H&M Faces an Uncertain Future as it Struggles to Adapt to Digital

Written by: Osman Husain on February 15, 2018

With almost 4,300 store locations in 69 markets across the world, fast fashion retailer H&M is a quintessential example of a brand that constantly strives to provide high-quality products at affordable prices.

It’s come a long way since its humble origins.

The first store of what would eventually be known as H&M was opened by Swedish entrepreneur Erling Persson in 1947, after inspiration during a trip to New York. Initially, the store catered to womenswear alone; and was called Hennes, Swedish for ‘Hers’.’

The addition of menswear came after Hennes acquired Stockholm-based retailer Mauritz Widforss in 1968. Stores were rebranded as Hennes & Mauritz with international expansion to Denmark, Norway, U.K, and Switzerland starting the next year.

The acronym H&M was adopted as the firm’s official name after it went public in 1970.

Photo credit: Wikimedia

Unprecedented expansion

H&M has grown by an average of 20% year-on-year in revenue since the 1980s. Part of the reason for this ferocious germination has been its ability to unearth the latest trends and sense what its target consumers aspire for.

Like other fast fashion companies, the product pipeline is quickly replenished as its marketing and design teams work in unison to keep clothes, shoes, & accessories up to date.

But it’s not enough just to make products that people want to buy. Brand building involves striking a chord with your audience; a message that H&M has carefully crafted over time.

Its focus on sustainability as a major ethos for the brand has earned acclaim. Consumers can drop off unwanted garments (of any brand) to H&M stores globally, which will be recycled and used in future products.

H&M explains that the global ambition is to work towards a “sustainable fashion future”, where unwanted clothes are used for fresh textile fibers and ensure no garments wind up in landfills.

The drive towards sustainability, which has been embraced by everyone at the company – from the CEO to middle management – is an example of how the company has always sought to redefine itself (and save itself from a PR disaster). Much like its products, the global retailer has tried to avoid stasis and remain top of mind for shoppers.

It first introduced online shopping in 1998 when the concept was still nascent, and in the 2000s set on a spree of international expansion, which saw further store openings in Europe, the US, and East Asia.

But central to the strategy of top line growth was the constant addition of new stores. This entailed costs – locations for new outlets need to be scouted, linking the store to a centralized supply chain, hiring staff, and ensuring all brand guidelines are adhered to. Not only does it take time, it can also prevent a fast fashion brand like H&M from trimming prices as much as it would like.

Challenges lurk

Despite H&M’s original launch of its online store in 1998, analysts are unequivocal in their opinion that the company has been slow to adapt to the internet age.

“We view value fashion retailers as the clothing retail segment most disrupted by online,” explains Anne Critchlow, an analyst at Societe Generale.

Digital disruption has eaten into H&M’s business. Pure play fashion ecommerce sites like Asos, Zalando, Zappos, and even Amazon private label brands don’t have to contend with managing expensive offline inventory and retail space. It helps them keep prices low in an attempt to undercut retailers like H&M.

Asos recorded US$2.6 billion in sales last year – a fair distance behind H&M – but the brand operates with a fraction of the same overheads as the Swedish retailer.

Euromonitor International estimates that online channels account for 14% of the global apparel and footwear market, with an overall size of US$231.7 billion. In developed markets, this statistic is even higher: 15.5% for the US, 18.7% for the UK, and 25.9% for China.

H&M is physically present in 69 countries but only offers ecommerce in 43.

The primary target market for fast fashion brands are digitally savvy millennials, which begs the question, why have they been so slow to respond?

CEO of H&M, Karl-Johan Persson says the company has made mistakes in its strategy.

2017 was a disappointing year for the company with its share price sliding to the lowest level since the 2008 financial crisis and the announcement that it would close 170 stores in 2018.

But the company plans on a net addition of 220 stores, causing even further consternation from investors who want it to double down on ecommerce and trim expensive offline forays.

“Fast pace is vital,” affirmed Karl last year, signalling H&M’s intention to accelerate its efforts towards ecommerce.

H&M stock isn’t performing well at all.

But this needs to happen sooner rather than later.

“[H&M and Zara] have been lagging definitely and they do need things like just faster delivery times; shoppers want it now,” explains Maureen Hinton, global retail research director at GlobalData. “They face a tougher, more competitive market who have less to spend and far more competition with Zalando, Amazon, and others.”

What’s the future?

At the moment, H&M seems to be concentrating on markets with large growth potential. Its decision to open up new stores in India helped increase revenue in the country by almost 100% and resulted in 12 new outlets. The retailer is also selling online in India, hoping to capitalize on the ecommerce rush in the South Asian state.

But this seems to be a repetition of the old business model, which hasn’t exactly gone to plan. The writing’s on the wall. US retailers are in significant stress as they haven’t prepared for the digital age.

Millennials demand an omni-experience i.e. a consistent experience across both online and offline. Zara, has already picked up on this trend with its popup shop in London trying to bridge the gap, whereas H&M only realized it needed to integrate physical and online stores after a 2% drop in Q3 compared to last year’s figures.

The company is also relying on its presence on Alibaba’s Tmall to improve its online footprint in overseas markets.

It seems like H&M is finally aware of the fact that it needs to improve its overall purchasing experience. Nils Vinge, H&M’s head of investor relations, told LA Times that they’re deploying algorithms to support forecast demand and reduce the chance of markdowns.

But are these feeble attempts enough to survive in the hypercompetitive environment that fast fashion operates in today?

Part of the reason startups like Asos and Zappos have been able to snatch away market share is because millennials care more about the product, and less for brands. 51% have no preference between private label and national brands.

For H&M, it’s not enough anymore to sell relatively cheap products. The entire retail experience needs an overhaul and it better start doing that soon or the stock price might see a sustained nosedive.

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