CASE STUDY: A combination of market changes has left a fledgling ethical fashion company struggling to keep afloat. A friend suggested buying currency forward - but, never a numbers person, Susan pushed hedging to the back of her mind and hoped the currency issue would resolve itself. It didn't

GALWAY-BORN Sheila Joyce trained as a nurse and qualified in 1994. Shortly afterwards she went to work in the African country of Burkina Faso for a large international aid agency. It was a stimulating and exciting experience which brought out her sense of practical compassion. In 2001, she returned to Ireland, working initially as an agency nurse mainly in large acute hospitals in Dublin.

However, she could not settle in the job. She found that, although she was happy to be home, she still wanted to do something that would continue to make a difference to the people she had met in Africa.

She began talking about this to her younger sister, Susan, over the first Christmas after her return home. Susan had studied fashion design in London and was now working as a junior fashion buyer in a large UK retail chain. She was eager to get back into fashion design and also to return home to Galway.

Very quickly the two young women began to formulate a plan. They saw significant potential in using cotton from Burkina Faso to make ethical clothing for women for sale in Ireland and possibly Britain via the internet.

Burkina Faso, a former French colony, is the largest cotton producer in sub-Saharan Africa. Although cotton represents less than 10 per cent of the country's gross domestic product, it still accounts for more than half of its export earnings and is its main source of foreign exchange. Furthermore, the country's share of world cotton exports has tripled over the past 10 years, something achieved in the face of a slump in world prices.

Using her contacts in Burkina Faso, Sheila's plan was to source the required cotton directly and to sub-contract the manufacturing to a women's co-operative, where the clothing would be made into her sister's designs. In order to generate a premium margin, this was to be a range of smart casual clothing with an ethnic twist.

It was to be an ethical, not an exploitative, venture with a portion of the profits, after all expenses, going to support community projects associated with the cotton producers.

Afrigarment, as the venture became known, would not be alone in adopting this type of approach - a number of larger and better funded enterprises, including some high-profile ones, were already seeking to support cotton producers in Africa and other developing countries.

For Sheila and Susan, Afrigarment had to be a practical business proposition, albeit one with a strong underlying ethical ethos. They were adamant that this was not a new aid organisation or not-for-profit venture. They wanted a viable, sustainable business that would develop and grow, but that would, at the same time, be of genuine help to those people whom Sheila had come to know.

The proprietors of the new business recognised that the market in Ireland for a relatively specialised product like this was limited.

Furthermore, with her experience in retail in Britain, Susan knew just how tight margins would be if they tried to establish themselves as a "label" sold in fashion shops. Their aim, therefore, was to access a much broader market via the internet.

Susan also came up with the idea of selling lengths of fabric printed in traditional African colours complete with a series of paper patterns for ceremonial robes and dresses. This proved to be a small, but profitable and distinctive niche business.

The sisters recognised that it would take time and money to build up brand awareness and sufficient business volumes to support them both financially. So Sheila continued to do agency work to generate an income while Susan focused on developing designs.

Despite some initial problems - mainly related to ensuring that all production met quality standards - the business fared well and soon the sisters started a complementary line of ethically-sourced baby clothing. They subsequently extended this to include a range of men's cotton boxer shorts and shirts, believing that their loyal female customers would also buy from the site for the menfolk in their lives.

Susan managed to get positive write-ups in a number of fashion and women's magazines in the UK. Shipping costs for such light items were low, relative to value, and Afrigarment was soon fulfilling primarily UK and Irish orders from a small warehouse in Galway, employing seven staff.

The business was gathering momentum month by month with a significant level of repeat orders, confirming to the sisters that they had found a good market niche. About two years ago, however, things started to go wrong.

The World Trade Organisation's Multi-Fibre Agreement in 2005 resulted in a flood of Chinese apparel on to the world market, with a consequent impact on sales of cotton by African producers. The cotton sector in Burkina Faso was hurt by lower world prices and the appreciation of the euro (to which the region's CFA franc is pegged) against the dollar.

In theory, the lower world price of cotton should have worked in favour of the Irish business, but this benefit was more than offset by the movement of the euro against the dollar - the primary currency in which cotton is traded - and by a rise in transport costs due to increases in fuel costs. The girls found that their costs per shipment from Africa were fluctuating far more than they had in the past, but they were understandably unwilling for this volatility to be reflected in the pricing of their products.

A friend suggested that they tackle this by buying currency forward - something of which neither of them had any experience. Sheila spoke to her bank manager, who put her in touch with the bank's Treasury division. Unfortunately, this left her more confused than ever and, never a numbers person, Sheila pushed hedging to the back of her mind and hoped that the currency issue would eventually resolve itself. It did not.

Furthermore, the increased availability of lower-cost finished cotton goods from Asia made it impossible for Afrigarment to look for price increases even as Irish costs, including postage, were rising.

This was compounded by a recurrence of the original difficulties with quality. Susan found herself forced to take a number of unexpected and expensive visits to Africa in an effort to resolve them. The sisters even began to wonder whether they should look to other developing countries equally deserving of their support. This looked like a realistic option but, upon investigation, they discovered that making such a switch would involve long lead times and potential suppliers were looking for what the sisters regarded as sizeable advance payments.

They had net cash reserves and could make the payments, but were uncertain about whether they should be committing the money at this time. They felt their money might be better spent developing a French website to target the sizeable Burkina Faso émigré population now living in France.

Another option would be to diversify into small household items from Africa, such as soft furnishings. The intention would be to purchase finished product from stock, thereby essentially developing a trading arm for Afrigarment.

That, however, would be a significant shift away from the company's core business and anecdotal evidence also suggested that this could be a very quick way to lose a lot of money if the venture soured.