Hip H&M

The Swedish retailer is reinventing the business of affordable fashion

Stefan Persson, chairman of Swedish retailer Hennes & Mauritz, vividly remembers his company's first attempt at international expansion. It was 1976, the year H&M opened its London store in Oxford Circus. "I stood outside trying to lure in customers by handing out ABBA albums," he recalls with a wry laugh. Persson, then 29, the son of the founder, waited for the crowds. And waited. "I still have most of those albums," he says.

Don't cry over that vinyl, Stefan. ABBA is still hot, but H&M is even hotter. Hotter than Shakira in July. Hotter even than harem pants, which, incidentally, is one of the items flying out of H&M's stores this season. (Warning to female shoppers: If you don't want to be a fashion pioneer, those pants may not be for you. Try the peasant blouse instead.)

A slowing global economy, lackluster consumer spending: There's little sign of either at H&M. While rivals retreat from disastrous foreign forays and retailers across Europe and the U.S. struggle to post a profit, H&M's pretax income is set to hit $833 million in 2002, a 34% increase from the previous year, on sales of $5.8 billion, according to Keith Wills, Goldman, Sachs & Co.'s European retail analyst. The growth is being fueled not only by expansion: Wills also estimates that same-store sales will be up between 4% and 5% this year. H&M has $1 billion in cash. Its market capitalization of $15 billion outstrips that of Gap Inc. and Zara International, its closest competitors. And at current sales levels, the chain is the largest apparel retailer in Europe. Although the stock has bounced around this year, it has doubled since 1998 and has far outperformed the Stockholm index. This isn't just a store chain. This is a real money machine.

If you stop by its Fifth Avenue location in New York or check out the mother ship at the corner of Regeringsgatan and Hamngatan in Stockholm, it's easy to see what's powering H&M's success. The prices are as low as the fashion is trendy, turning each location into a temple of "cheap chic." At the Manhattan flagship, mirrored disco balls hang from the ceiling, and banks of televisions broadcast videos of the body-pierced, belly-baring pop princesses of the moment. On a cool afternoon in October, teenage girls in flared jeans and two-toned hair mill around the ground floor, hoisting piles of velour hoodies, Indian-print blouses, and patchwork denim skirts--each $30 or under. (The average price of an H&M item is just $18.) This is not Gap's brand of classic casuals or the more grown-up Euro-chic of Zara. It's exuberant, it's over-the-top, and it's working. "Everything is really nice--and cheap," says Sabrina Farhi, 22, as she clutches a suede trench coat she has been eyeing for weeks.

H&M is also shrewdly tailoring its strategy to fit the U.S. market. In Europe, H&M is more like a department store--selling a range of merchandise from edgy street fashion to casual basics for the whole family. Its U.S. stores are geared to younger, more fashion-conscious females. H&M's menswear line, a strong seller in Europe, hasn't proved popular with the less-fashion-conscious American male. So a number of U.S. outlets have either cut back the selection or eliminated the line. And while the pricing is cheap, the branding sure isn't. H&M spends a hefty 4% of revenues on marketing. This year's photo ad campaign was shot by fashion-world legend Richard Avedon.

Behind this stylish image is a company so buttoned-down and frugal that you can't imagine its executives tuning into a soft-rock station, let alone getting inside a teenager's head. Stefan Persson, whose late father founded the company, looks and talks more like a financier than a merchant prince. A penny-pinching financier, at that. "H&M is run on a shoestring," says Nathan Cockrell, a retail analyst at Credit Suisse First Boston in London. "They buy as cheaply as possible and keep overheads low." Fly business class? Only in emergencies. Taking cabs? Definitely frowned upon. To rein in costs, Persson even took away all employee mobile phones in the 1990s. Today, only a few key employees have cell-phone privileges.

But that gimlet eye is just what a retailer needs to stay on its game--especially the kind of high-risk game H&M is playing. Not since IKEA set out to conquer the world one modular wall unit at a time has a Swedish retailer displayed such bold international ambition. H&M is pressing full-steam ahead on a program that will bring its total number of stores to 844 by the end of 2002, a nearly 75% increase in the past six years. With the Nov. 1 opening of its latest Manhattan store, near Macy's, H&M will have 45 outlets in the U.S. It plans to open a further 20 stores in the U.S. by yearend 2003. "No other European retailer has expanded so quickly and so successfully beyond its own borders," says Goldman Sachs's Wills.

Yet H&M is pursuing a strategy that has undone a number of rivals. Benetton tried to become the world's fashion retailer but retreated after a disastrous experience in the U.S. in the 1980s. Gap (GPS ), once the hottest chain in the U.S., has lately been choking on its mismanaged inventory and has never taken off abroad. Body Shop and Sephora had similar misadventures.

Nevertheless, Persson and his crew are undaunted. "When I joined in 1972, H&M was all about price," he says. "Then we added quality fashion to the equation, but everyone said you could never combine [them] successfully. But we were passionate that we could." Persson is just as passionate that he can apply the H&M formula internationally.

What's that formula, exactly? Treat fashion as if it were perishable produce: Keep it fresh, and keep it moving. That means spotting the trends even before the trendoids do, turning the ideas into affordable clothes, and making the apparel fly off the racks. "We hate inventory," says H&M's head of buying, Karl Gunnar Fagerlin, whose job it is to make sure the merchandise doesn't pile up at the company's warehouses. Not an easy task, considering H&M's stores sell 550 million items per year.

All major fashion retailers aim for fast turnaround these days, but H&M is one of the few in the winners' circle. All merchandise is designed in-house by a team of 95 designers in Stockholm. To keep costs down, the company outsources all manufacturing to a huge network of 900 garment shops located in 21 mostly low-wage countries, primarily Bangladesh, China, and Turkey. "They are constantly shifting production to get the best deal," says Johan Tisell, an analyst at Enskilda Securities in Stockholm.

Working hand-in-glove with suppliers, H&M's 21 local production offices have compressed lead times--meaning how long it takes for a garment to travel from design table to store floor--to as little as three weeks. Only Zara has a faster turnaround. But Zara has nearly 300 fewer stores. Plus its parent, Inditex, owns its own production facilities in Galicia, Spain, allowing Zara to shrink lead time to a mere two weeks. Gap Inc. operates on an 9-month cycle, a factor analysts say is to blame for its chronic overstock problem.

H&M's speed maximizes its ability to churn out more hot items during any season, while minimizing its fashion faux pas. Every day, Fagerlin and his team tap into the company's database for itemized sales reports by country, store, and type of merchandise. Stores are restocked daily--but sometimes, even that's not enough to meet demand. When H&M opened its Manhattan flagship in the spring of 2002, crowds grew so large the store had to be restocked hourly.

Faster turnaround means higher sales, which helps H&M charge low prices and still log gross margins of 53%, a key measure of a retailer's profitability. But cheap and fast don't cut it unless the fashion sense is there. H&M's young designers find inspiration in everything from street trends, to films, to flea markets. Despite the similarity between haute couture and some of H&M's trendier pieces, copying the catwalk is not allowed, swears Margareta van den Bosch, who heads the H&M design team. "Whether it's Donna Karan, Prada, or H&M, we all work on the same time frames," she says. "But we can add garments during the season."

Although H&M sells a range of clothing for women, men, and children, its cheap-chic formula goes down particularly well with the 15-to-30 set. Lusting after that Dolce & Gabbana corduroy trench coat but unwilling to cough up $1,000-plus? At $60, H&M's version is too good to pass up. Sure, it's more Lycra than luxe and won't last forever. But if you're trying to keep au courant, one season is sufficient. "At least half my wardrobe comes from H&M," says Emma Mackie, a 19-year-old student in London. "It's really good value for money."

Although one brightly-colored collection two years ago proved a bust, H&M's past three collections have been winners. Shoppers this summer couldn't get enough of its embroidered peasant blouses and flowing gypsy skirts. What H&M's designers call the ethno-romantic look--a melange of 1920s-style beading and embroidery and 1970s hippie wear--is still all the rage.

Acquiring this deft touch has taken decades. H&M founder Erling Persson, who died on Oct. 28 at 85, began his career working for his father delivering cheese by bicycle to Stockholm restaurants. During a visit to New York in 1947, Persson marveled at the success of retailers such as Macy's. Upon his return, he launched small women's clothing chain Hennes--Swedish for "hers." The store's low prices proved a huge hit in Sweden, where retailing, as in the rest of Europe, was dominated by pricey department stores. By 1968, Hennes had morphed into H&M with the acquisition of Swedish men's retailer Mauritz, and its stores were dotted across Scandinavia. But it wasn't until after Stefan joined the company that H&M's international expansion really took off.

Persson's goal now is to enter a new country every two years. This year, the retailer is stepping into Portugal. Italy, Canada, and Eastern European nations may be next. These forays are essential, but they carry big risks. Germany, the source of 31% of H&M'S revenues, is sputtering. H&M'S German sales through September were still up 10%, while the overall retail market was down 10%. But a prolonged downturn in Germany could crimp overall sales.

The make-or-break market for H&M, though, will be the U.S., since 9 of the 13 European countries in which H&M operates are mature markets for the retailer. Despite a successful launch on Fifth Avenue, H&M has found cracking the U.S. market tougher than anticipated. Many of the stores opened in 2000 were too big. That proved to be the case with H&M's massive 5,400-square-meter store at Carousel Center in Syracuse, N.Y. The top floor now sits empty. Poor location was another teething problem. H&M blundered when it set up shop in suburban Livingston Mall in Newark, N.J. The mall is dominated by numerous inexpensive chains such as Express, Old Navy, and Wet Seal, making it hard for H&M to stand out.

But H&M is learning from its mistakes. The company is now staying clear of the tired 1970s-style malls that have proved troublesome. Instead, it's heading for more upscale malls and busy downtown centers. During the third quarter of this year, H&M managed to halve the losses from its U.S. outlets, to $6 million, and is expected to break even by the end of 2002. "They've been quite sensible, compared with other European retailers in the U.S.," says Wendy Liebmann, founder of WSL Strategic Retail in New York.

For H&M founder Erling Persson, though, the company's expansion at times seemed a bit too fast. "Sometimes, he asked me: `Why are you in such a hurry?"' says Stefan. The answer's easy: When you're hot, you don't stop to cool off.

By Kerry Capell in Stockholm, with Gerry Khermouch in New York

— With assistance by Gerry Khermouch

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