April 8 (Bloomberg) -- Counting on the old adage that sales of affordable luxuries like lipstick and scarves climb in tough times, Hennes & Mauritz AB is rolling out a new chain called & Other Stories that focuses on upscale accessories.
As it seeks to make up ground lost to rival Inditex SA and win a bigger share of the $111 billion market for shoes and accessories in western Europe, H&M is opening seven outlets of the chain across the crisis-ravaged region this spring.
Better known for dresses and ballet flats cheap enough to be almost disposable, H&M promises curated style at & Other Stories. The stores feature a selection of more expensive clothing jockeying for space with wardrobe add-ons such as jewelry, lingerie, and shoes in four basic styles ranging from “Industrial” to “Glamorous.”
“H&M is getting a lot of pressure from low-price retailers on the one hand and from retailers like Inditex, which reacts faster to demand in the fashion world, on the other,” said Soeren Loentoft Hansen, an analyst at Sydbank A/S. With & Other Stories, H&M can “build some bridges to a higher price segment.”
H&M needs a hit. Europe’s second-largest clothing retailer has been lagging behind Inditex, owner of the Zara brand. The Spanish company’s sales growth has outpaced H&M’s for seven of the last eight quarters. Inditex has set the industry standard for quickly getting product from design table to shop, defining the style of the moment while H&M shoppers are left waiting. That helped Inditex, which opened its own fashion and accessories chain called Uterque in 2008, overtake H&M by market value. Its price to earnings ratio has surged to 26.9, versus H&M’s 23.
H&M shares rose as much as 0.2 percent to 231 kronor ($35.87) in Stockholm trading today, while Inditex stock gained as much as 1 percent to 102.10 euros ($132.69) in Madrid.
“& Other Stories’ is a totally different concept, a totally different brand with its own creative team and creative expression,” said Pernilla Wohlfahrt, head of new business at H&M. “So it was natural and essential for us to put it in a different store.”
H&M might accelerate the expansion of the chain after sales “far exceeded” expectations, Chief Executive Officer Karl-Johan Persson said March 21 during the company’s earnings conference at its Stockholm headquarters. Wohlfahrt said H&M may add more stores this autumn.
“We have to evaluate how the openings are going and take it step by step, but we believe the concept can work in all H&M’s markets,” she said by phone from the opening of the & Other Stories shop in Stockholm.
To sell & Other Stories -- a name meant to evoke the creation of personal identities -- H&M promises styles from its own ateliers in Paris and Stockholm. The first of the chain’s stores, a two-story shop on London’s Regent Street a few doors down from an H&M, opened last month. It sells accessories such as 145-pound ($221) Clare Vivier totes, 10-pound brass rings, beauty lipsticks promising the perfect pout and Nike shoes.
Accessories offer “a very immediate way of buying into a fashion trend without having to commit to a full fashion look,” said Jane Francis, head of the accessory course at the London College of Fashion.
In addition to its shops in major European cities, & Other Stories will ship online orders to 10 countries in the region. The brand’s website boasts pictures of a garter-belted model pulling on her stockings, and “stories” -- sequences of photographs showing how items can be worn.
The buzz generated by & Other Stories caught the eye of Ebba Koerlof Sundberg, a 23-year-old student in Stockholm.
“It’s fun,” the loyal H&M shopper said as she stepped out of the Biblioteksgatan store in the city center. “There’s thought behind it and there’s something for everybody.”
With the new chain, H&M is following Inditex’s strategy. The Spanish company has expanded with Massimo Dutti, oriented toward urban professionals, and seven other brands. Zara made up 66 percent of sales and 29 percent of stores for Inditex, based in Arteixo, Spain.
H&M has added about 150 outlets of its upscale COS and three other non-flagship brand stores since 2007, but those, plus the new & Other Stories shops, account for less than 6 percent of H&M’s 2,818 outlets globally.
H&M’s new brand also puts it in the footsteps of luxury titans like Gucci, which gets about two-thirds of revenue from leather goods and shoes. Gucci’s margin last year was more than 31 percent while H&M’s dropped to 18 percent from 18.5 percent last year.
The apparel market has been suffering amid the economic crisis as austerity measures weigh on spending in the euro area. Sales of bags and costume jewelry are forecast to grow more than 13 percent through 2017 to $18.7 billion, twice as fast as clothing, according to Euromonitor. Footwear will expand slightly faster than apparel in the period, the researcher predicts.
“They are trying to move away a bit from the too sanitized, fast-fashion, mass-market feel of H&M, and move a bit more towards an almost independent, more entrepreneurial feel,” said Daniel Lucht, an analyst at ResearchFarm, a retail and consumer-goods forecaster in London.
Given the limited rollout, it will be at least five years before the new brand will have much impact on H&M’s profitability and growth, Societe Generale predicts. And it will face competition from Inditex’s Uterque, which has expanded to 92 stores and posted 9 percent sales growth last year.
Still, & Other Stories will help the company win customers who might otherwise shop at Zara, and who wouldn’t likely spend much at H&M, said Suzanne Stahlie, managing director at retail consultancy FutureBrand in Paris.
“H&M is very smart to create fashion legitimacy by combining their own brands with others,” Stahlie said, “and creating something that isn’t similar to any other brand.”
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