Research Progress Report

Alta Gracia: Work with a Salario Digno John M. Kline

Edward Soule

Reflective Engagement Initiative

Georgetown University

December 5, 2011

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Research Progress Report

Alta Gracia: Work with a Salario Digno

John M. Kline

Edward Soule

Reflective Engagement Initiative

Georgetown University

December 5, 2011

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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

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Executive Summary

A bold enterprise commenced operations in April of 2010. The place was a factory in Villa Altagracia, a small town in the Dominican Republic. The product was licensed collegiate apparel. But in sharp contrast to the typical “sweatshop,” owners of this factory made a blanket commitment to humane employment practices. Employees would receive a “living wage,” their rights to associate freely and bargain collectively would be respected, and their workplace would be subject to exemplary health and safety standards. To ensure that these were not empty promises, an independent organization was authorized to monitor operations and verify compliance. Production would be marketed under the brand name Alta Gracia, and carry the tagline “Changing Lives One Shirt at a Time.”

The purpose of this report is to chronicle the Alta Gracia enterprise after eighteen months of production. 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.

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The Alta Gracia enterprise is a model of humane employment practices in the global apparel industry. As such, it warrants the attention of anyone concerned about “sweatshop” labor—from policymakers, activists and academics to leaders of firms and unions alike. We do not suggest that lessons learned in Villa Altagracia are robust enough to support a call for a universal “living wage.” However, there is considerable distance between a “living wage” and the wage and other labor standards that dominate the apparel industry. Reducing this gap requires novel thinking in multiple domains. Alta Gracia is important because it challenges the status quo and points the way to alternative production models.

We describe the Alta Gracia enterprise as “bold” because the track record for such projects is not encouraging. Alta Gracia stands a better chance of succeeding because of its sponsor, Knights Apparel. As the leading producer of collegiate apparel, Knights has the critical ingredients of capital and expertise, along with a management team personally committed to its success. The company has joined a private multi-stakeholder approach that draws together business, labor and non-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 and their families.

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TABLE OF CONTENTS

Preface.........................................................................................................................1 Dedication ...................................................................................................................2

Introduction .................................................................................................................3

Background and Start-up Period .................................................................................5

First-Year Standards, Implementation and Verification ...........................................10

What Does Salario Digno Mean? .............................................................................12

Impacts: Workers, Families and Community ..........................................................13

Individual Worker Stories .........................................................................................15

Financial and Operational Analysis ..........................................................................22

Production Profile: Burdens and Benefits............................................................22

Business Model: Initial Performance and Challenges Ahead ..............................25

Issues: Jobs, Development and Competitive Markets ..............................................27

The Near-Term Challenge ........................................................................................29

Wider Implications of Alta Gracia ............................................................................30

About the Authors .....................................................................................................33

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Preface

This Research Progress Report covers developments at the Alta Gracia apparel factory in the Dominican Republic since the August 30, 2010 publication of the initial Research Report on Alta Gracia: Branding Decent Work Conditions. That first Report traced the factory’s start-up period in early 2010, contrasting its unique practices of paying a “living wage,” respecting labor rights and 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 practices are verified by the Workers Rights Consortium. Alta Gracia is owned and operated by Knights Apparel Inc., the leading supplier of collegiate branded apparel. Findings from this research raise challenges to assertions that international cost competition requires the suppression of worker rights and wages in foreign factories.

This second-stage research updates and expands on the initial Report. The implementation of Alta Gracia’s unusually high labor standards is assessed along with the brand’s product penetration of the collegiate apparel market. For this new study, Professor Edward Soule of the McDonough School of Business has joined Professor John Kline of the Walsh School of Foreign Service, adding in-depth analysis of the Alta Gracia business model and the financial and marketing challenges it faces. This Report also contains more extensive examples of the way Alta Gracia’s factory affects people’s lives. Interviews with workers and their families provide general descriptions while a series of individual vignettes detail the real-world impact of Alta Gracia’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 400 college bookstores. Where Alta Gracia products have gained adequate floor display space, the apparel 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 less support future expansion to hire more workers. The next 18 months will be crucial to build on the initial momentum to assure the factory’s viability. Such success would not only benefit current and future workers at Alta Gracia; it would challenge traditional beliefs by offering a competitive labor-management model that respects labor rights and offers employees “Work with a Salario Digno.”

The research and publication of this Report was funded by a grant from Georgetown University’s Reflective Engagement Initiative. This program supports public scholarship, i.e., academic research that contributes to a major public issue. Further work on Alta Gracia is being supported by a new University program on Complex Moral Problems that can fund the continuation of research on such issues. The authors gratefully acknowledge this financial support and appreciate Georgetown University’s commitment to academic research with public policy applications.

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Dedication

LaMarr Q. Billups was Assistant Vice President for Business Policy Planning at Georgetown University. Beginning with his prior position at the University of Wisconsin-Madison, LaMarr worked to adopt and implement university codes that would prohibit the “sweatshop” conditions he witnessed on overseas trips. At Georgetown University and through his service on the Board of the Worker Rights Consortium, he was an early supporter of the Alta Gracia project. As the Chair of Georgetown’s Licensing Oversight Committee, LaMarr worked closely and easily with students, faculty and other administrators, displaying dedication, candor and his own personal style 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.

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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.

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Research Progress Report1

Alta Gracia: Work with a Salario Digno

Introduction

Alta Gracia is a new unique brand of clothing from Knights Apparel that provides workers in Villa Altagracia, the Dominican Republic, with a pathway out of poverty and hope for a better future. Beginning operations in April, 2010, the Alta Gracia factory produces t-shirts and hooded sweatshirts for colleges and universities throughout the United States. The enterprise supports 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 companies can 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 their families. This wage is more than three times the minimum wage for apparel workers in the Dominican Republic.

The Spanish translation of “living wage” is salario digno -- a wage with dignity -- which better captures 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, the right to be treated with dignity and respect on the job, and the right to form a union, which has already been organized and approved.

A respected independent organization, the Worker Rights Consortium (WRC), verifies Alta Gracia’s compliance with these standards through intensive on-the-ground monitoring of the factory. Every Alta Gracia product carries a WRC tag confirming the product was sewn by workers who are paid a living wage, have a union to represent them, and are treated fairly when they come to work. Alta Gracia is the only clothing brand in the developing world known to achieve these standards.

The living wage puts Knights Apparel at a competitive disadvantage. As other companies in the global apparel industry look for the bottom rung on the cost ladder, Alta Gracia is perched at or near the top. Management hopes to offset some of the additional costs through increased worker productivity. However, productivity gains alone cannot sustain the operation. Alta Gracia must also establish its competitive presence at a quality and price level against already well-entrenched brands, without bearing the requisite marketing costs generally required to establish and maintain a new fashion brand. 1 This report summarizes findings from recent research that updates progress since an initial Research Report by John M. Kline, Alta Gracia: Branding Decent Work Conditions, 30 August 2010, accessible online at: http://ibd.georgetown.edu/117448.html.

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In the meantime, management of Knights Apparel is sacrificing a nontrivial portion of the company’s earnings in order to get the project off the ground. Rare indeed are comparable instances where the managers of an apparel manufacturing facility in the developing world prioritize the welfare of its workers over short-term profit maximization.

Key to Knight’s strategy is the ability to penetrate university bookstores. As distribution channels go, this one has formidable barriers to entry. For one thing, it is a tiny sliver of the apparel marketplace.2 Yet it is highly sought-after: powerful global brands vie for placement on extremely constrained floor spaces. Worse yet, these brands have long-standing relationships with the bookstores, over 1,200 of which are reportedly managed by two companies.3

2 According to the National Association of College Stores, university bookstores recorded sales of $10 billion in 2010, including all categories of merchandise. http://www.nacs.org/about.aspx 3 James Koch, “An Economic Analysis of Textbook Pricing and Textbook Markets,” ACSFA College Textbook Cost Study Plan Proposal, p.6. online, available at: http://www2.ed.gov/about/bdscomm/list/acsfa/kochreport.pdf (accessed August 31, 2011)

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.

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And yet Alta Gracia garments offer consumers a compelling proposition: equal or better quality as compared to the most recognizable brands at an equivalent or slightly lower price. On top of that, point of purchase signage highlights the human dimension of the Alta Gracia brand. It is not surprising that the merchandise has sold at the same pace as established brands and commensurate with the floor space allocated to it.

After its first year of operation, Alta Garcia remains a work in progress and its viability is an open question. On the one hand, a major hurdle has been cleared. One year ago a major unknown was whether enough consumers would forego recognizable brands and purchase Alta Gracia garments. Although the exact size of the consumer base cannot be determined, it is not trivial. The experience of the Duke University bookstore is telling: allocated considerable floor space, sales of Alta Gracia products reached one-half million dollars in November, 2011 without deterioration in overall apparel sales. That is the good news. Another bit of good news is that nearly 400 bookstores now carry Alta Gracia products. The main difficulty is that, with a handful of exceptions, bookstores have not devoted enough display space. Orders are running at an unsustainable level—making the next year a critical time for this bold and important venture.

Background and Start-up Period4

The Alta Gracia concept is rooted in the anti-sweatshop campaign of the 1990s, sparked by revelations that many expensive, brand-name apparel products were made in developing country factories under horrible work conditions that included child labor, forced overtime, unsafe equipment, sub-poverty wages, worker abuse and anti-union violence. Organized protests soon centered on college campuses where students demanded that administrators require labor codes of conduct for any licensed collegiate apparel that would carry the university logo. Following a wave of demonstrations that included widely-reported sit-ins, most universities adopted labor codes contractually committing licensees to assure that their collegiate apparel were not made in factories with “sweatshop” conditions.

The next challenge was monitoring implementation of these codes. Most brand apparel companies do not produce anything. Rather they subcontract with literally thousands of “contract manufacturers” around the world, using their purchasing power and ability to pit producer against producer to achieve the lowest possible costs. As revelations of continued labor abuses emerged, student pressure, coordinated by United Students Against Sweatshops (USAS), led to a grudging agreement by apparel companies to disclose the location of factories producing collegiate apparel. With the locations in hand, oversight organizations were finally in positions to monitor code compliance. One such organization, the Fair Labor Association (FLA), included industry and university membership while another group, the WRC, was formed with only university and student representation.

4 This section is adapted from Kline, 2010.

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Notwithstanding the oversight mechanism, abusive practices continued to emerge, centering around two issues. The sheer number of globally-scattered contract manufacturers producing collegiate apparel proved a formidable obstacle to effective monitoring. In practice, the monitoring organizations have responded to complaints from foreign workers that were aware of the code standards, knew how to contact monitoring groups, and were willing to risk firing or even violence for reporting the violations. Remediation of violations proved slow, frustrating and sometimes futile. Apparel companies resisted taking responsibility for the losses and hardships workers suffered at contract manufacturing plants that had been found in violation of university 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 codes and guidelines exist, including the Collegiate Licensing Company (CLC) Special Agreement Regarding Labor Codes of Conduct, the FLA Workplace Code of Conduct, and the WRC Model Code for Universities. The CLC Code Agreement provides a type of baseline framework to encompass the codes of member universities. The FLA Code provides more specific standards with compliance benchmarks while the WRC Model Code generally proposes the highest labor standards.

Individual university codes of conduct for apparel licensees vary quite widely in the level and specificity of their provisions. The baseline standard on compensation recognizes that employee wages are essential to meet basic needs but requires only that employers pay the higher of the legal minimum or prevailing industry wage. Stronger codes define a “living wage” standard calculated to meet a specific list of essential needs for workers and their families. Codes also vary from simply stating worker rights to freedom of association and collective bargaining to more specific standards of conduct and treatment in how management relates to workers seeking to form a union to negotiate on their behalf.

One proposal to address these two issues is a Designated Supplier Program (DSP) where the production of licensed collegiate apparel would be consolidated into a relatively small group of factories that could be monitored and certified to meet code standards. Core standards would include the payment of a “living wage” and full respect for labor rights, including freedom of association. Licensees would be required to follow pricing policies that would enable the Designated Suppliers to implement the standards. Opponents to the DSP cite the added costs as well as logistical impediments. Advocates of the proposal have not secured enough university endorsements of the DSP to support its adoption.

Against this background, conversations between the WRC and Knights Apparel led to a project that offers a possible bridge to a new model, particularly on labor-management relations and payment of a “living wage.” Knights proposed to establish a factory that would produce collegiate apparel using the type of high labor standards proposed in the DSP and market the merchandise under its own line of licensed collegiate apparel. To understand management’s

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rationale, note that Knights does not own a recognizable brand. Rather, its merchandise carries the brand of other organizations (e.g. the NCAA and the NFL) and is distributed primarily through mass market retailers (e.g. Walmart and Target). By producing goods in a plant meeting exemplary labor standards, Knights would gain entrée to university bookstores – a very high value distribution channel – without the costs of licensing another brand. If successful, Knights stood 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 Villa Altagracia’s free trade zone (FTZ), a decision that can only be understood from an historical perspective. The factory that houses Alta Gracia had been occupied by a Korean-owned contract manufacturer, BJ&B, for the production of hats. At its zenith, BJ&B had employed as many as 3,000 workers. University code violations, including harsh treatment and the dismissal of workers who were thought to support organizing a union, led to significant protests by USAS and university licensees. Facing substantial sustained pressure, BJ&B finally recognized a representative union and reached the first collective bargaining agreement in a Dominican Republic FTZ that included a wage increase.

This signature achievement in the anti-sweatshop movement soon turned sour as the brands shifted their orders to other factories, causing BJ&B to lay off workers and, eventually, to abandon the facility in 2007. To make matters worse, the company refused to meet its severance pay obligations, precipitating another battle. A handful of workers from the company’s former union held firm against unfair partial settlement offers. With the continued support of university students, these workers finally received overdue payments. But they were without jobs. And no other significant company established operations in the FTZ, perhaps because of the union success 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.

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Knights Apparel agreed in advance to respect freedom of association in its new factory so the union history of former BJ&B workers was not a deterrent whereas their experience in apparel production was an attraction. In fact, several former workers in the union leadership were included in discussions between Knights Apparel and the WRC that led to the creation of the Alta Gracia factory. This initial pattern of cooperative, fair discussions reflecting a respect for basic labor rights laid the foundation for a different style of labor-management relations – one based on trust that grew from experience as agreed upon standards were actually followed during the initial phase of the Alta Gracia’s startup.

Central among the key labor standards was the guarantee of a “living wage” – the notion that a full-time worker should earn enough to pay for the basic necessities of life. Conceptually similar to a legal minimum wage, this voluntary “floor” for worker pay is advocated because the legal minimum wage in most developing countries does not meet basic needs. Moreover, compliance with minimum wage and other labor laws and regulations is rarely enforced. Improving this state of affairs is unlikely because it is designed to attract foreign investors and to keep indigenous manufacturers from seeking out lower cost alternatives.

Opponents to a “living wage” raise practical concerns: What should it cover? To whom should it apply? Additionally, they assert that a “living wage” is not realistic from a competitive point of view. The WRC calculated a “living wage” for the Alta Gracia factory by collecting local costs 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

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.

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discretionary spending.5

In October, 2011 the minimum wage applicable to FTZ workers was increased to RD$5,940. It is 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, 2011 the adjusted “living wage” rate for Alta Gracia employees was RD$20,893, or over 350% above the legal minimum wage (and still 330% higher than the projected legal minimum raise after the scheduled January, 2012 increase). The cost of maintaining this wage differential is actually even greater than it appears because employers in the Dominican Republic are assessed for the cost 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.

Assuming the primary wage-earner should be able to cover the needs of three people in a four-person family, the calculation came out to a monthly salary of RD$18,152.99, equivalent to US$497.34 in October 2008. The comparable monthly legal minimum wage at the time in the Dominican Republic was RD$5,400, or less than one-third of a “living wage.”

Employee Wage Cost Comparison (November, 2011)

Monthly Wage Benefits Total Total (US$)

Minimum FTZ Wage RD$5,940 RD$2,257 RD$8,197 $216 Alta Gracia “Living Wage” RD$20,893 RD$7,939 RD$28,832 $759

These 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 university licensing standards for collegiate apparel. There are other important elements to the Alta Gracia standards, including provisions for their verification, which will be discussed below. Together the standards and their implementation form an integrated pattern of labor-management relations that is better captured by the salario digno translation of “living wage,” also explained below. In summary, as the Alta Gracia factory commenced operations, it was poised to bridge the gap between demands for better working conditions and assertions that such demands were unrealistic.

5 The WRC methodology is described more fully in Kline, 2010 and detailed online at the WRC website: http://www.workersrights.org/

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First-Year Standards, Implementation and Verification

In its first year and a half of operation, the Alta Gracia factory met or exceeded its commitment to pay workers a “living wage,” respect labor rights and attain high workplace standards in health, safety and respect for its employees. This evaluation is attested to through the WRC’s rigorous monitoring process that includes visiting the factory to observe and inspect workplace conditions, reviewing factory records to compare payroll accounts to worker pay slips, communicating with managers and union leaders, interviewing workers in off-site locations and responding to all complaints. Any violation of agreed standards is reported to Knights Apparel with a recommendation for remedial action and a timeline for completion. The WRC can suspend or withdraw the use of its verification hangtag on Alta Gracia apparel if corrective action is not taken in a timely manner.

The WRC’s verification reports, available on the organization’s website, cover the period up to September 1, 2011. They found Alta Gracia in full compliance with wage, hours and overtime standards. Monitoring identified a few reporting or calculation errors that were immediately corrected, with steps taken to prevent a recurrence. The factory was found to have complied fully with anti-discrimination standards, prohibitions on forced and child labor, respect for women’s rights, and the “dignified and respectful treatment of employees.”6

The Maquiladora Health and Safety Solidarity Network (MHSSN) joined the WRC in monitoring Alta Gracia’s workplace practices. Comprised of 400 volunteer occupational health and safety professionals, the US-based MHSSN provides information, technical assistance and on-site instruction about workplace hazards. Knights Apparel consulted MHSSN during the factory’s renovation and an inspection team has visited the facility twice.

Along with training for management and workers, MHSSN inspectors offered suggestions that were accepted and implemented to improve electrical wiring and insulation, lighting, ventilation, chemical exposure, machine safety and ergonomics. According to the WRC, the Alta Gracia factory “has worked to implement industry best practices, above and beyond the legal minimum requirements, to prevent workplace accidents and illnesses.”7

In verifying Alta Gracia’s compliance with its unusually strong commitment to respect rights to freedom of association and collective bargaining, the WRC reports the factory’s conduct “has been exemplary and should serve as a model for other factories.”

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6 “Worker Rights Consortium Verification Report: Findings”, WRC, 23 December 2010, p. 14, online, available at:

Soon after the factory opened, employees met in the plant during normal work hours for training sessions with NGO and union

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.

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representatives on labor rights. In the spring of 2010, employees formed a committee to explore the 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.

Alta Gracia management meets with union representatives regularly on a range of issues. For example, the representatives requested and management agreed to change the times of daily breaks and to alter the factory’s schedule prior to some Thursday holidays so workers could spend long four-day weekends with their families. SITRALPRO is preparing a contract proposal to submit to collective bargaining, a process in which the company has agreed to negotiate in good faith. Overall, the WRC declares that “management successfully created an atmosphere within the factory where workers felt free to unionize without fear of management retaliation – a first, in our experience, in any export apparel factory in the Global South that supplied a US brand or retailer.”9

The WRC verification reports were corroborated during the authors’ research in the Dominican Republic, most recently during July and November, 2011. Meetings with management, union leaders, union members, and non-union workers (of whom there are less than ten) confirmed that the overall state of management-labor relations was by far the best of any factory in their experience. Workplace conditions drew consistent approval with several workers commenting on how training alerted them to safety risks they had disregarded in other jobs. These factors all contribute to the strong commitment expressed by all the workers to producing a quality product that will sustain their opportunity for continued employment with Alta Gracia.

9 Ibid.

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.

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What Does Salario Digno Mean?

The English term “living wage” is generally translated in Spanish as salario digno, or wage with dignity. Whereas the English term basically signifies a level of monetary compensation sufficient to pay for the fundamental necessities of life, the Spanish term connotes more than just pay rates, encompassing other aspects of how workers are treated and how they feel about themselves, both collectively and individually. In multiple interviews, Alta Gracia workers discussed the importance of these broader notions and rejected the idea that higher wages alone are sufficient for a salario digno. The right to be represented by a union was an essential element for nearly all workers, but other responses stemmed from more personalized values and experiences that often reflected pride in their work as well as their family responsibilities and accomplishments. In their own roughly-translated words, the following unattributed comments help 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.”

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Impacts: Workers, Families and Community

Assessed after a year’s experience, the impacts of Alta Gracia’s “living wage” policy are already visible physically and manifest psychologically in the lives of the workers, their families and the community of Villa Altagracia. One type of impact arises from choices in allocating weekly income that, while still modest, is several times more than most of the workers have ever received. Local NGOs provided early briefings with information on budgeting and saving, but the workers appear to have adapted easily to income management responsibilities. Although most earnings still go for the purchase of basic necessities, the spectrum of alternative uses for disposable income varies with the individual, ranging from surprising the children with an ice cream 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 frequent beneficiaries were children who now can enjoy regular meals of more nutritious food along with the clothes, books, and other expenditures needed for schooling. Housing improvements are often 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 hung sheets, and concrete roofs instead of tin sheets. Some workers save a portion of their wages to build up a down payment and qualify for their first-ever bank loan.

Other frequently noted expenditures are the purchase of basic home appliances such as a refrigerator or a clothes washer. Workers report that having more money enables them to change shopping habits, permitting a greater variety of healthier food choices for the family. They can also purchase goods in larger and less expensive quantities; for example, selecting a sixty-pound bag of rice instead of having only enough cash to buy small, more expensive packages every few days. Some workers are returning to school to complete their education or to pursue advanced studies while others must first repay funds borrowed from relatives during periods of unemployment.

Nearly all of this activity stimulates the moribund economy in Villa Altagracia. The economic multiplier effect would predict that the wages paid to Alta Gracia workers create significantly

Interior room dividers and appliances are some early improvements Alta Gracia workers finance with higher wages.

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more wealth as they circulate through the community. Examples include increased demand for construction materials for home improvements as well as appliance purchases such as refrigerators, stoves, washing machines and motor scooters. Paying back money borrowed from family and friends increases their potential spending power. Banks gain new customers with sufficient financial stability to qualify for first-time loans. Childcare centers improve their quality with more children attending from the families of Alta Gracia workers. Small restaurants open outside the FTZ’s gates to provide lunchtime options.

While economic impacts are visible, psychological impacts are expressed in the words of Alta Gracia employees. One common refrain is family. Many workers had suffered long periods where their choice was unemployment or minimum wage jobs in Santo Domingo or other distant cities. The time and expense of commuting forced parents to leave home before dawn and return well after dark, or alternatively sleep away from home and, at most, spend time with their family on weekends or often only Sunday. Regular absences and constant financial worries combined to loosen family bonds and deny children parental guidance and nurturing. A salario digno meant freedom from daily worry and fear about “What can I feed the kids? How can we pay the rent? What happens if we get sick?” Alta Gracia’s local employment opportunity and unusually high wages address both these causes of psychological strain, permitting an easier and more cohesive family life.

Another expression of salario digno is the employees’ feelings at work and about work. More than simply higher pay, salario digno meant respect for labor rights and being treated with dignity 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 health and 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 individual and collective self-worth is recognized and valued at Alta Gracia. This feeling is reflected in the “dignified and respectful treatment of employees”10

The story of one young woman captures the difference between the conditions in many “sweatshops” and salario digno.

documented by the WRC as well as management’s response to the workers’ union.

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10 Ibid, p. 14.

In her previous job in an apparel factory she was given one break 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 that sometimes she would; but other times her requests were denied and there were occasions when it became impossible to wait. She explained further that pregnant women were particularly vulnerable to this treatment. One can only imagine the humiliation and anger of being subjected to such petty tyrannies. One can easily imagine the joy of working in a place where, as this employee put it, “we are our supervisors.”

11 Related to the authors in an interview on July 21, 2011

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Salario digno also encompasses the role work should play in how individuals view their opportunities for choice and hope for the future. Remembering her jobs at other factories, one worker 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. Work only allowed them to live a day longer in the same conditions, without any hope for improvement. Alta Gracia’s policies empower workers to have dreams, set goals and make choices, providing a pathway out of poverty.

Individual Worker Stories

The motto adopted by the Alta Gracia brand is “Changing Lives One Shirt at a Time.” While the above description provides an overview of how lives are changing in Villa Altagracia, the true measure of this impact is more vivid and meaningful when viewed from the perspective of individual workers and their families. With their permission, the following summaries relate the personal stories of some of those workers. There are many more workers, and many more stories, but these capsules are representative of the significant effects Alta Gracia has produced in workers’ lives in just its first year of operation.

Isabel

Isabel 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. Life became harder when her wooden house burned down in 2008. She was able to move into her mother’s house next door but her husband had to live with his family in their house. After being hired for a job at Alta Gracia, Isabel was able to secure a loan to help rebuild her house and reunite her husband and young daughter. She even added internal walls in the rebuilt house to replace the hanging sheets that previously were used to separate rooms. Isabel is now building an 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 her situation so well; they are not jealous of her good fortune but hope the factory can hire more people. 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.

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Ana

After losing her apparel job in Villa Altagracia’s FTZ, Ana worked for four years making men’s boxer shorts at a factory near the airport in Santo Domingo. She had to live away from home and went up to 15 days without seeing her two children, now ages 9 and 6, who stayed with her mother. She then spent nearly two years unemployed, although she found some temporary work as a cashier and in a hotel daycare center. She could only afford to rent a place so small the children still had to live with her mother. After starting a job at Alta Gracia, Ana rented a larger house. Now she can see her children every day and keep them close. She can also provide them a better education and she dreams of owning her own home one day. Ana believes the factory’s economic effects flow into the town’s economy, where the hardware firm and corner stores are doing well. She helped finance construction on a part of her mother’s house. “In this way I am passing along the wealth.” Working at Alta Gracia enables Ana to stay close to home and assist her 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.

Susy

Susy moved to Villa Altagracia as a young girl when her father got a job in the paper mill. She worked for nearly five years at BJ&B when it first opened. After she got married and had a first child, she left to care for the baby. She was unemployed for 18 years as three more children were born, but her husband was fully employed for 10 years and worked as a handyman the rest of the time. Unfortunately, his work did not provide adequate health insurance; they could not afford additional expensive treatment for a daughter born ill after another pregnancy and she died. 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 by Susy, her husband and four children. Another result Susy cites with pride is being able to support her daughter’s dream to play on the nation’s Olympic-level volleyball team. After

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.

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winning regional and national medals, the 15-year-old now travels each day to practice in Santo Domingo, which means money for transportation and other expenses to support her training. She will soon leave the country for the first time to play abroad in tournaments. Susy’s Alta Gracia job is changing their lives with new opportunity, greater security and strengthened family bonds.

Yolanda

Yolanda worked at the BJ&B apparel factory for nine years and was an active member of its union before the company closed. During Yolanda’s unemployment, her husband usually found work for a couple days a week. They could generally afford only two meals a day, if they were lucky. She was unable to pay for the medication needed to treat her high blood pressure. Since obtaining a job at Alta Gracia, Yolanda has repaid the money they had to borrow. They fixed the front of the family’s house where she lives with her husband, two children, her mother and her sister. She was able to enroll her children in a better school and is helping support her sister and mother, 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.

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.

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Clary

Clary was unemployed for several years and her husband’s work had to support the family of five. There was no money to repair their house or add internal walls to separate the living and sleeping areas. After she was hired at Alta Gracia, they made a few small improvements but postponed substantial renovation in order to pursue a business opportunity. Since she was a young girl, Clary had dreamed of starting a laundry. With employment at Alta Gracia, she was able to secure a loan and lease a small store space along the town’s main street. Her husband manages the business and they have hired their first employee. Clary gave birth to a daughter in June, 2011, expanding her family to six. She was able to take 12 weeks of maternity leave at full pay, 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 law provides 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 their use. With the new laundry business doing well, Clary was recently able to replace her home’s tin roof with a concrete one and add a new wall.

Aracelis

After losing her job at the TK apparel factory in Villa Altagracia’s FTZ, Aracelis worked for a year at a pants and shirt factory in Santo Domingo. Unable to afford public transport, she left her home at 5:30 am and hitchhiked to the capital city. She finished work at 4:15 pm but had no reliable way means of getting home. Aracelis next worked for two years making bathing suits at a different factory, also in Santo Domingo, from 7 am to 5 pm. After that she was unemployed

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.

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and just tried to sell things from her home. Life was very hard because she was the sole provider for four children and had no family living in Villa Altagracia. Aracelis was hired by Alta Gracia in March, 2010. The first thing she did with her pay was to send her oldest son, then age 20, to the university in Santo Domingo where he studies accounting. Aracelis was also approved for her first bank loan, enabling her to build an extension behind her home. She plans to live in it while renting out the front part of the house. Later she hopes to add a second floor that could also be rented, providing a stable income.

Ramon

Ramon is building a new house, employing neighbors to help with the construction. He and his wife have carefully planned the design and calculated the expenses, recording everything in a journal. With a job at Alta Gracia, Ramon qualified for a first-ever bank loan to help him finance the house. Previously he had to work in another city for a year and a half, earning RD$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. He can now spend more time with them and with his wife. They are also covered by Alta Gracia’s health insurance and Ramon has enrolled the children in a better school. Soon the family will enjoy life together in their new home.

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.

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.

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Matilde

Matilde was unemployed for four years after an apparel factory closed, sometimes working as a housekeeper but surviving with support from her sister and mother. Her husband had passed away and it was difficult to provide meals for her four children. There was no money for healthcare, even though she knew something was wrong. After being hired at Alta Gracia in the summer of 2010, Matilde obtained health insurance and scheduled a physical exam. She was diagnosed with cancer. The insurance covered a successful operation that December. Matilde’s salary at Alta Gracia allowed her to rent a house closer to the factory, enroll her children (then ages 3, 5, 15, 16) in better schools and progressively pay off her debts. She also began studying at the university in Santo Domingo, taking classes after work from 6 – 10 pm on Monday through Friday and 8 am – 2 pm on Saturday. Her older children take care of the younger ones while she’s in class. When asked how the children respond to her commitment to study at the university, Matilde related how hard the children were now working in their own studies, as shown in the good grades they were receiving at school. At the university Matilde is learning how to operate medical equipment. She wants to become a medical technician and help make sonogram and X-ray technology more easily available to residents of Villa Altagracia.

Manuel

Manuel began working at BJ&B in 1995 and was employed there until 2001, leaving before the union was formed. He worked at a hat factory in the capital for a year and a half, commuting by bus six days a week, leaving early and returning late. He spent most of his weekly earnings of 940 pesos on transportation and meals. Manuel then found a job that paid 1,500 pesos weekly in another factory producing hats and shorts. He endured the same daily commute for 6 years until political changes affected his employment. He learned about Alta Gracia from friends who had worked at BJ&B and his long apparel sector experience helped him secure one of the scarce jobs.

Employment at Alta Gracia provides Matilde and her children with health insurance and enough financial stability to pursue their educational dreams.

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With a “living wage” income and his savings on transport, Manuel put aside money toward building a family home. After qualifying for a bank loan, he completed a concrete house that provides room for the whole family. Without the long daily commute, Manuel can also spend more time with his children, now ages 16, 10, 7, and 3, making the house a real home. He hopes Alta Gracia expands to give other people an opportunity to provide their children with better conditions and a good education so that they will be able to pursue their own goals.

Ana Maria

Ana Maria has held low-wages jobs both in and outside the apparel sector. For example, when she worked in Bavaro (a town on the island’s eastern edge) in 2005, her job was to cook 40 pounds of rice and 30 pounds of beans every day. She had to use a wood stove and transport the food in a motorized cart. She was paid 3,000 pesos every 22 days for her cooking while her husband drove a truck and earned 7,000 pesos a month. The worst part of the work in Bavaro was that travel to Villa Altagracia took nearly a full day, permitting her to see the children only three days each month. Ana Maria started her Alta Gracia job in May, 2010. She was able to pay 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 wage will be education for the children. One son is already studying industrial engineering at the university while another is expecting to begin studying medicine. The other two children are still in public school. Now the sole support for her children, Ana Maria hopes company benefits may extend to include partial scholarship help for the children of employees.

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.

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Financial and Operational Analysis

Alta Gracia merchandise has passed a critical test: it sells. And Alta Gracia has transformed lives. But is the operation sustainable? Will it grow and transform more lives or will it come to an inglorious end. While it is premature to answer these questions, it is the ideal time to understand the forces and factors that will determine the outcome of this bold enterprise. Alta Gracia will either flourish or fail—muddling along indefinitely is not a lively possibility. In either case, the best defense against opportunistic interpretations is to understand and document what is actually transpiring. Thus far this Progress Report has concentrated on the background and history of the Alta Gracia initiative and its impacts on workers. Now we consider its viability as a business.

PRODUCTION PROFILE: BURDENS & BENEFITS

It is no exaggeration to describe Alta Gracia as the high-cost producer of licensed collegiate apparel. 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 nation does not afford easy access to the major supply chain hubs in Latin America or Asia. Thus, it is not surprising that of all the circum-Caribbean nations, the Dominican Republic suffered the most from the expiration of the Multi-Fibre Arrangement in 2005. Werner and Blair report that garment exports fell by more than half and 73,000 jobs were lost in the succeeding three years.13

12 According to a 2007 study by the Fair Labor Association, electricity in the DR was three times more expensive than in Mexico and 23% more than in Honduras.

Suffice it to say that Alta Gracia stands in sharp contrast to the race-to-the-bottom of the cost ladder that characterizes the global apparel industry.

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”, NACLA Report on the Americas, July-August 2009, pp. 6-10.

Before her job at Alta Gracia, Ana Maria had to live far from her four children. Now they live together and her better wages help support one son already studying engineering while another son (not pictured) prepares to enter the university to study medicine.

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To put the cost burden of Alta Gracia in perspective, consider an often-cited metric in the apparel industry: operating costs per minute. The computation is straightforward: divide the total operating costs (i.e., everything except material) over a specified period by the total minutes worked by the production staff (over the same period). A member of Alta Gracia’s management team estimates that the factory’s operating costs could be as high as 14 cents per minute when it reaches full capacity. Based on first-hand experience, he reported that facilities in Sri Lanka operate at approximately 5 cents per minute. Insofar as operating costs represent a significant portion of the total costs of producing t-shirts and fleece tops, operating at nearly three times the costs 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 depress earnings. 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 the following factors, it will not be trivial.

First, as the undisputed employer of first resort, some of Alta Gracia’s higher labor costs will be offset by a highly productive workforce. Management has been selective in terms of experience and reliability; and turnover and absenteeism have been negligible. An experienced workforce matters because, despite the characterization of “cut and sew” factory workers as “unskilled,” it takes approximately three months of training for a sewing machine operator to become minimally proficient. A reliable and stable workforce matters because the typical manager will add staff in the face of chronically high levels of turnover and absenteeism. Thus, although the Alta Gracia workforce is considerably more expensive than the norm, it should be quite lean and productive in comparison to the typical cut and sew operations.

Two other factors stand to offset some of Alta Gracia’s higher labor costs: supervisors and material waste. To explain, consider that the labor-intensive part of the apparel manufacturing process is an assembly line operation. Precut parts are sewn together and reinforced by teams of between 8 and 20 employees (called modules). Each employee sews a single seam. The work demands intense concentration on a repetitive task. Mistakes can result in the scrapping of partially completed garments – and disengaged employees are apt to make many mistakes. In response, garment manufacturers deploy a significant tier of supervision. Alta Gracia is different: two supervisors cover six modules. And rather than hovering over the shoulders of unhappy machine operators, these individuals serve as trainers and were described by workers and management alike as “problem solvers.” Alta Gracia modules are self-managed, with employees taking responsibility for the quality and quantity of their work. Indeed, management estimates that several more modules could be added without increasing “supervision.”

These three factors should cushion the financial impact of paying a “living wage.” However, the magnitude of that cushion should not be overstated: Alta Gracia will still be a high cost producer. To illustrate, consider that the payroll for 100 Alta Gracia workers is $75,900 per month ($759 times 100). And consider that a similarly configured factory could be set up next

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door and pay the legal minimum wage cost of $216 per month (with benefits). Now, assume that the neighboring factory required twice as many employees to produce the same output as 100 Alta Gracia workers. In that rather farfetched case, its payroll would be $43,200 ($216 times 200) or not quite 60% of the Alta Gracia payroll. Productivity gains cannot overcome a cost differential that is rooted in the fact that three people can be hired for 85% of the cost of a single Alta Gracia employee.

The financial impact of the above factors cannot be quantified until the factory achieves a steady state of normalized production. At present, the plant is grossly underutilized by the production for which it was designed. The factory can produce 30,000 units per week, but actual production has been closer to 24,000 units (as of November, 2011). And that 80% capacity utilization rate is deceiving. Orders from university bookstores have fallen short of expectations and Knights management was faced with a decision. They could have furloughed or terminated workers but chose, instead, to shift production of standard Knights merchandise from contract manufacturers around the world to Alta Gracia. Doing so kept the workers employed but much of their output has 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, and unit sales prices. Injecting this production saved the day for the Alta Gracia workers, but it confounds any meaningful analysis of the financial or operational performance.

In shifting production from contract manufacturers to Alta Gracia, Knights moved from low cost producers to a high cost operation. As explained below, the Alta Gracia factory is predicated on a premium product for a premium distribution channel. Knights Apparel is bearing that extra cost for now but the arrangement is not sustainable.

The cost structure and underutilization of Alta Gracia may strike some readers as dire and insurmountable. And they would be if Alta Gracia were just another cut and sew factory in the global apparel industry and if its sponsor were did not have the resources to overcome some serious difficulties. However, Alta Gracia is not just another garment manufacturing plant:

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.

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owing largely to the attractiveness of its mission, the operation has received considerable attention and support. Additionally, Knights Apparel has the managerial expertise and capital to move the project forward. To explain how management intends to rationalize its cost structure and utilize the factory, an explanation of the Alta Gracia strategy is in order.

BUSINESS MODEL: INITIAL PERFORMANCE AND CHALLENGES AHEAD

The Alta Gracia strategy is straightforward: produce premium garments and distribute them through a high value channel, university bookstores. A key element of this strategy is that it would be executed without an established brand and without a sales force with the heft to service a highly fragmented national market. This is a key element because the enterprise cannot prosper unless Alta Gracia garments command prices that are comparable to those of recognizable brands, but without incurring the prohibitively high costs of establishing a brand or maintaining a national sales force. If successful, Knights Apparel stands to achieve margins that are sufficient to absorb the increased labor and operating costs that are not offset through productivity gains. In effect, lower sales and marketing costs make it possible for Alta Gracia employees to receive a “living wage.”

At first blush, this is not a realistic strategy. As discussed earlier, gaining access to university bookstores 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 other brands have established cachet with consumers and long-standing relationships with bookstore buyers. Access to this highly sought-after floor space was achieved by positioning Alta Gracia to gain the backing of student activists and similarly committed faculty and administrators. To elaborate, 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 of Alta 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.

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The value proposition to the bookstores is compelling. As discussed earlier, the sales and margins per square foot of Alta Gracia merchandise are indistinguishable from those of other premium priced garments. For those stores that are managed by the universities (referred to as independents), 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 College Booksellers and Follett Higher Education Group), universities control the space in which they do business through limited duration operating agreements. Under the circumstances, there is no rational reason for not accommodating their client and landlord.

The value proposition for the consumer is more complicated. The purchase of an Alta Gracia garment entails sacrificing the cachet of a popular sports brand (e.g., Nike). However, sales thus far suggest that consumers are willing to do so, probably because the university logo is their dominant consideration. Once the influence of a recognized brand is neutralized, purchasing decisions 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 to determine the extent to which consumers are influenced by the point of purchase cause-marketing materials or the WRC verification tags. Anecdotal evidence suggests that the perceived quality of Alta Gracia garments is the dominant consideration, but a formal study is clearly warranted.

Given its barriers to entry, Alta Gracia’s initial performance has been impressive. Merchandise is in over 400 bookstores. Unfortunately, most of those stores have devoted little more than a token amount of floor space. So although Alta Gracia has achieved fairly wide penetration of the universe 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 a longer-term goal of profitability. Management estimates that breakeven would be achieved if university bookstore sales accounted for half of the plant’s output or approximately 720,000 units per year. Orders are expected to be roughly half of that level for the 2011-12 academic year. Longer term, orders would need to quadruple in order to utilize the productive capacity of the plant, provide a return to Knights Apparel, and keep the Alta Gracia workforce gainfully employed.

These objectives may seem unattainable but on closer examination they are quite realistic. To begin, Alta Gracia products are not yet sold in two-thirds of the more than 1,200 college bookstores across the United States. Considering only bookstores already selling Alta Gracia merchandise, 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 bookstores matched the purchases at Duke University, the employment of Alta Gracia’s workforce would be secure. Based on recent sales performance, management estimates this result could be achieved if such stores devoted only 6 or 7 percent of their apparel floor space to Alta Gracia merchandise.

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If these marketing targets are achieved, the brand would have legs and management could look toward expanding into an adjacent building and hiring additional workers.

Issues: Jobs, Development and Competitive Markets

Alta Gracia’s commitment to a “living wage,” respect for labor rights, and other enhanced workplace standards challenges core assumptions about the “sweatshop” model that dominates the global apparel industry. The earlier Research Report14

The first issue concerns the possibility that paying Alta Gracia workers a “living wage” deprives others of employment opportunities. Since Alta Gracia pays workers over three times the minimum wage, why not provide minimum wage jobs to three times as many workers? In theory, this makes sense. In reality, it is not feasible. The “living wage” is a key feature of the Alta Gracia brand and a major reason why it is offered in university bookstores. The argument that 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 already being supplied.

traces past debates and addresses several issues where Alta Gracia’s approach calls into question assertions that “sweatshop” jobs are justified by the absence of a better economic alternative. Further research confirms and extends this analysis, particularly on three issues: more jobs versus better jobs; “sweatshops” as a path to development; and the competitive dynamics of the global apparel industry.

14 Kline, 2010.

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.

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A second issue centers on the argument that low-wage “sweatshops,” though undesirable, are a stage 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, such as the Dominican Republic, where such progress has been elusive at best. Development is a highly idiosyncratic process and lessons learned from one country’s experience do not necessarily apply in other countries. Sometimes carefully choreographed government policies have lifted people out of poverty, not free market ideology, but unfortunately many developing countries are not governed wisely or consistently. In any event, the evidence is not clear and convincing enough to endorse the status quo of “sweatshop” labor conditions on the basis of economic theory.

The third issue lies at the heart of conventional wisdom about economic realities in a global apparel industry. Most economic analyses attribute the industry’s low wages and poor labor conditions to competitive market pressures on apparel firms. Thousands of factories compete to fill 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 factory owners 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 marketplace competition. However, if the industry’s full business structure is considered, a distorted picture of market competition emerges. The highly competitive conditions facing thousands of small developing country apparel factories contrasts markedly with the relatively small number of large, developed country brands and retail firms that enjoy oligopsony bargaining power. The big 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

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.

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ideology that free market competition dispassionately allocates costs and benefits among parties in the global apparel industry does not match the sector’s dichotomous competitive market structure.

The Near-Term Challenge

Prospects for the Alta Gracia brand rest largely with two groups: merchandise buyers and managers 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 and logo, but there will be several brands from which to choose. Product design, quality and price determine 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 social marketing strategy to inform potential consumers about the exemplary labor conditions under which its apparel are produced, trusting that this association will be meaningful to the person making the purchase. This process depends heavily on individual students and campus organizations to alert and inform others about the Alta Gracia difference through seminars, articles, tabling, posters and social networking channels. Supported by groups such as United Students Against Sweatshops and United Students for Fair Trade, these activities are progressively taking hold. Some faculty and university administrations have also recognized Alta 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 recognition of the substantial differential between the standards under which collegiate brand apparel is produced. This step would involve more institutional action at the level of university administrations. Following the past decade’s student protests against “sweatshop” conditions, most universities adopted codes that set minimum labor standards for apparel licensees. Despite continuing monitoring and enforcement problems, these codes offered some reasonable assurance that a college’s logo will not appear on apparel produced under extreme labor conditions -- essentially establishing a “not a sweatshop” standard. However, Alta Gracia is the only brand that is independently verified to comply with much higher labor standards by paying a “living wage,” fully respecting labor rights and providing exemplary safety and health

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.

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workplace conditions. More than simply “not a sweatshop”, the Alta Gracia brand pioneers a new approach that encompasses the broader concept of salario digno.

Interestingly, many colleges and universities have already adopted or endorsed codes of conduct for apparel licensees that call for such higher standards, including the payment of a “living wage.” Until now, however, the industry asserted such a wage standard was impossible to achieve because it would make the product commercially uncompetitive. With no company offering a product that met a “living wage” criterion, universities were essentially forced to accept 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 that was above the legal minimum and prevailing industry wage. If followed, these standards would favor Alta Gracia products as the only brand that complies with the wage provisions in the existing apparel licensing codes of many universities. Almost certainly, these codes have not been monitored from this perspective because, until now, no company had been willing to offer a product that could meet a “living wage” standard. Perhaps with Alta Gracia’s arrival, it is time to review university codes to reassess whether their stated terms are being met. These codes should guide university actions, including steps to assure that products meeting such standards and 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 “living wage” or “basic needs” code provision resolved to enforce such a standard. Arguably, however, those colleges should give Alta Gracia products preferential treatment in contracts, purchasing and bookstore displays. Such preferential treatment and increasing demand would clearly signal other producers to adopt comparably higher labor standards or risk losing market share.

Wider Implications of Alta Gracia

Alta Gracia is a managerial moral exemplar in an industry in which workers have not been accorded the respect they deserve. As with many ideals, there is plenty of space between what is transpiring 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 it realistic for all firms to pay a full “living wage.” But there is a wide spread between a “living wage” 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 to provide in the apparel sector. Over time, the benefits of its intelligent and humane approach to management should be evident, and they should be adaptable to a range of business models and pay scales. The long-term promise of Alta Gracia is the light it shines on these possibilities.

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The Alta Gracia workers appreciate the support of consumers who buy their products and hope this business model can expand to provide others an opportunity to improve their lives.

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About the Authors

Dr. John M. Kline is a Professor of International Business Diplomacy in the Walsh School of Foreign Service, Georgetown University. His teaching focuses on international business-government relations, international investment strategies and negotiations, and international business ethics. The second edition of Dr. Kline's textbook, Ethics for International Business: Decision-Making in a Global Political Economy, was released by Routledge in London and New York in May, 2010. He is the author of three other books as well as numerous scholarly articles and chapters in co-authored and edited books. Prior to joining the Georgetown faculty, Dr. Kline was Director of International Economic Policy at the National Association of Manufacturers. He received his doctorate in political science from The George Washington University and holds a masters degree in international relations from The Johns Hopkins University School of Advanced International Studies. Dr. Kline serves as a consultant to various international organizations and private multinational corporations. Recent projects include a comparative analysis for UNCTAD on foreign investment policy promoting small and medium-sized enterprises (SMEs) in Malaysia and Singapore, 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 social responsibility since 1999. In 2002 and 2011 he was awarded the Joseph F. Le Moine Award for Undergraduate and Graduate Teaching Excellence. Dr. Soule’s research considers two facets of business from a moral point of view: management responsibility and commercial regulation. His research appears in a range of scholarly books, journals, and reports: from The Academy of Management Review to The Journal of Philosophy and Medicine. Recent works include a 2009 article, “Principles of Managerial Moral Responsibility” (with Hedahl and Dienhart), that appeared in Business Ethics Quarterly; and an essay, “Regulation,” that was included in a 2010 collection 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 political philosophy that came at the conclusion of his business career. He practiced public accounting for twelve years, after which he served as the Chief Financial Officer of Edward Jones from 1986 to 1995. In 1999 he received a Ph.D. in moral and political philosophy from Washington University in St. Louis. Dr. Soule chairs the Board of Trustees of Rare, an international conservation organization headquartered in Arlington, Virginia (rareconservation.org). A native of St. Louis and a seasonal resident of Clarksville, Missouri, Ed is a devoted fan of the most illustrious organization in professional sports, the St. Louis Cardinals.

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