meet basic needs. Moreover, compliancewith minimum wage and other labor laws and regulations is rarely enforced. Improving thisstate of affairs is unlikely because it is designed to attract foreign investors and to keepindigenous manufacturers from seeking out lower cost alternatives.Opponents to a “living wage” raise practical concerns: What should it cover? To whom shouldit apply? Additionally, they assert that a “living wage” is not realistic from a competitive pointof view. The WRC calculated a “living wage” for the Alta Gracia factory by collecting localcosts of a basket of goods and services that included food and water, housing and energy,clothing, healthcare, transportation, education and childcare, modest savings and some
  • 16. 9discretionary spending. 5 Assuming the primary wage-earner should be able to cover the needs ofthree people in a four-person family, the calculation came out to a monthly salary ofRD$18,152.99, equivalent to US$497.34 in October 2008. The comparable monthly legalminimum wage at the time in the Dominican Republic was RD$5,400, or less than one-third of a“living wage.”In October, 2011 the minimum wage applicable to FTZ workers was increased to RD$5,940. Itis scheduled to increase to RD$6,320, effective January 2, 2012. The Alta Gracia “living wage”is adjusted each October to reflect inflationary increases (but not decreases). In November, 2011the adjusted “living wage” rate for Alta Gracia employees was RD$20,893, or over 350% abovethe legal minimum wage (and still 330% higher than the projected legal minimum raise after thescheduled January, 2012 increase). The cost of maintaining this wage differential is actuallyeven greater than it appears because employers in the Dominican Republic are assessed for thecost of employee benefits as a percentage of wages (roughly 38%). Thus, the higher cost of the“living wage” is magnified in terms of the total cost of employing a worker. Employee Wage Cost Comparison (November, 2011) Monthly Wage Benefits Total Total (US$)Minimum FTZ Wage RD$5,940 RD$2,257 RD$8,197 $216Alta Gracia “Living Wage” RD$20,893 RD$7,939 RD$28,832 $759These two core tenets of Alta Gracia’s operations, respect for basic labor rights and payment of a“living wage,” respond to the most evident short-comings in the application of universitylicensing standards for collegiate apparel. There are other important elements to the Alta Graciastandards, including provisions for their verification, which will be discussed below. Togetherthe standards and their implementation form an integrated pattern of labor-management relationsthat is better captured by the salario digno translation of “living wage,” also explained below. Insummary, as the Alta Gracia factory commenced operations, it was poised to bridge the gapbetween demands for better working conditions and assertions that such demands wereunrealistic.5 The WRC methodology is described more fully in Kline, 2010 and detailed online at the WRC website:http://www.workersrights.org/
  • 17. 10First-Year Standards, Implementation and VerificationIn its first year and a half of operation, the Alta Gracia factory met or exceeded its commitmentto pay workers a “living wage,” respect labor rights and attain high workplace standards inhealth, safety and respect for its employees. This evaluation is attested to through the WRC’srigorous monitoring process that includes visiting the factory to observe and inspect workplaceconditions, reviewing factory records to compare payroll accounts to worker pay slips,communicating with managers and union leaders, interviewing workers in off-site locations andresponding to all complaints. Any violation of agreed standards is reported to Knights Apparelwith a recommendation for remedial action and a timeline for completion. The WRC cansuspend or withdraw the use of its verification hangtag on Alta Gracia apparel if correctiveaction is not taken in a timely manner.The WRC’s verification reports, available on the organization’s website, cover the period up toSeptember 1, 2011. They found Alta Gracia in full compliance with wage, hours and overtimestandards. Monitoring identified a few reporting or calculation errors that were immediatelycorrected, with steps taken to prevent a recurrence. The factory was found to have compliedfully with anti-discrimination standards, prohibitions on forced and child labor, respect forwomen’s rights, and the “dignified and respectful treatment of employees.” 6The Maquiladora Health and Safety Solidarity Network (MHSSN) joined the WRC inmonitoring Alta Gracia’s workplace practices. Comprised of 400 volunteer occupational healthand safety professionals, the US-based MHSSN provides information, technical assistance andon-site instruction about workplace hazards. Knights Apparel consulted MHSSN during thefactory’s renovation and an inspection team has visited the facility twice.Along with training for management and workers, MHSSN inspectors offered suggestions thatwere accepted and implemented to improve electrical wiring and insulation, lighting, ventilation,chemical exposure, machine safety and ergonomics. According to the WRC, the Alta Graciafactory “has worked to implement industry best practices, above and beyond the legal minimumrequirements, to prevent workplace accidents and illnesses.” 7In verifying Alta Gracia’s compliance with its unusually strong commitment to respect rights tofreedom of association and collective bargaining, the WRC reports the factory’s conduct “hasbeen exemplary and should serve as a model for other factories.” 8 Soon after the factory opened,employees met in the plant during normal work hours for training sessions with NGO and union6 “Worker Rights Consortium Verification Report: Findings”, WRC, 23 December 2010, p. 14, online, available at:http://www.workersrights.org/freports/WRC%20Verification%20Report%20re%20Altagracia%20Factory%2012-23-10.pdf. (accessed 25 November 2011).7 Ibid, p. 10.8 Ibid, p. 15.
  • 18. 11representatives on labor rights. In the spring of 2010, employees formed a committee to explorethe formation of a union. In near-record time, the Union of Alta Gracia Workers (SITRALPRO)was established in June, 2010 and officially registered with the government. Pablo Tolentino and Elba Nurys are among over 130 Alta Gracia employees who enjoy much better and safer workplace conditions than in their prior factory jobs. Management followed the advice of U.S. experts who inspected the plant regarding lighting, ventilation, electrical wiring, ergonomic chairs, safety training and other workplace standards.Alta Gracia management meets with union representatives regularly on a range of issues. Forexample, the representatives requested and management agreed to change the times of dailybreaks and to alter the factory’s schedule prior to some Thursday holidays so workers couldspend long four-day weekends with their families. SITRALPRO is preparing a contract proposalto submit to collective bargaining, a process in which the company has agreed to negotiate ingood faith. Overall, the WRC declares that “management successfully created an atmospherewithin the factory where workers felt free to unionize without fear of management retaliation – afirst, in our experience, in any export apparel factory in the Global South that supplied a USbrand or retailer.” 9The WRC verification reports were corroborated during the authors’ research in the DominicanRepublic, most recently during July and November, 2011. Meetings with management, unionleaders, union members, and non-union workers (of whom there are less than ten) confirmed thatthe overall state of management-labor relations was by far the best of any factory in theirexperience. Workplace conditions drew consistent approval with several workers commentingon how training alerted them to safety risks they had disregarded in other jobs. These factors allcontribute to the strong commitment expressed by all the workers to producing a quality productthat will sustain their opportunity for continued employment with Alta Gracia.9 Ibid.
  • 19. 12What Does Salario Digno Mean?The English term “living wage” is generally translated in Spanish as salario digno, or wage withdignity. Whereas the English term basically signifies a level of monetary compensationsufficient to pay for the fundamental necessities of life, the Spanish term connotes more than justpay rates, encompassing other aspects of how workers are treated and how they feel aboutthemselves, both collectively and individually. In multiple interviews, Alta Gracia workersdiscussed the importance of these broader notions and rejected the idea that higher wages aloneare sufficient for a salario digno. The right to be represented by a union was an essentialelement for nearly all workers, but other responses stemmed from more personalized values andexperiences that often reflected pride in their work as well as their family responsibilities andaccomplishments. In their own roughly-translated words, the following unattributed commentshelp convey the broader significance of salario digno for Alta Gracia workers. “To me salario digno means being taken into account; you are actually valued at work. People are able to get a higher education, better intellectual development, and better nutrition; without this we can’t have goals. Before, we were excluded from the whole system.” “It means having the right to health. Living dignified means having the security of money, not living day to day, not knowing if you will be able to make ends meet; not having everything left up to chance.” “Dignified means more union of the family. When there is hunger, there is disunion in the home. Dignified means better nutrition. Dignified means better education. “To live dignified means to have a bathroom inside; it means being able to eat three times a day; it means being able to get an education and being able to have your children get education. A not dignified life is not having a future.” “With a salario digno, I don’t lose sleep anymore, as a mother, wondering how I will make ends meet. I would say Alta Gracia is the salvation for a lot of mothers.” “Salario digno means being able to work toward our aspirations. It allows one to accomplish dreams. In (a previous factory), the road was always dark. We always had to be borrowing money and taking out loans. You don’t get to see the results of working. A salario digno allows you to be identified as a human being.”
  • 20. 13Impacts: Workers, Families and CommunityAssessed after a year’s experience, the impacts of Alta Gracia’s “living wage” policy are alreadyvisible physically and manifest psychologically in the lives of the workers, their families and thecommunity of Villa Altagracia. One type of impact arises from choices in allocating weeklyincome that, while still modest, is several times more than most of the workers have everreceived. Local NGOs provided early briefings with information on budgeting and saving, butthe workers appear to have adapted easily to income management responsibilities. Althoughmost earnings still go for the purchase of basic necessities, the spectrum of alternative uses fordisposable income varies with the individual, ranging from surprising the children with an icecream treat to repaying predatory loans bearing weekly rates of interest of ten percent or higher.Two priorities commonly top the list for using available funds. Clearly the most frequentbeneficiaries were children who now can enjoy regular meals of more nutritious food along withthe clothes, books, and other expenditures needed for schooling. Housing improvements areoften the second priority: some employees are moving from a parent’s home to a rented house;others are renovating existing homes to add inside bathrooms, interior walls to replace hungsheets, and concrete roofs instead of tin sheets. Some workers save a portion of their wages tobuild up a down payment and qualify for their first-ever bank loan. Interior room dividers and appliances are some early improvements Alta Gracia workers finance with higher wages.Other frequently noted expenditures are the purchase of basic home appliances such as arefrigerator or a clothes washer. Workers report that having more money enables them to changeshopping habits, permitting a greater variety of healthier food choices for the family. They canalso purchase goods in larger and less expensive quantities; for example, selecting a sixty-poundbag of rice instead of having only enough cash to buy small, more expensive packages every fewdays. Some workers are returning to school to complete their education or to pursue advancedstudies while others must first repay funds borrowed from relatives during periods ofunemployment.Nearly all of this activity stimulates the moribund economy in Villa Altagracia. The economicmultiplier effect would predict that the wages paid to Alta Gracia workers create significantly
  • 21. 14more wealth as they circulate through the community. Examples include increased demand forconstruction materials for home improvements as well as appliance purchases such asrefrigerators, stoves, washing machines and motor scooters. Paying back money borrowed fromfamily and friends increases their potential spending power. Banks gain new customers withsufficient financial stability to qualify for first-time loans. Childcare centers improve theirquality with more children attending from the families of Alta Gracia workers. Small restaurantsopen outside the FTZ’s gates to provide lunchtime options.While economic impacts are visible, psychological impacts are expressed in the words of AltaGracia employees. One common refrain is family. Many workers had suffered long periodswhere their choice was unemployment or minimum wage jobs in Santo Domingo or other distantcities. The time and expense of commuting forced parents to leave home before dawn and returnwell after dark, or alternatively sleep away from home and, at most, spend time with their familyon weekends or often only Sunday. Regular absences and constant financial worries combinedto loosen family bonds and deny children parental guidance and nurturing. A salario dignomeant freedom from daily worry and fear about “What can I feed the kids? How can we pay therent? What happens if we get sick?” Alta Gracia’s local employment opportunity and unusuallyhigh wages address both these causes of psychological strain, permitting an easier and morecohesive family life.Another expression of salario digno is the employees’ feelings at work and about work. Morethan simply higher pay, salario digno meant respect for labor rights and being treated withdignity as a human partner rather than an instrumental tool in the factory’s production process.At Alta Gracia, workers essentially self-manage their own production modules, receive healthand safety training, and have union and other channels to offer ideas and raise grievances.Particularly compared to their experience at other factories, the workers believe their individualand collective self-worth is recognized and valued at Alta Gracia. This feeling is reflected in the“dignified and respectful treatment of employees” 10 documented by the WRC as well asmanagement’s response to the workers’ union.The story of one young woman captures the difference between the conditions in many“sweatshops” and salario digno. 11 In her previous job in an apparel factory she was given onebreak for lunch. Otherwise, she was not allowed to leave her sewing station without permission.Asked whether she was given permission to take brief bathroom breaks, she explained thatsometimes she would; but other times her requests were denied and there were occasions when itbecame impossible to wait. She explained further that pregnant women were particularlyvulnerable to this treatment. One can only imagine the humiliation and anger of being subjectedto such petty tyrannies. One can easily imagine the joy of working in a place where, as thisemployee put it, “we are our supervisors.”10 Ibid, p. 14.11 Related to the authors in an interview on July 21, 2011
  • 22. 15Salario digno also encompasses the role work should play in how individuals view theiropportunities for choice and hope for the future. Remembering her jobs at other factories, oneworker recalled simply feeling that: “I worked to be tired, without accomplishing anything.”Workers commonly describe their efforts in other factories as, at the end of the day, futile. Workonly allowed them to live a day longer in the same conditions, without any hope forimprovement. Alta Gracia’s policies empower workers to have dreams, set goals and makechoices, providing a pathway out of poverty.Individual Worker StoriesThe motto adopted by the Alta Gracia brand is “Changing Lives One Shirt at a Time.” While theabove description provides an overview of how lives are changing in Villa Altagracia, the truemeasure of this impact is more vivid and meaningful when viewed from the perspective ofindividual workers and their families. With their permission, the following summaries relate thepersonal stories of some of those workers. There are many more workers, and many morestories, but these capsules are representative of the significant effects Alta Gracia has producedin workers’ lives in just its first year of operation.IsabelIsabel lost her job when she was laid off from an apparel factory in the Villa Altagracia’s FTZ.She worked as a maid, cleaning and cooking in other homes, to secure some income. Lifebecame harder when her wooden house burned down in 2008. She was able to move into hermother’s house next door but her husband had to live with his family in their house. After beinghired for a job at Alta Gracia, Isabel was able to secure a loan to help rebuild her house andreunite her husband and young daughter. She even added internal walls in the rebuilt house toreplace the hanging sheets that previously were used to separate rooms. Isabel is now buildingan outside restroom so that it can be shared with her mother, since neither house has a bathroom.She reports that people in the community are surprised that she was able to come out of hersituation so well; they are not jealous of her good fortune but hope the factory can hire morepeople. For herself, Isabel hopes to return to school and study to be a nurse. Isabel’s rebuilt home reunites her family; the new outdoor restroom will also benefit her mother who lives next door.
  • 23. 16AnaAfter losing her apparel job in Villa Altagracia’s FTZ, Ana worked for four years making men’sboxer shorts at a factory near the airport in Santo Domingo. She had to live away from homeand went up to 15 days without seeing her two children, now ages 9 and 6, who stayed with hermother. She then spent nearly two years unemployed, although she found some temporary workas a cashier and in a hotel daycare center. She could only afford to rent a place so small thechildren still had to live with her mother. After starting a job at Alta Gracia, Ana rented a largerhouse. Now she can see her children every day and keep them close. She can also provide thema better education and she dreams of owning her own home one day. Ana believes the factory’seconomic effects flow into the town’s economy, where the hardware firm and corner stores aredoing well. She helped finance construction on a part of her mother’s house. “In this way I ampassing along the wealth.” Working at Alta Gracia enables Ana to stay close to home and assisther extended family, both ways to maintain family bonds which is an important value for her.Ana wants to return to school and become a teacher. After several years living away from her children, Ana’s job at Alta Gracia allows her to rent a small house near the factory where they live together. She wants to return to school and become a teacher.SusySusy moved to Villa Altagracia as a young girl when her father got a job in the paper mill. Sheworked for nearly five years at BJ&B when it first opened. After she got married and had a firstchild, she left to care for the baby. She was unemployed for 18 years as three more childrenwere born, but her husband was fully employed for 10 years and worked as a handyman the restof the time. Unfortunately, his work did not provide adequate health insurance; they could notafford additional expensive treatment for a daughter born ill after another pregnancy and shedied. Susy’s job at Alta Gracia provides good health insurance coverage and her “living wage”salary secured a bank loan that financed an expansion of their home, providing space needed bySusy, her husband and four children. Another result Susy cites with pride is being able tosupport her daughter’s dream to play on the nation’s Olympic-level volleyball team. After
  • 24. 17winning regional and national medals, the 15-year-old now travels each day to practice in SantoDomingo, which means money for transportation and other expenses to support her training. Shewill soon leave the country for the first time to play abroad in tournaments. Susy’s Alta Graciajob is changing their lives with new opportunity, greater security and strengthened family bonds. Susy and two of her children show off volleyball medals won by another daughter. Susy’s Alta Gracia job supports that daughter’s training for the national team as well as addition to their home.YolandaYolanda worked at the BJ&B apparel factory for nine years and was an active member of itsunion before the company closed. During Yolanda’s unemployment, her husband usually foundwork for a couple days a week. They could generally afford only two meals a day, if they werelucky. She was unable to pay for the medication needed to treat her high blood pressure. Sinceobtaining a job at Alta Gracia, Yolanda has repaid the money they had to borrow. They fixed thefront of the family’s house where she lives with her husband, two children, her mother and hersister. She was able to enroll her children in a better school and is helping support her sister andmother, including paying for her mother’s medicine. Yolanda’s long unemployment meant daily struggles and debt for her family. With a decent wage at Alta Gracia, the debts are repaid and she can now help others.
  • 25. 18ClaryClary was unemployed for several years and her husband’s work had to support the family offive. There was no money to repair their house or add internal walls to separate the living andsleeping areas. After she was hired at Alta Gracia, they made a few small improvements butpostponed substantial renovation in order to pursue a business opportunity. Since she was ayoung girl, Clary had dreamed of starting a laundry. With employment at Alta Gracia, she wasable to secure a loan and lease a small store space along the town’s main street. Her husbandmanages the business and they have hired their first employee. Clary gave birth to a daughter inJune, 2011, expanding her family to six. She was able to take 12 weeks of maternity leave at fullpay, divided if she wanted between pre- and post-natal care. When she returned to work,insurance covered the cost of childcare at a center located close to the FTZ and national lawprovides for a one hour leave each day for a year to permit mothers to feed their newborns.Because Clary knew about these rights and benefits, she was able to plan in advance for theiruse. With the new laundry business doing well, Clary was recently able to replace her home’stin roof with a concrete one and add a new wall. Alta Gracia’s maternity leave benefitted Clary when her baby was born and insurance now covers the cost of a childcare facility near the factory. Her job also secured a loan that enabled Clary to start her “dream” business that her husband manages.AracelisAfter losing her job at the TK apparel factory in Villa Altagracia’s FTZ, Aracelis worked for ayear at a pants and shirt factory in Santo Domingo. Unable to afford public transport, she left herhome at 5:30 am and hitchhiked to the capital city. She finished work at 4:15 pm but had noreliable way means of getting home. Aracelis next worked for two years making bathing suits ata different factory, also in Santo Domingo, from 7 am to 5 pm. After that she was unemployed
  • 26. 19and just tried to sell things from her home. Life was very hard because she was the sole providerfor four children and had no family living in Villa Altagracia. Aracelis was hired by Alta Graciain March, 2010. The first thing she did with her pay was to send her oldest son, then age 20, tothe university in Santo Domingo where he studies accounting. Aracelis was also approved forher first bank loan, enabling her to build an extension behind her home. She plans to live in itwhile renting out the front part of the house. Later she hopes to add a second floor that couldalso be rented, providing a stable income. After long commutes to find scarce work in the capital, Aracelis’ job at Alta Gracia allows her to spend time at home where she is adding a rental room for extra income to support her four children.RamonRamon is building a new house, employing neighbors to help with the construction. He and hiswife have carefully planned the design and calculated the expenses, recording everything in ajournal. With a job at Alta Gracia, Ramon qualified for a first-ever bank loan to help himfinance the house. Previously he had to work in another city for a year and a half, earningRD$6,300 a month (one-third his current pay). He worked from 8 am – 5 pm, 7 days a week.He could only go home to see his family three days a month. Ramon has three daughters. Hecan now spend more time with them and with his wife. They are also covered by Alta Gracia’shealth insurance and Ramon has enrolled the children in a better school. Soon the family willenjoy life together in their new home. Ramon lived away from his family to find a job. Working now at Alta Gracia, he can live at home, earn three times as much and finally begin building the family’s own house.
  • 27. 20MatildeMatilde was unemployed for four years after an apparel factory closed, sometimes working as ahousekeeper but surviving with support from her sister and mother. Her husband had passedaway and it was difficult to provide meals for her four children. There was no money forhealthcare, even though she knew something was wrong. After being hired at Alta Gracia in thesummer of 2010, Matilde obtained health insurance and scheduled a physical exam. She wasdiagnosed with cancer. The insurance covered a successful operation that December. Matilde’ssalary at Alta Gracia allowed her to rent a house closer to the factory, enroll her children (thenages 3, 5, 15, 16) in better schools and progressively pay off her debts. She also began studyingat the university in Santo Domingo, taking classes after work from 6 – 10 pm on Mondaythrough Friday and 8 am – 2 pm on Saturday. Her older children take care of the younger oneswhile she’s in class. When asked how the children respond to her commitment to study at theuniversity, Matilde related how hard the children were now working in their own studies, asshown in the good grades they were receiving at school. At the university Matilde is learninghow to operate medical equipment. She wants to become a medical technician and help makesonogram and X-ray technology more easily available to residents of Villa Altagracia. Employment at Alta Gracia provides Matilde and her children with health insurance and enough financial stability to pursue their educational dreams.ManuelManuel began working at BJ&B in 1995 and was employed there until 2001, leaving before theunion was formed. He worked at a hat factory in the capital for a year and a half, commuting bybus six days a week, leaving early and returning late. He spent most of his weekly earnings of940 pesos on transportation and meals. Manuel then found a job that paid 1,500 pesos weekly inanother factory producing hats and shorts. He endured the same daily commute for 6 years untilpolitical changes affected his employment. He learned about Alta Gracia from friends who hadworked at BJ&B and his long apparel sector experience helped him secure one of the scarce jobs.
  • 28. 21With a “living wage” income and his savings on transport, Manuel put aside money towardbuilding a family home. After qualifying for a bank loan, he completed a concrete house thatprovides room for the whole family. Without the long daily commute, Manuel can also spendmore time with his children, now ages 16, 10, 7, and 3, making the house a real home. He hopesAlta Gracia expands to give other people an opportunity to provide their children with betterconditions and a good education so that they will be able to pursue their own goals. Manuel’s job at Alta Gracia enabled the family to build a new house with room for all four children. More importantly, Manuel no longer commutes to the capital daily and can spend time with his family making the new house a home.Ana MariaAna Maria has held low-wages jobs both in and outside the apparel sector. For example, whenshe worked in Bavaro (a town on the island’s eastern edge) in 2005, her job was to cook 40pounds of rice and 30 pounds of beans every day. She had to use a wood stove and transport thefood in a motorized cart. She was paid 3,000 pesos every 22 days for her cooking while herhusband drove a truck and earned 7,000 pesos a month. The worst part of the work in Bavarowas that travel to Villa Altagracia took nearly a full day, permitting her to see the children onlythree days each month. Ana Maria started her Alta Gracia job in May, 2010. She was able topay off their debts after just 5 months in her new position. Subsequently she purchased a stove,refrigerator, computer, and a new bed (three children had been sleeping in one “sandwich” bed --the ones that fold up). However, she believes the most important benefit from the higher wagewill be education for the children. One son is already studying industrial engineering at theuniversity while another is expecting to begin studying medicine. The other two children are stillin public school. Now the sole support for her children, Ana Maria hopes company benefits mayextend to include partial scholarship help for the children of employees.
  • 29. 22Before her job at Alta Gracia, Ana Maria had to live far from her four children. Now they livetogether and her better wages help support one son already studying engineering while another son(not pictured) prepares to enter the university to study medicine.Financial and Operational AnalysisAlta Gracia merchandise has passed a critical test: it sells. And Alta Gracia has transformedlives. But is the operation sustainable? Will it grow and transform more lives or will it come toan inglorious end. While it is premature to answer these questions, it is the ideal time tounderstand the forces and factors that will determine the outcome of this bold enterprise. AltaGracia will either flourish or fail—muddling along indefinitely is not a lively possibility. Ineither case, the best defense against opportunistic interpretations is to understand and documentwhat is actually transpiring. Thus far this Progress Report has concentrated on the backgroundand history of the Alta Gracia initiative and its impacts on workers. Now we consider itsviability as a business.PRODUCTION PROFILE: BURDENS & BENEFITSIt is no exaggeration to describe Alta Gracia as the high-cost producer of licensed collegiateapparel. No other firm pays a “living wage” or anything approaching it. To compound matters,the Dominican Republic tends to have higher non-payroll costs. 12 Moreover, the island nationdoes not afford easy access to the major supply chain hubs in Latin America or Asia. Thus, it isnot surprising that of all the circum-Caribbean nations, the Dominican Republic suffered themost from the expiration of the Multi-Fibre Arrangement in 2005. Werner and Blair report thatgarment exports fell by more than half and 73,000 jobs were lost in the succeeding three years. 13Suffice it to say that Alta Gracia stands in sharp contrast to the race-to-the-bottom of the costladder that characterizes the global apparel industry.12 According to a 2007 study by the Fair Labor Association, electricity in the DR was three times more expensivethan in Mexico and 23% more than in Honduras.http://www.fairlabor.org/fla/_pub/SyncImg/drmissionreport_final.pdf (accessed November 26, 2011)13 Marlon Werner and Jennifer Bair, “After Sweatshops? Apparel Politics in the Circum-Caribbean”, NACLAReport on the Americas, July-August 2009, pp. 6-10.
  • 30. 23To put the cost burden of Alta Gracia in perspective, consider an often-cited metric in the apparelindustry: operating costs per minute. The computation is straightforward: divide the totaloperating costs (i.e., everything except material) over a specified period by the total minutesworked by the production staff (over the same period). A member of Alta Gracia’s managementteam estimates that the factory’s operating costs could be as high as 14 cents per minute when itreaches full capacity. Based on first-hand experience, he reported that facilities in Sri Lankaoperate at approximately 5 cents per minute. Insofar as operating costs represent a significantportion of the total costs of producing t-shirts and fleece tops, operating at nearly three times thecosts of a low-cost producer is not a prescription for prosperity.Although Alta Gracia is saddled with a serious cost burden, some portion of it will not depressearnings. In particular, paying a “living wage” stands to redound to the benefit of the enterprise.As explained below, the amount of the benefit cannot be quantified at this time, but based on thefollowing factors, it will not be trivial.First, as the undisputed employer of first resort, some of Alta Gracia’s higher labor costs will beoffset by a highly productive workforce. Management has been selective in terms of experienceand reliability; and turnover and absenteeism have been negligible. An experienced workforcematters because, despite the characterization of “cut and sew” factory workers as “unskilled,” ittakes approximately three months of training for a sewing machine operator to becomeminimally proficient. A reliable and stable workforce matters because the typical manager willadd staff in the face of chronically high levels of turnover and absenteeism. Thus, although theAlta Gracia workforce is considerably more expensive than the norm, it should be quite lean andproductive in comparison to the typical cut and sew operations.Two other factors stand to offset some of Alta Gracia’s higher labor costs: supervisors andmaterial waste. To explain, consider that the labor-intensive part of the apparel manufacturingprocess is an assembly line operation. Precut parts are sewn together and reinforced by teams ofbetween 8 and 20 employees (called modules). Each employee sews a single seam. The workdemands intense concentration on a repetitive task. Mistakes can result in the scrapping ofpartially completed garments – and disengaged employees are apt to make many mistakes. Inresponse, garment manufacturers deploy a significant tier of supervision. Alta Gracia isdifferent: two supervisors cover six modules. And rather than hovering over the shoulders ofunhappy machine operators, these individuals serve as trainers and were described by workersand management alike as “problem solvers.” Alta Gracia modules are self-managed, withemployees taking responsibility for the quality and quantity of their work. Indeed, managementestimates that several more modules could be added without increasing “supervision.”These three factors should cushion the financial impact of paying a “living wage.” However, themagnitude of that cushion should not be overstated: Alta Gracia will still be a high costproducer. To illustrate, consider that the payroll for 100 Alta Gracia workers is $75,900 permonth ($759 times 100). And consider that a similarly configured factory could be set up next
  • 31. 24door and pay the legal minimum wage cost of $216 per month (with benefits). Now, assume thatthe neighboring factory required twice as many employees to produce the same output as 100Alta Gracia workers. In that rather farfetched case, its payroll would be $43,200 ($216 times200) or not quite 60% of the Alta Gracia payroll. Productivity gains cannot overcome a costdifferential that is rooted in the fact that three people can be hired for 85% of the cost of a singleAlta Gracia employee. Alta Gracia employees work in modular teams with help available from trainers rather than multiple levels of supervisors. The system respects the dignity of the workers and fosters responsibility for quality control and productivity.The financial impact of the above factors cannot be quantified until the factory achieves a steadystate of normalized production. At present, the plant is grossly underutilized by the productionfor which it was designed. The factory can produce 30,000 units per week, but actual productionhas been closer to 24,000 units (as of November, 2011). And that 80% capacity utilization rate isdeceiving. Orders from university bookstores have fallen short of expectations and Knightsmanagement was faced with a decision. They could have furloughed or terminated workers butchose, instead, to shift production of standard Knights merchandise from contract manufacturersaround the world to Alta Gracia. Doing so kept the workers employed but much of their outputhas been value category merchandise that is distributed through mass-market retailers. As such,it is not representative of Alta Gracia merchandise in terms of production runs, materials, andunit sales prices. Injecting this production saved the day for the Alta Gracia workers, but itconfounds any meaningful analysis of the financial or operational performance.In shifting production from contract manufacturers to Alta Gracia, Knights moved from low costproducers to a high cost operation. As explained below, the Alta Gracia factory is predicated ona premium product for a premium distribution channel. Knights Apparel is bearing that extracost for now but the arrangement is not sustainable.The cost structure and underutilization of Alta Gracia may strike some readers as dire andinsurmountable. And they would be if Alta Gracia were just another cut and sew factory in theglobal apparel industry and if its sponsor were did not have the resources to overcome someserious difficulties. However, Alta Gracia is not just another garment manufacturing plant:
  • 32. 25owing largely to the attractiveness of its mission, the operation has received considerableattention and support. Additionally, Knights Apparel has the managerial expertise and capital tomove the project forward. To explain how management intends to rationalize its cost structureand utilize the factory, an explanation of the Alta Gracia strategy is in order.BUSINESS MODEL: INITIAL PERFORMANCE AND CHALLENGES AHEADThe Alta Gracia strategy is straightforward: produce premium garments and distribute themthrough a high value channel, university bookstores. A key element of this strategy is that itwould be executed without an established brand and without a sales force with the heft to servicea highly fragmented national market. This is a key element because the enterprise cannotprosper unless Alta Gracia garments command prices that are comparable to those ofrecognizable brands, but without incurring the prohibitively high costs of establishing a brand ormaintaining a national sales force. If successful, Knights Apparel stands to achieve margins thatare sufficient to absorb the increased labor and operating costs that are not offset throughproductivity gains. In effect, lower sales and marketing costs make it possible for Alta Graciaemployees to receive a “living wage.”At first blush, this is not a realistic strategy. As discussed earlier, gaining access to universitybookstores is a formidable challenge, especially in the premium priced category. Simply put,adding a rack of Alta Gracia merchandise takes one away from another brand. And those otherbrands have established cachet with consumers and long-standing relationships with bookstorebuyers. Access to this highly sought-after floor space was achieved by positioning Alta Graciato gain the backing of student activists and similarly committed faculty and administrators. Toelaborate, many colleges and universities are operated as “values-driven” or “values-based”organizations. To one extent or another, the values they espouse are aligned with the mission ofAlta Gracia. In other words, the fit is excellent. Knight’s Apparel CEO Joe Bozich (left) presents an Alta Gracia t-shirt to Georgetown University President John J. DeGioia at a September 6, 2011 symposium on “The Alta Gracia Project: Continuing Georgetown’s Leadership.” Factory employees Maritza Vargas and Elba Nurys told the audiences about their jobs at the Alta Gracia factory.
  • 33. 26The value proposition to the bookstores is compelling. As discussed earlier, the sales andmargins per square foot of Alta Gracia merchandise are indistinguishable from those of otherpremium priced garments. For those stores that are managed by the universities (referred to asindependents), stocking Alta Gracia garments is an opportunity to manifest the institutions’values. For the stores that are managed by third party contractors (i.e., Barnes & Noble CollegeBooksellers and Follett Higher Education Group), universities control the space in which they dobusiness through limited duration operating agreements. Under the circumstances, there is norational reason for not accommodating their client and landlord.The value proposition for the consumer is more complicated. The purchase of an Alta Graciagarment entails sacrificing the cachet of a popular sports brand (e.g., Nike). However, sales thusfar suggest that consumers are willing to do so, probably because the university logo is theirdominant consideration. Once the influence of a recognized brand is neutralized, purchasingdecisions turn on standard considerations of features, benefits, and price. On that playing field,Alta Gracia has proven to be very competitive. Exit interviews have not yet been conducted todetermine the extent to which consumers are influenced by the point of purchase cause-marketing materials or the WRC verification tags. Anecdotal evidence suggests that theperceived quality of Alta Gracia garments is the dominant consideration, but a formal study isclearly warranted.Given its barriers to entry, Alta Gracia’s initial performance has been impressive. Merchandiseis in over 400 bookstores. Unfortunately, most of those stores have devoted little more than atoken amount of floor space. So although Alta Gracia has achieved fairly wide penetration of theuniverse of university bookstores, it needs to be deepened on a store-by-store basis.The challenge ahead entails a short-term objective of achieving a breakeven level of sales and alonger-term goal of profitability. Management estimates that breakeven would be achieved ifuniversity bookstore sales accounted for half of the plant’s output or approximately 720,000units per year. Orders are expected to be roughly half of that level for the 2011-12 academicyear. Longer term, orders would need to quadruple in order to utilize the productive capacity ofthe plant, provide a return to Knights Apparel, and keep the Alta Gracia workforce gainfullyemployed.These objectives may seem unattainable but on closer examination they are quite realistic. Tobegin, Alta Gracia products are not yet sold in two-thirds of the more than 1,200 collegebookstores across the United States. Considering only bookstores already selling Alta Graciamerchandise, a 60 percent increase in current sales would meet initial objectives. Of course,universities and their bookstores vary in size and sales potential. If fewer than 50 bookstoresmatched the purchases at Duke University, the employment of Alta Gracia’s workforce would besecure. Based on recent sales performance, management estimates this result could be achievedif such stores devoted only 6 or 7 percent of their apparel floor space to Alta Gracia merchandise.
  • 34. 27If these marketing targets are achieved, the brand would have legs and management could looktoward expanding into an adjacent building and hiring additional workers. The UCLA bookstore features several types of attractive Alta Gracia displays along with multiple racks and shelves fully stocked with various sizes and styles of apparel.Issues: Jobs, Development and Competitive MarketsAlta Gracia’s commitment to a “living wage,” respect for labor rights, and other enhancedworkplace standards challenges core assumptions about the “sweatshop” model that dominatesthe global apparel industry. The earlier Research Report 14 traces past debates and addressesseveral issues where Alta Gracia’s approach calls into question assertions that “sweatshop” jobsare justified by the absence of a better economic alternative. Further research confirms andextends this analysis, particularly on three issues: more jobs versus better jobs; “sweatshops” as apath to development; and the competitive dynamics of the global apparel industry.The first issue concerns the possibility that paying Alta Gracia workers a “living wage” deprivesothers of employment opportunities. Since Alta Gracia pays workers over three times theminimum wage, why not provide minimum wage jobs to three times as many workers? Intheory, this makes sense. In reality, it is not feasible. The “living wage” is a key feature of theAlta Gracia brand and a major reason why it is offered in university bookstores. The argumentthat the enterprise should hire more and pay less is based on a faulty assumption. Eliminate the“living wage” and the project would not exist; the low-wage segment of the market is alreadybeing supplied.14 Kline, 2010.
  • 35. 28A second issue centers on the argument that low-wage “sweatshops,” though undesirable, are astage that a developing country must pass through on the way to future economic development.Proponents of this view point to examples of success while conveniently ignoring countries, suchas the Dominican Republic, where such progress has been elusive at best. Development is ahighly idiosyncratic process and lessons learned from one country’s experience do notnecessarily apply in other countries. Sometimes carefully choreographed government policieshave lifted people out of poverty, not free market ideology, but unfortunately many developingcountries are not governed wisely or consistently. In any event, the evidence is not clear andconvincing enough to endorse the status quo of “sweatshop” labor conditions on the basis ofeconomic theory. A “living wage” provides a pathway out of poverty for workers and their families while benefitting the local community. The Alta Gracia business model challenges the assertion that “sweatshops” are a necessary stage of economic development.The third issue lies at the heart of conventional wisdom about economic realities in a globalapparel industry. Most economic analyses attribute the industry’s low wages and poor laborconditions to competitive market pressures on apparel firms. Thousands of factories compete tofill orders placed by large brands and retail stores that pressure foreign suppliers to reduce costs,knowing orders can be shifted to other factories willing to accept a lower price. While factoryowners face these price pressures, the burden of reducing costs inevitably falls on workers,especially where unemployment is high and labor regulations are weak.These circumstances are often seen as dictated by the impartial forces of marketplacecompetition. However, if the industry’s full business structure is considered, a distorted pictureof market competition emerges. The highly competitive conditions facing thousands of smalldeveloping country apparel factories contrasts markedly with the relatively small number oflarge, developed country brands and retail firms that enjoy oligopsony bargaining power. Thebig buyers are price-setters and small producers are price-takers who, in turn, satisfy the buyers’cost reduction demands by further squeezing workers who have few job alternatives. The
  • 36. 29ideology that free market competition dispassionately allocates costs and benefits among partiesin the global apparel industry does not match the sector’s dichotomous competitive marketstructure. Alta Gracia begins cost and income planning with a “living wage” guarantee for its workers rather than maximizing profits by seeking lowest-cost labor locations.The Near-Term ChallengeProspects for the Alta Gracia brand rest largely with two groups: merchandise buyers andmanagers of university bookstores and the consumers of collegiate apparel. Students, parents,friends and alumni will buy t-shirts and sweatshirts emblazoned with their college name andlogo, but there will be several brands from which to choose. Product design, quality and pricedetermine many decisions, but the significance of a brand name also exerts some influence,especially when other product characteristics are similar. Alta Gracia depends on a socialmarketing strategy to inform potential consumers about the exemplary labor conditions underwhich its apparel are produced, trusting that this association will be meaningful to the personmaking the purchase. This process depends heavily on individual students and campusorganizations to alert and inform others about the Alta Gracia difference through seminars,articles, tabling, posters and social networking channels. Supported by groups such as UnitedStudents Against Sweatshops and United Students for Fair Trade, these activities areprogressively taking hold. Some faculty and university administrations have also recognizedAlta Gracia’s substantially higher labor standards and expressed support for the product.For the Alta Gracia brand to succeed, these efforts must continue with even greater recognitionof the substantial differential between the standards under which collegiate brand apparel isproduced. This step would involve more institutional action at the level of universityadministrations. Following the past decade’s student protests against “sweatshop” conditions,most universities adopted codes that set minimum labor standards for apparel licensees. Despitecontinuing monitoring and enforcement problems, these codes offered some reasonableassurance that a college’s logo will not appear on apparel produced under extreme laborconditions -- essentially establishing a “not a sweatshop” standard. However, Alta Gracia is theonly brand that is independently verified to comply with much higher labor standards by payinga “living wage,” fully respecting labor rights and providing exemplary safety and health
  • 37. 30workplace conditions. More than simply “not a sweatshop”, the Alta Gracia brand pioneers anew approach that encompasses the broader concept of salario digno.Interestingly, many colleges and universities have already adopted or endorsed codes of conductfor apparel licensees that call for such higher standards, including the payment of a “livingwage.” Until now, however, the industry asserted such a wage standard was impossible toachieve because it would make the product commercially uncompetitive. With no companyoffering a product that met a “living wage” criterion, universities were essentially forced toaccept products that fell below their adopted code standards.A review of nearly sixty university codes revealed that over one-third specifically endorsed a“living wage” standard while another twenty percent used a “basic needs” wage criterion thatwas above the legal minimum and prevailing industry wage. If followed, these standards wouldfavor Alta Gracia products as the only brand that complies with the wage provisions in theexisting apparel licensing codes of many universities. Almost certainly, these codes have notbeen monitored from this perspective because, until now, no company had been willing to offer aproduct that could meet a “living wage” standard. Perhaps with Alta Gracia’s arrival, it is timeto review university codes to reassess whether their stated terms are being met. These codesshould guide university actions, including steps to assure that products meeting such standardsand bearing the university logo are recognized and readily available at campus bookstores.It is doubtful that current Alta Gracia capacity could meet demand if all colleges with a “livingwage” or “basic needs” code provision resolved to enforce such a standard. Arguably, however,those colleges should give Alta Gracia products preferential treatment in contracts, purchasingand bookstore displays. Such preferential treatment and increasing demand would clearly signalother producers to adopt comparably higher labor standards or risk losing market share.Wider Implications of Alta GraciaAlta Gracia is a managerial moral exemplar in an industry in which workers have not beenaccorded the respect they deserve. As with many ideals, there is plenty of space between what istranspiring in Villa Altagracia and management practices in apparel factories around the world.Emulating every feature of the Alta Gracia model is not the only way to improve. Nor is itrealistic for all firms to pay a full “living wage.” But there is a wide spread between a “livingwage” and the current practice of paying the legal minimum or the prevailing industry wage.Reducing that spread requires a compelling “business case” – something Alta Gracia stands toprovide in the apparel sector. Over time, the benefits of its intelligent and humane approach tomanagement should be evident, and they should be adaptable to a range of business models andpay scales. The long-term promise of Alta Gracia is the light it shines on these possibilities.
  • 38. 31The Alta Gracia workers appreciate the support of consumers who buy their products and hope thisbusiness model can expand to provide others an opportunity to improve their lives.
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  • 40. 33About the AuthorsDr. John M. Kline is a Professor of International Business Diplomacy in the Walsh School ofForeign Service, Georgetown University. His teaching focuses on international business-government relations, international investment strategies and negotiations, and internationalbusiness ethics. The second edition of Dr. Klines textbook, Ethics for International Business:Decision-Making in a Global Political Economy, was released by Routledge in London and NewYork in May, 2010. He is the author of three other books as well as numerous scholarly articlesand chapters in co-authored and edited books.Prior to joining the Georgetown faculty, Dr. Kline was Director of International EconomicPolicy at the National Association of Manufacturers. He received his doctorate in politicalscience from The George Washington University and holds a masters degree in internationalrelations from The Johns Hopkins University School of Advanced International Studies. Dr.Kline serves as a consultant to various international organizations and private multinationalcorporations. Recent projects include a comparative analysis for UNCTAD on foreigninvestment policy promoting small and medium-sized enterprises (SMEs) in Malaysia andSingapore, and electricity infrastructure in Chile and New Zealand.Dr. Edward Soule is an Associate Professor at the McDonough School of Business,Georgetown University where he has taught courses in managerial ethics and corporate socialresponsibility since 1999. In 2002 and 2011 he was awarded the Joseph F. Le Moine Award forUndergraduate and Graduate Teaching Excellence. Dr. Soule’s research considers two facets ofbusiness from a moral point of view: management responsibility and commercial regulation. Hisresearch appears in a range of scholarly books, journals, and reports: from The Academy ofManagement Review to The Journal of Philosophy and Medicine. Recent works include a 2009article, “Principles of Managerial Moral Responsibility” (with Hedahl and Dienhart), thatappeared in Business Ethics Quarterly; and an essay, “Regulation,” that was included in a 2010collection entitled Finance Ethics: Critical Issues in Theory and Practice (Ed. John Boatright).Dr. Soule’s academic activities reflect his unlikely past—formal training in moral and politicalphilosophy that came at the conclusion of his business career. He practiced public accountingfor twelve years, after which he served as the Chief Financial Officer of Edward Jones from1986 to 1995. In 1999 he received a Ph.D. in moral and political philosophy from WashingtonUniversity in St. Louis. Dr. Soule chairs the Board of Trustees of Rare, an internationalconservation organization headquartered in Arlington, Virginia (rareconservation.org). A nativeof St. Louis and a seasonal resident of Clarksville, Missouri, Ed is a devoted fan of the mostillustrious organization in professional sports, the St. Louis Cardinals.
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