Swedish retail giant H&M Hennes & Mauritz is facing tougher competition and slowing sales growth. So the king of affordable "fast fashion" is raising the ante with a long-awaited expansion into Asia, a new upscale chain in Europe, and a high-profile collaboration with pop star Madonna.
On Dec. 11, Europe's second-largest apparel chain elaborated plans to bring its brand of affordable fashion to the Far East for the first time. H&M will open stores in China and Hong Kong next year, followed in fall, 2008, by its first Japanese store, in Tokyo's Harajuku shopping district.
"Japan is an exciting market for H&M, with fashion-conscious consumers with great spending power," said Chief Executive Rolf Eriksen in a statement. "We see great opportunities for expansion in this part of the world."
It's just one of several new initiatives H&M hopes will pump up its results. Next spring the company plans to roll out an as-yet-unnamed chain of stores with more upscale offerings—"everything from updated classics to high fashion," according spokeswoman Annacarin Bjorne. And on Dec. 7, the company said it will team up with Madonna to create a new range of clothing and accessories. The one-off collection, called "M by Madonna," will hit H&M's 1,300 stores in 24 countries in March, 2007.
The moves underscore the importance for budget retailers such as H&M to find new growth avenues in an increasingly competitive market. The fast-fashion segment has gotten increasingly crowded on both sides of the Atlantic. Established chains such as H&M and Spain's Inditex, owner of cheap-chic chain Zara, are fighting for market share with everyone from local clothing chains to big-box retailers such as Wal-Mart Stores (WMT), Target (TGT), and Tesco.
No question, the 59-year-old Swedish chain is still a master of low-priced high fashion—a concept it pioneered. Over the past two years, H&M's collaborations with designers such as Karl Lagerfeld, Stella McCartney and, most recently, Dutch designers Viktor & Rolf, have sharpened its cutting-edge reputation and proved popular with trend-conscious customers. The $349 Viktor & Rolf wedding dress flew off the racks in Europe and the U.S. soon after hitting the stores in November (see BusinessWeek.com, 12/18/06, "The Best of 2006—Products").
The Spaniards are Gaining Ground
But intense competition, especially in H&M's core European markets, is taking a toll on sales growth. For 2006 through October, sales at H&M stores open one year or more (same-store or comparable sales) have advanced just 2% vs. the year-earlier period. Analysts blame unseasonably warm weather in Northern Europe. Worse, sales have actually declined by 4% in the important German market, which accounts for 30% of H&M's revenues, according to Rasmus Engberg, an analyst at Handelsbanken Capital Markets in Stockholm.
H&M also appears to have slipped somewhat behind archrival Inditex, which entered China earlier this year and already has rolled out high-end outlets such as Massimo Dutti. The Spanish company now reaches a wide range of customers at different price points through eight different brands, including Zara Home, Stradivarius, Pull & Bear, and Bershka (see BusinessWeek.com, 9/4/06, "Fashion Conquistador").
That formula helped Inditex overtake H&M as Europe's largest clothing retailer earlier this year. Although H&M still boasts higher profit margins—22% compared to 16.5% for Inditex—the Spanish retailer's sales are growing faster. For the first half of its fiscal year ending July 31, Inditex's sales climbed 23%, to $4.6 billion, while H&M's sales rose 14%, to $4.
7 billion for the first half to May 31, the most recent comparable figures.
Enhancing the Shopping Experience
Inditex is focusing its expansion efforts on Europe and Asia, opening one new store per day this year. It now has 3,000 stores in 64 countries. H&M has preferred to concentrate on the U.S., where it now has 105 stores, more than twice the number of Zara outlets. Investors seem to prefer Inditex's prospects: Its shares are up 43% for the year, compared with 25% for H&M (see BusinessWeek.com, 4/4/06, "Zara: Taking the Lead in Fast-Fashion").
Now, taking a page from Inditex's playbook, H&M aims to broaden its appeal and boost revenues with the new chain of upscale-format stores. The first store, on Regent Street in London, will be followed by outlets in nine other European locations, including Hamburg, Berlin, Brussels, and the Hague. H&M chose these cities because they're already big markets for the company and have well-established logistics networks.
H&M won't reveal much about the new chain, but the stores promise an enhanced shopping experience. They'll be smaller, with more stylish interiors and better service. The men's and women's clothes will be created by a new team of designers. Both the quality and the prices will be higher than at a typical H&M or Zara store.
The Madonna deal also could boost growth. It's the second time H&M and the pop diva have teamed up: The Swedish retailer supplied Madonna and her entourage with a complete offstage wardrobe for her recent world tour, and this fall, H&M is selling a $50 "Madonna-inspired" tracksuit.
Living in a Material World
Now the Material Girl will collaborate with H&M's head of design Margareta van den Bosch to come up with a collection of nearly three-dozen mostly tailored items, such as dresses and shirts, and a line of 10 matching accessories.
"To be a successful retailer you need to get people to come into your store frequently by convincing them that every time they visit they will see something different," says Richard Hyman, chairman of London-based retail consultancy Verdict Research. "By adding big name designers and high-profile collaborations they are able to add a bit of spice to the mix." And, they hope, a bit of sizzle to the top line.