As a purveyor of chic, reasonably priced clothing, retail chain H&M sees the economic downturn as an opportunity for expansion.
With the credit crunch in full swing, retailers around the world are slashing prices and closing up shop. But the Swedish company Hennes & Mauritz, a pioneer of chic and inexpensive fashion, managed to take advantage of it: opening new stores, entering new markets, and adding new brands. “Our strategy is based on the concept of fashion and quality at the best price,” says Rolf Eriksen, director of H&M. “It helps us stay stable even in times of economic downturn. »
Defying difficult times, H&M will enter one of the most competitive fashion markets with the opening of its first store in Japan on September 13th. The initial outlet, in Tokyo’s Ginza shopping district, will be followed by a second store in Harajuku on November 8. At the same time, H&M will also launch its latest high-potential line in collaboration with Japanese designer Rei Kawakubo, founder of fashion-forward brand Comme des Garçons. A third Japanese store is scheduled to open in Shibuya next fall.
The arrival of the fashion chain gives shivers to the Japanese members of the H&M fan-club, which already registers 20,000. and the H&M fan club present, H&M has a good chance of doing well there,” says Erik Sandstedt, retail analyst at Kaupthing Bank in Stockholm.
GLOBAL GROWTH
Indeed, as a provider of stylish, reasonably priced clothing, H&M sees the economic downturn as an opportunity to grow. With its entry into Japan, the company will have more than 1,600 stores in 30 countries, including China, where it opened in 2007. Over the next year, the company plans to increase the number of its stores by more than 15%, with a focus on expansion in the United States, Europe and Japan.
As the economic environment deteriorates, H&M, which leases its store locations, is finding it easier to secure key premises on better terms, particularly in the US, where the company has 153 stores , mainly on the east and west coasts. “We are getting much better contracts now that we are a known player in the United States. says NilsVinge, H&M Head of Investor Relations. “The owners approach us. »
How does H&M manage to thrive in what many observers call the toughest trading conditions in decades? By believing in the ongoing focus on price, which extends from the company’s merchandise to its business model. First, H&M’s average selling prices are lower than those of its main competitors such as Gap Inc., or Zara, owned by Spanish parent company Indite. This will allow the Swedish chain to increase its “market share in the current slowdown, since consumers are looking for better prices”, explains Sandstedt, an analyst at Kaupthing.
THE ADVANTAGE OF OUTSOURCING
H&M’s greatest advantage is its business model. An in-house team of 100 designers work with consumers to develop clothing lines. These are then outsourced to a network of 700 suppliers, more than two-thirds of which are based in low-cost countries in Asia. Having no factories, “H&M can be more flexible in cutting costs than many other retailers,” says Raphael Moreau, a retail analyst at market research firm Euromonitor International in London.
So far, it has proven to be a lucrative formula. Operating profit for the 2007 fiscal year ended Nov. 30 rose more than 20% to $2.8 billion on sales of $11.9 billion, up 14.5% compared to the previous year. Broker Sanford C. Bernstein estimates operating profits for 2008 will rise nearly 15% to $3.2 billion, and sales will rise 12.6% to $13.4 billion.
Hoping to fuel its future growth, H&M has added a number of new brands to its portfolio. In March 2007, the company launched its first new retail brand, called COS (Collection of Style), in London. The new brand, which has now expanded to 12 stores in major European cities, is positioned at the highest end. It caters to older consumers than those of the core H&M brand, offering men’s and women’s clothing and accessories at higher prices.
HUGE POTENTIAL
Last year, H&M also made its first acquisition since the company was founded in 1947, taking majority control of Swedish company Fabric Scandinavien in May. The four-year-old company owns two hip Swedish brands: Monki, a 12-store chain aimed at teenage customers, and smaller Weekday, whose six stores carry a mix of brands including ultra-hip jeans Cheap Monday (which are also sold by 1000 other retailers including Barneys New York). Both channels are still small and limited to Sweden, at least for now. “But there is huge potential to make these new acquisitions more efficient and to scale them internationally through access to H&M’s sourcing logistics,”
By experimenting with new brands, H&M is getting ahead of rival Inditex’s playing field. The Spanish group, which recently overtook Gap as the biggest fashion retailer by number of sales, has seven different brands, including its flagship chain Zara. Many analysts believe this is an approach that offers the best chance for growth. “The multi-format strategy allows fashion retailers to cover a wider space in the market, both in terms of price and fashion content,” says Luca solca, senior research analyst at Sanford C. Bernstein in London. The challenge for H&M will be to hold its own, whatever the trends in the economy.
