Living wage & responsible purchasing

^*Our aim is to achieve a minimum average score of 80% (4 out of 5) from our suppliers across the ACT purchasing practices assessment questionnaire. For further details on the ACT questionnaire, please see here.

Our Challenge

As part of our commitment to respect human rights, we understand the importance of a fair wage to help protect human dignity and enhance quality of life. This is why we have committed to work with our partners to achieve a living wage for factory workers. A living wage is the minimum income necessary for a person to meet their basic needs as well as that of his/her family, including some discretionary income.

Kmart sources from many countries, such as Bangladesh, China, India and Indonesia, which have low wage levels by world standards, and where many workers do not currently earn a living wage. This is particularly true in the apparel industry in Bangladesh where Kmart sources a significant proportion of our apparel and where wages have been historically lower than most countries in the region. As a result, we understand that contributing to solutions that will sustainably improve wages over the long term is a priority human rights topic for business.

In 2015, we launched a research project to better understand the challenges and opportunities associated with achieving a living wage for factory workers,; as a first step in developing a long-term strategy. This research, including consultations with global brands, trade unions, NGOs, suppliers and employer associations, highlighted a number of factors impeding progress toward a living wage. These included:

• Competition between brands and between suppliers across countries that creates downward pressure on prices and wages

• Inconsistent purchasing practices by brands, such planning and forecasting and costing and negotiation, that creates inefficiencies for suppliers that ultimately impacts (among other factors) the ability to pay higher wages.

• Restrictions on freedom of association that limits the ability of workers to organise and advocate for wage rises in some countries

• A lack of minimum wage and collective bargaining laws and mechanisms in some countries impedes the ability of all parties to negotiate fair and sustainable wage increase.

• Individual brand and factory initiatives had failed to lead to sustainable and scalable change in the industry.

A key finding of the research was the importance of partnerships. Sustainable improvements in wages cannot be achieved by individual brands and retailers working alone – they require active industry collaboration and partnerships with employers, trade unions and governments.

To further improve our understanding of our supply chain, in 2018 Kmart Group conducted benchmark analysis on wage levels in 12 supplier factories in Bangladesh drawing on industry benchmarks such as the Anker methodology, Asia Floor Wage and WageIndicator Foundation. This study showed that, on average, the total worker wages (excluding overtime) across these 12 factories were 75% higher than the legal minimum wage in the Bangladesh garment industry. However, the average total wage of workers in the study represented only 56% of a living wage based on the ISEAL Living Wage Benchmark (Anker methodology) at that time, highlighting that a significant gap still remains.

Our Approach

ACT and Industry-Wide Collective Bargaining

As a result of our research, in 2015 we joined 'Action, Collaboration, Transformation' (ACT), a collaboration between international brands and retailers, and IndustriALL Global Union, the international trade union federation. ACT aims to achieve a living wage in the garment and textile industry - in countries such as Bangladesh, Cambodia, and Turkey - by establishing industry-wide collective bargaining, supported by responsible purchasing practices.

Since joining ACT we have been working alongside its other members and with IndustriALL to assess the industrial relations and competitive context in key sourcing countries. These assessment have helped to identify the main factors impeding progress toward a living wage in each country, such as legal restraints on freedom of association and collective bargaining, and have formed the basis of ongoing country consultations with employer representatives and trade unions (along with government representatives), who are ultimately responsible for negotiating an industry agreement at a national level. Working in partnership, ACT aims to develop a clear roadmap toward industry-wide collective bargaining in each priority country.

ACT’s vision of industry-wide collective bargaining agreements and a living wage for garment and textile workers is a long-term journey with many challenges to overcome. But we are convinced this is the right path and the only sustainable solution. Industry-wide agreements will:

• ensure that many workers benefit from higher wages, rather than a factory-by-factory approach; and

• encourage employers to compete through innovation and quality, rather than low pay and conditions.

For more information on ACT’s country activities and progress, please visit ACT Global Purchasing Practices Commitments.

ACT Global Purchasing Practices Commitments

In December 2018, ACT publicly released its Global Purchasing Practices Commitments. The commitments are the result of three years of review and consultations aimed at developing a common set of changes and implementation measures on purchasing practices that will support the movement towards living wages in the garment, textile and footwear industry. In addition to our support for freedom of association and industry-wide collective bargaining agreements, the implementation of the ACT Global Purchasing Practices Commitments is a key part of our role within ACT, working in partnership with other retailers and brand members, and IndustiaALL Global Union.

The commitments cover five broad areas:

• Brands commit that purchasing prices include negotiated wages as itemised costs;

• Brands commit to fair terms of payments;

• Brands commit to better planning and forecasting;

• Brands commit to undertake training on responsible sourcing and buying;

• Brands commit to practice responsible exit strategies.

Compliance with the Purchasing Commitments is now an expectation for all buying and sourcing team members. All team members, as well as apparel suppliers, have been trained in the basic commitments, with further in-depth training and guidance planned on individual topics. Read more about the commitments please see here. For specific information on our methodology for ring-fencing labour costs, please refer to the ACT Labour Costing Protocol. Kmart applies the Cost Based Calculation Model (CBC) to isolate labour costs.

Payment terms

Kmart suppliers are paid in an average of 90 days in-line with our standard payment terms; however, all suppliers are offered access to finance facilities via our partner Prime Revenue, which enables early payment of invoices. Under this system, suppliers can request payment in as little as 5 days after the delivery of goods, and through the Prime facility, they will receive payment in-full for the delivery from their local bank. For this service, the supplier pays a small amount of interest to their bank until the the invoice matures (at 90 days or 7 days in Bangladesh) and the loan from the bank is paid out by Kmart via the Prime facility. The Prime facility has the benefit of allowing suppliers to improve their cash flow if needed (as Kmart provides a letter of credit which guarantees the loan). Individual suppliers may choose whether they are paid, for example, at 5, 10, 20, 50 days; however, they must pay interest for each day they use the facility. Further information can be found here.

For suppliers who traded using the Prime facility in FY22, the average payment term was 51 days.

Worker payments

Currently, 40.2% of the workers in Kmart’s own brand apparel factories receive their payments digitally. The remainder receive their payments via cash.

Piece rate arrangements are uncommon but most likely to occur in our apparel supply chain. Following a sample analysis undertaken in March 2023 of the audit report findings in 100 Kmart and Target apparel supplier factories, it was determined that approximately 2.3% of workers received piece rate wages and 97.7% received an hourly rate wage. From this sample analysis, all workers received at least minimum wage payment

Based on audit report findings in the last 12 months, there were 11 findings in Kmart and Target supplier factories indicating non- payment of minimum wage. These are all isolated cases with 23 workers impacted, which represent less than 0.01% of the total workers in all our factories. Remediation through corrective action plans has been completed and confirmed to ensure all workers are now paid at least the minimum wage.

Our Progress

ACT Global Purchasing Practice commitments

In the past year, Kmart has continued implementation of changes required to meet our December 2023 commitment on the ACT Global Purchasing Practice commitments, including:

• The continued implementation of a new open costing sheet with our team and suppliers to itemise and ring-fence labour costs. Approximately 95%^* of the apparel orders placed for our own brand clothing products in the past 12 months have complied with this open costing requirement.

• Continued roll-out of enhanced planning and forecasting mechanisms with strategic and core suppliers to improve accuracy of forecasts and maximise capacity planning in factories.

• The implementation of our responsible exit strategy and procedures in accordance with the ACT Responsible Exit Policy and Checklist.

• Completed the implementation of the first ACT purchasing practices baseline assessment with our team and suppliers, with 51 responses received from suppliers and 75 responses from team members. The assessment is the key mechanisms on which we will measure our progress toward our 2023 commitments. In late 2021, ACT released its first General Report summarising the results of the survey for all brands, which included feedback from 1,338 suppliers and 1,831 brand employees.

Although our actions on responsible purchasing alone will not ensure the payment of a living wage, the 2021 ACT baseline survey results indicate some areas where our actions have led to improvements (as perceived by our suppliers) as well opportunities for further improvement. For example:

• Kmart received an average score of 4.6 out of 5 on questions relating to ‘fair terms of payment’ and 4.4 out of 5 on questions relating to ‘better planning and forecasting’. These results indicate that a majority or a near majority of suppliers responded that these areas are ‘well-established and effective’.

• By comparison, Kmart scored an average of 4 out of 5 on questions relating to ‘purchasing prices include negotiated wages as itemised costs’. This suggests that, despite our recent actions to enhance open costing and ring fence labour costs, a majority or near majority of suppliers responded that this area is ‘established, but still needs improvement’.

We aim to continue reviewing and taking action to enhance the consistency of our purchasing practices over the coming year, with the next ACT purchasing practices assessment due in early 2023.

^*Suppliers compliant with our open costing requirement accounted for over 95% of the financial value of orders in FY22. We are working on a roadmap to achieve 100% compliance.