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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.

GUEST POST BY: JEFFREY TOWSON

H&M and Zara are two companies I pay a lot of attention to in China.

  • They have great business models. Fast fashion is really impressive in general.
  • They are popular with Chinese consumers.
  • They are both following market leader Uniqlo in terms of expansion into second and third-tier cities.
  • They seem to be growing steadily, despite slowing growth in apparel overall.

Overall, both look like big winners in China going forward. But I think there are two potential threats emerging. More on this in a second. First a quick diversion.

I keep a list of questions that I think are both important but difficult. These are things I try to figure out over time. One of these questions is “will fast fashion work the same in China as elsewhere?”. As exemplified by Zara and H&M, fast fashion has been a stunningly powerful business model. It continues to expand in the Europe and US – and is now growing in emerging markets. But it’s still not clear to me how well it will do in China, where consumers are fickle, competitors are ferocious and mobile/ecommerce appears to be changing almost everything in retail.

My answer to this question, thus far, is that the Western fast fashion giants are well positioned for China and for rising Chinese consumers.

The Zara and H&M business model has been studied extensively. It relies on syncing consumer behavior in stores with centralized design/manufacturing capabilities. Zara is the more extreme case with manufacturing in-house and re-design and shipping done on almost a weekly basis based on customer purchases. H&M, in contrast, has most of its manufacturing outsourced to Asia.

This “quick reaction” apparel platform makes great sense in China. If >50% of a season’s merchandise is re-mixed and re-designed during the season, that enables you to change with rapidly changing Chinese consumers. In this, “quick reaction” has a strength (i.e., reacting in real time to changing tastes) where many other Chinese consumer-facing companies have a perpetual problem.

This operating model also enables them to push discount versions of the latest designs from the fashion capitals (Paris, Milan, etc.) to China stores in a couple of weeks. Having design centralized in Europe also probably helps these stores in China. It is a differentiating strength relative to both local Chinese competitors and to “slower fashion” houses like Gucci and Prada.

Overall, fast fashion still looks like a great approach for rising Chinese consumers.

One more quick aside

(skip to the below points if you’re reading quick).

One of the benefits of fast fashion is you can have multiple style waves instead of 2-3 fashion seasons per year. One result of this is that consumers tend to come in more often as there is frequently new stuff to see. This, in theory, gets you greater revenue (people come more and buy more). You also get a greater “share of the consumer mind” (a Warren Buffett term). Greater frequency of consumer activity generally creates a stronger brand and a better relationship.

Financially, these frequent style waves also show up as less discounting of goods (a perpetual problem in fashion retail), higher revenue, and better working capital. That’s the theory anyway. And H&M and Zara do produce tons of cash, which they can then put into more scale and more stores. It’s a powerful approach when compared to traditional department stores or luxury fashion houses.

That said, it’s not clear to me that you get these same benefits in China. In particular, I don’t know if you see the same increased visits and branding benefits. Cycle times are already pretty fast in China. Most of the textile/apparel production is actually done in China / Asia. And I’m not sure you have the same historical expectations for a seasons’ new merchandise to contrast with. So I’m not sure about the revenue and gross margins of this model in China. Gross margins are typically 60% elsewhere.

Ok. Back to my main point, that there are two threats to the big China dreams of these fast fashion giants.

Threat 1: Ecommerce, mobile, and O2O are happening fast in China – and these companies are not real fast at this stuff.

Retailers are pretty much ground zero for changes in Chinese e-commerce, mobile, and online-to-offline activity. Digital transformation is hitting this sector like just about no other (except maybe auto and transportation).

First, the rapid adoption of everything mobile in China is transforming the interface with consumers. It is no longer just about walking in the mall and then going into a nice store like it might happen in Sweden. The Chinese customer experience is already a combination of the mall, a store, your activities in various online ecosystems and a rapidly developing logistics/delivery network. The two words you hear over and over in Chinese retail are digital and delivery. How this offline-online mix is going to play out and what “new retail” is going to end up looking like is unclear. But Chinese retail is where it is happening really quickly.

Against this rapidly changing Chinese retail landscape, here are some disturbing facts. Zara didn’t have an online store until around 2010 (about a decade after the Gap). And H&M didn’t start online sales in the US until around 2012. They also didn’t open a shop on Tmall until 2014. These companies are notoriously slow in digital stuff.

Both Zara and H&M are awesome in inventory and logistics. That is their strength. They have a powerful supply chain that connects retail activity around the world with centralized design and manufacturing, almost in real time. But they have been pretty slow when it comes to ecommerce and mobile. And these are precisely the things that are happening quickly in China – and that their Chinese competitors are particularly good at.

Threat 2: The local Chinese competition is moving upmarket.

You also need to consider the recent actions of the Chinese apparel giants such as Peacebird, Heilan, and Septwolves. They operate about 10x more stores than the foreign companies. Zara, H&M, and Uniqlo have 200-500 stores each. Helian and Septwolves have 2,000-4,000 stores each.

These big local competitors have historically been cheaper but they are now upgrading and moving upmarket. They are going to increasingly challenge Uniqlo, Zara, and H&M, especially as they continue to expand into second and third-tier cities.

When you combine #1 and #2, things get really interesting. What happens when you combine rising Chinese competitors with big digital, mobile and ecommerce disruptions? Does that change the fast fashion business model that has been so powerful in so many countries? This is the question I have been thinking about.

Anyways, that said, both H&M and Zara do appear to be in great shape in China right now. They both continue to open tons of China stores each year. They have a nicely adaptable model that is well-suited to the continually changing preferences of Chinese consumers. And Chinese consumers keep getting wealthier and wealthier. So that is all pretty great.

These companies may well turn out to be unbeatable in China, just like in most other places. But I am keeping an eye on these two particular threats to their China plans. We’ll see.


The first version of this article was published here

THE BACKGROUND

Japanese-based fast-fashion designer, manufacturer and retailer owned by Fast Retailing Co., Uniqlo has been providing “made for all” wardrobe staples to global citizens since September 1974.

Unique Clothing evolved into ‘Uniqlo’

Feeding on the thriving minimalist culture in Japan and need for closet essentials around the world, the fashion brand’s net sales came to $15.7 billion, up 6 percent from the previous year. Uniqlo has long associated itself with affordable clothing that speaks volumes to the Japanese values of simplicity, quality and longevity.

As GQ commented, “even when the Japanese retailer goes for hype, it doesn’t ever get weird,” following a collaboration the company did with French designer Christophe Lemaire that bore gray hoodies and white sneakers.

The rainbow array of t-shirts, big name collaborations and ever fresh S/S, W/F collections seem to be a hit as Uniqlo has 834 active stores around the world (data from June 2017). Most are in Japan, but other popular locations include the US, France, Singapore, Malaysia, the Philippines, China and Taiwan.

THE CHALLENGE

The company made headlines last year after reports revealed that the brand was struggling in the States – a forecast of roughly $36.31 million impairment loss on its US operations in the six months through August.

Bloomberg also reported that Fast Retailing Co. Chairman Tadashi Yanai cut Uniqlo revenue target by 40 percent to 3 trillion yen by fiscal 2020. Analysts attribute the more realistic predictions to the weakened yen, certain cultural barriers and most importantly, the rise of online players.  

eIQ Brand Series

Drop of Fast Retailing Co (parent company of Uniqlo) earnings. Source: Bloomberg

Other fast fashion brands such as H&M and Zara have also given Uniqlo a run for its money with aggressive market expansion, high product turnover and strong online presence. It means Uniqlo needs to keep up and the company knows it.

THE INNOVATION

“We need to be fast,” said Chairman Yanai. “We need to deliver products customers want quickly.”

Despite both being fast-fashion companies and having a similar production strategy, Uniqlo and Zara are still vastly different.

“Zara sells fashion rather than catering to customers’ needs,” he said. “We will sell products that are rooted in people’s day-to-day lives, and we do so based on what we hear from customers.”

Not only has Uniqlo vowed to increase clothing production, it has also focused rigorous interest on emerging countries.

Rumours arose a few weeks ago regarding Uniqlo holding recruitment days in Ho Chi Minh City – a market already occupied by fast fashion labels such as Zara and H&M, the latter announcing a store opening later this year.

Uniqlo was also the first in Japan to implement a ‘SPA’ model – short for “specialty-store retailer of private label apparel” meaning it encompasses every aspect of the business, from design, production to the final sale.

This gives the company the ability to test new in-store technology such as attaching radio-frequency identification (RFID) tags to all products so the store system can identify which items need restocking and free up time for sales clerks to tend to customers.

Bold marketing initiatives and branding included its partnership with Muslim fashion designer Hana Tajima, to naming world professional wheelchair tennis star Gordon Reid as a global brand ambassador.

Uniqlo winter collection ‘17 by Hana Tajima.

The company also allocates marketing budget to offline pop ups in premium malls. An example is a mini-fashion in Bangkok on July 12 promoting the brand’s new styles of denim.

Uniqlo fashion show at EmQuartier shopping mall in Bangkok to promote its new denim styles.

Uniqlo fashion show at EmQuartier shopping mall in Bangkok to promote its new denim styles.

Uniqlo is declaring to audiences around the world that it’s not afraid to stand up for a cause.

THE STRATEGY

As reported by Nikkei Asian Review, Masanobu Kusaka, previous manager of Uniqlo’s Fifth Avenue store in New York in 2015, realized that Uniqlo’s true rivals were somewhere else. He also witnessed the sudden closure of some of those shops. The culprit? Online retailers.

Kusaka began by improving the company’s existing digital assets starting with the app first. His team added functions that displayed the user’s purchase history and recommended matched clothing sets.

The company’s online sites have also expanded their product sizes – a huge limitation for brick and mortar stores – and offered XXXL to accommodate Americans.

Uniqlo also focuses on upholding a strong omnichannel strategy across its retail footprint. The company plans to open over 200 stores in China and Southeast Asia alone as the company reported same-store sales in Indonesia, Thailand, the Philippines and Malaysia posted double-digit growth in the first half.

Chairman Yanai hopes that customers will find convenience from the company’s new service where shoppers can visit any Uniqlo store, get fitted for a particular item of clothing, order it online and have it delivered to their homes straight from a warehouse.

“The ability to provide anybody, anywhere, anytime with the ultimate, high-quality day-to-day clothing will set us apart,” he said. “We want to deliver products that customers want quickly. That’s why it’s Fast Retailing.”

THE FUTURE

Chairman Yanai, Japan’s richest man, said in April 2016 he wants to expand Fast Retailing’s ecommerce worldwide, with an initial target for online sales to make up 30 percent of total revenue, up from 5 percent currently.

Given the rising popularity of online retail and the brand’s quick strides to innovate, it doesn’t seem too farfetched.  

Fast Retailing Co. Chairman Tadashi Yanai

Here’s what you need to know today.

1. Vietnam’s ‘NextTech’ aims to bring retailers online

NextTech is becoming a gateway in Vietnam to digitize traditional business into ecommerce.

Small business owners installing the online payment is still not easy. On the other hand, ecommerce companies are not connected to traditional businesses. NextTech, formerly PeaceSoft, provides information technology to traditional businesses to help them go online.

NextTech invests and partners with startups across their three main verticals: payment, logistics and sourcing.

The company shares similarities to Alibaba, as it tries to improve Vietnam’s ecommerce ecosystem.

Read the rest of the story here.

2. Alipay extends reach to big spenders in Italy

Italian bank UniCredit announced that it has opened up Alibaba Group’s payment solution to its network of 120,000 merchants in Italy, allowing visitors from China to pay for services and products in Italy by simply scanning a barcode with their phones.

According to Euromonitor, the growth of Italian luxury businesses in 2016 greatly benefited from the influx of luxury shopping tourism, where Chinese travelers’ contribution was notably significant.

The Alipay app also supports a geo-location feature that offers a marketing opportunity for niche and local brands in Italy that are less known to Chinese consumers.

Read the rest of the story here.

 

3. Recommended Reading: The new meaning of fast fashion

The fashion resale market is currently worth $18 billion and is expected to grow to $33 billion by 2021, and the average American woman does not wear 60% of the pieces in her closet.

A handbag is not a bottle of milk for a baby. It’s not a staple. And it’s not necessarily a good idea to create a situation in which it is equated to one.

It may not be sustainable, in any sense of the word. How can fast fashion in this age be defined?

Read the rest of the story here.

 

4. Recommended Reading: How WeChat Pay became Alipay’s largest rival

“Because of WeChat’s traffic and social advantage, in these past two years, WeChat Pay has become Alipay’s biggest competitor,” Wang Pengbo, finance analyst at research firm Analysys.

Last month, Analysys published a report on China’s mobile payment market for the fourth quarter of 2016. Alipay had a market share of 54.7%; Tenpay – which includes WeChat Pay – came in second with about 37%.

So how did WeChat Pay catch up? By doubling down on two key areas: social payments and offline retail.

Read the rest of the story here.

Here’s what you should know today.

1. Alexa now takes orders from Amazon’s instant Prime Now and alcohol delivery services

Great news for impulse shoppers – Amazon announced that it will now let Prime subscribers order from Prime Now, its two-hour delivery service, as well as its newer alcohol delivery service, in cities where these are offered.

Amazon says that Alexa’s Prime Now implementation will let you order multiple items at once and make recommendations whilst automatically give you the next available two-hour delivery window.

These two newest features are also a mark of how Amazon is giving Alexa a front and center place as a key interface between Amazon itself and its customers.

 Prime Now and alcohol delivery are designed in the same vein. The idea is that you can use Alexa when you are multitasking at home and too busy to get on the computer or your phone.

Read the rest of the story here.

2. Alibaba buys online ticketing platform Damai

China’s Alibaba Group Holding Ltd has fully acquired online ticketing platform Damai.cn

The move marks a further push into entertainment by the firm as it expands beyond its core online retail business.

Damai.cn will be a strong platform to distribute the company’s media content as well as expand its user reach and engagement.

Read the rest of the story here.

 

3. Walmart launches tech incubator

The Silicon Valley based incubator will be called ‘Store No. 8’. The incubator will help identify changes that will reshape the retail experience in the next few years, including AI reality, autonomous vehicle and drone delivery, and personalized shopping.

The US retailer has been overhauling its online team to better challenge Amazon with greater selection and lower prices, including various acquisitions of smaller fashion labels, most recently Modcloth.

Read the rest of the story here.

 

4. Adidas trials customer personalization to tackle fast fashion

Adidas has been testing a store where shoppers can design a sweater, have a body scan to determine fit and get it knitted by a state-of-the-art machine within hours, as a way to respond to fast customer demands.

It hopes the drive will help it adjust better to fickle fashion trends, allowing it to sell more products at full price

“If we can give the consumer what they want, where they want it, when they want it, we can decrease risk, at the moment we are guessing what might be popular,” says brand chief, Eric Liedtke.

Read the rest of the story here.

European fashion group Inditex, operator of global fast fashion chain Zara is making an aggressive global push this year through expansion of stores, following a 10% rise in full net-year earnings.

The group, which also owns fashion brands Pull&Bear and Bershka, plans to open 450-500 new offline stores in 2017 while closing approximately 150-200 of its smaller stores worldwide. Read more