Insulating Levi’s from climate change

Climate change poses significant risk to fashion brands and retailers, yet few of them have taken precautions to protect against future downside. Despite general industry sluggishness, one brand stands out for its proactivity: Levi’s.

As both a manufacturer and retailer of denim, Levi’s business model is threatened by the repercussions of climate change. The key input into Levi’s manufacturing of denim is cotton. Like many crops, cotton can be harvested in a variety of geographies, each with a different set of temperature and rainfall parameters required for successful growth. In addition to general warming, climate change also contributes to erratic weather patterns, which may include periods of drought and/or monsoon. Given cotton’s geographic diversity, it is difficult to make a blanket statement around how its production will be impacted by climate change. However, most researchers agree that production will suffer, especially in tropical regions.¹

Any shock in cotton yield will dramatically impact Levi’s supply chain. Levi’s may find itself in a situation where a global cotton shortage leaves it unable to produce enough denim to meet customer demand. Additionally, should supply fall, Levi’s may need to pay more to acquire cotton in market. Its ability to build these costs into its prices may be poorly tolerated by customers, who have come to expect a relatively low price point from Levi’s. Lastly, on the topic of manufacturing, it is important to note that Levi’s operates many factories in Southeast Asia, a region that has been hit hard by natural disasters.²

Unpredictable weather patterns also challenge Levi’s ability to plan, manage, and merchandise its inventory in stores. Retail analysts cited unusually warm weather in the US during the ’15-’16 winter as a key driver of sluggish sales. Most retailers adhere to a rigid product calendar that aligns to the four seasons. Last year, in keeping with this calendar, they stocked their shelves with winter apparel even as temperatures in the Northeast remained in the 60s throughout December.³ Even if retailers wanted to delay the launch of winter apparel, most would not have had enough fall apparel on hand to fill their shelves, nor could they purchase and receive more in time. Unlike some notable fast-fashion brands (e.g., Zara), most do not boast supply chains that are flexible enough to account for weather variability. This means that in the event of unusual seasonal patterns, Levi’s retail stores are at risk of being filled with merchandise that is irrelevant to its customers’ needs.

To date, Levi’s has employed several strategies to tackle climate change. Most of their focus has been around taking control of their cotton supply. For example, they co-founded the Better Cotton Initiative (BCI), an organization that empowers cotton farmers to be more efficient in their growing practices. BCI trains farmers to improve their skills, so that when they encounter challenges such as weather irregularities due to global warming, they are prepared to problem solve and maximize yield.⁴ Levi’s also encourages customers to recycle old denim by providing incentives for trade-ins. They have established the goal of utilizing 100% “sustainable” cotton (e.g., sourced from BCI farmers, recycled denim, etc.) by 2020, which, if achieved, would enable them to mitigate the risk of climate change to their supply chain.⁵

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In the process of pursuing operational improvements, Levi’s has also established itself as a socially and environmentally conscious brand, a positioning that has garnered significant media buzz. Not only has Levi’s evolved into a brand with which millennials can resonate, but it has also leveraged its investments in supply chain to support the marketing claim that its products are higher quality than those made by traditional competitors.⁶

Despite these strides, Levi’s must continue innovating its operations to address future challenges posed by climate change. Although denim production relies extensively on cotton, Levi’s should consider diversifying the raw materials it uses to manufacture other goods, thereby insulating the other parts of its business from swings in cotton yield. The company should also think critically about the location of its factories. Although the overall mix is geographically diverse, many factories remain in tropical areas that are vulnerable to erratic weather; depending on cost, there may be a business case for relocating these to more temperate locations.  Lastly, Levi’s needs to develop a faster, more responsive supply chain to rival fast-fashion players. Doing so will enable it to react more aggressively to seasonal variations.

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Works Cited

1) “Cotton and Climate Change: Impacts and Options to Mitigate and Adapt.” International Trade Centre, 2011.

2) “Levi Strauss & Co. Factory List.” Levi Strauss, http://levistrauss.com/wp-content/uploads/2016/09/Levi-Strauss-Co-Factory-List-September-2016.pdf.

3) Tabuchi, Hiroko. “Retailers Feel the Heat of Lost Winter Clothing Sales.” The New York Times, http://www.nytimes.com/2015/12/16/business/retailers-feel-the-heat-of-lost-winter-clothing-sales.html.

4) “Better Cotton Standard System.” Better Cotton Initiative, http://bettercotton.org/about-better-cotton/better-cotton-standard-system.

5) “Levi’s Sustainability Planet.” Levi Strauss, http://www.levistrauss.com/sustainability/planet/.

6) Mainwaring, Simon. “Sustainability Storytelling: How Levi’s Inspires Engagement To Scale Impact.” Forbes, http://www.forbes.com/sites/simonmainwaring/2015/10/03/sustainability-storytelling-how-levis-inspires-engagement-to-scale-impact/#5c2fcf496e83.