The drop in stock price by more than seven percent has prompted the management of the Swedish clothing retail chain Hennes & Mauritz AB, better known as H&M, which has over four thousand stores worldwide, to change its business strategy and policy. CEO Karl-Johan Persson stated in an interview with the American business weekly Bloomberg a few days ago that a major change in business is forthcoming.
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Persson is a member of the family that owns the H&M group founded in 1947 in Västerås, Sweden. The foundations of H&M were laid by the then 30-year-old entrepreneur Erling Persson, the grandfather of today’s CEO, who opened a women’s clothing store and named it Hennes. A few years later, a similar store was opened in Stockholm, and the company continued to expand. In 1968, Persson bought Mauritz Widfors, changed the name to Hennes & Mauritz, and expanded the clothing offer to men and children. The shortened name H&M has been used since 1974, and by then it had already expanded to the markets of Denmark, Norway, the United Kingdom, and Switzerland.
Drop in Profit
As certain years in history have periodically marked H&M’s business, 2017 is expected to be a turning point. Karl-Johan Persson stated that the company’s business policy will focus on e-commerce, new fashion brands, and emerging markets as the current business models are not equipped to handle the rapid changes caused by digitalization. The online sales model is killing the classic one, turning the customer into a static consumer who no longer wants to waste time in shopping centers and stand in lines at checkout.
The popular Swedish clothing chain is once again at a crossroads. Its pre-tax profit in the third quarter has fallen by as much as 20 percent. It is being pressured by huge stocks of unsold clothing and a wave of digitalization. Its leader is reducing plans for opening new stores and will seek further development in e-commerce and new markets.
But the online thunder has not only hit H&M; the foundations of the entire global fashion industry are shaking, so much so that even the most famous designers, such as one of the leading fashion companies Ralph Lauren Corp, located on Fifth Avenue in New York, are closing stores and turning to online sales. Aware that the moment when the fast train of digitalization could run over H&M is approaching, Persson stated that the change in purchasing habits is affecting profit reduction so significantly that action must be taken quickly to seek new markets and develop online sales. However, H&M’s biggest competitor, Spanish Inditex SA, the owner of the Zara retail chain, has already surpassed it in this regard.
Inditex SA has already accelerated product development, from idea to finished product, to just a few weeks and expanded its online offer. Despite H&M’s attempts to improve the situation with a summer clearance sale, among other things to appease investors, sales increased by only 2.8 percent, while pre-tax profit in the third quarter fell by as much as 20 percent.
Attached Brands and Markets
Charles Allen, an analyst at Bloomberg Intelligence in London, pointed out that inventory remains the biggest problem for H&M. As a consequence, some stores are closing, including two of the oldest stores in the center of Milan. However, an H&M spokesperson reported that this is not a real closure but a relocation to a larger space and a better position.
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Consequently, Persson emphasized that they must be very disciplined in opening new markets and only choose those they believe have long-term growth potential. Regarding existing markets, they will work more with what they already have in them. This statement from Persson means that H&M, one of the largest and most successful global clothing retail chains, is seriously affected by the crisis that has shaken retail and is reducing ambitions in the existing market. Although this Swedish company operates more successfully than American clothing retail chains, as well as large department stores that are closing in large numbers, H&M will increasingly turn to the ‘virtual’ market, i.e., online offerings, instead of opening classic stores in the ‘old’ market, and will focus on promoting new brands.
Recently, the company introduced a new brand, Arket, which joins the existing ones: H&M and H&M Home, COS, Monki, Weekday, and Cheap Monday. The goal of the H&M group is to increase sales in local currencies by 10 to 15 percent annually while maintaining high profitability. Therefore, H&M online stores were opened this spring in six new markets in Turkey, Taiwan, Hong Kong, Macau, Singapore, and Malaysia, which have already proven successful from the start.
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H&M’s online stores are now available in 41 markets, and soon they will also open in Cyprus and the Philippines, reaching 43 markets by the end of the year. Next year, this type of sales of H&M clothing will expand to India. H&M has opened classic stores in new markets this year: Kazakhstan, Colombia, Iceland, Vietnam, and Georgia, and next year it will open in Uruguay and Ukraine. During the spring of this year, the first H&M stores opened in Kazakhstan and Colombia, the first store in Reykjavik, Iceland, opened this summer, and in September in Ho Chi Minh City, Vietnam.
Initial results show that the decision was good, and during 2017, H&M will open about 475 new classic stores in growing new markets. Most of the new stores will feature H&M brands, and around 70 will include newer ones like COS, & Other Stories, Monki, Weekday, and Arket. H&M’s fashion brand Arket has already been well received in two stores in London on Regent Street and Covent Garden, as well as in Copenhagen and Brussels. During the year, a store of this brand will also open in Munich, and in spring 2018 in Stockholm and Amsterdam.
In addition, online sales of this brand have been launched in 18 European markets. H&M Home intends to expand rapidly in this sector, planning to open around 60 new H&M Home stores in 2017, with the first standalone H&M Home set to open in 2018. Despite the initial positive results in new markets, it is noteworthy that H&M has not always been successful in expanding its business in the past, especially when it acquired the brands Weekday and Monki in 2008.
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Andreas Inderst, an analyst at Macquarie Capital, stated that, despite everything, H&M cannot avoid the battle with dramatic changes in the global fashion market. Especially since the network of its classic stores is very large, and problems are also occurring in strong and stable markets such as Germany. However, according to Persson, H&M’s online sales are growing, now accounting for as much as a quarter of total sales in some markets, and in the coming years, it should increase by 25 percent. However, the growth in online sales does not mean an increase in revenue, as there is a simultaneous decline in sales in classic stores. More online customers mean fewer visits and purchases in H&M stores.
Therefore, Persson admitted that the growth of e-commerce has not compensated for the reduced rate in stores in several established markets. This has led to overall sales development not aligning with set goals.
Ethical Standards
But besides high business goals, H&M also has a high ethical standard when it comes to corporate social responsibility and environmental protection. Although it significantly contributes to the fact that clothing production worldwide has doubled from 2000 to 2014, as the entire process has accelerated and technologically advanced so that the journey from design to finished product takes only a few weeks, and brands are multiplying, H&M strives to reduce environmental damage.
According to calculations by McKinsey, one kilogram of fabric produces 23 kilograms of greenhouse gases, starting from the pesticides used to treat cotton during cultivation to washing clothes and finally waste disposal. There are many ways for clothing manufacturers to influence the reduction of environmental pollution; from using renewable energy sources in production, reducing chemicals in treating clothing, developing new materials and production processes to recycling waste.
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Last year, H&M was the largest buyer of cotton produced under the program for eliminating the most dangerous pesticides and promoting water management. Such cotton is grown in 24 countries and represents about 12 percent of the 25 million tons of cotton produced annually worldwide. H&M also encourages customers to donate old clothes for recycling, which do not have to be purchased in its stores, for which, for example, in Croatia, it offers a 15 percent discount when shopping at H&M.
Women’s Issues
The company has also paid special attention to promoting women’s entrepreneurship by launching an alternative to the Fortune 500, a list of the most successful companies in the world. This is the 500 Foundation, funded by the family of Stefan Persson, where women play a leading role. The goal of the 500 Foundation is to change the stereotype of entrepreneurship as a field dominated by men. Diana Amini, the CEO of the 500 Foundation, pointed out that most business magazines do not give up on the stereotypical portrayal of entrepreneurs, and thus Fortune has not had a woman on its cover since October 2013, and only 6.4 percent of women are on its list. In H&M’s 500 Foundation, they believe they can contribute to redefining the meaning of the word entrepreneur and create a list of 500 influential women entrepreneurs and present them in the same way that male entrepreneurs are presented.
