H&M purges its shelves to get back on track
Sleeker, more streamlined stores and improved online offerings are paying off
In a Hennes & Mauritz store in an affluent central district of Stockholm, an experiment is taking place that is crucial for the future of the Swedish purveyor of cheap chic.
For several years, H&M has struggled with falling profitability, complaints about tired stores, and a perception that rival brands such as Zara were sharper on fashion. The refurbished Karlaplan store is one of a number of tests the world’s second-largest clothes retailer has taken to address its problems.
The store, inside a mall, has been decluttered, with far fewer garments on display but more that appeals to the local, upmarket clientele. Menswear has been taken out so the selection focuses on women with a small kids’ section. There is a nail bar that also does hair styling at weekends and the lighting in the fitting rooms is softer.
Anna Bergare, head of business development at H&M Lab — which works on new concepts — said that the store now had 30-40 per cent fewer items in it than before but after the refit turnover had gone up.
Maria, a 39-year-old charity worker shopping after work, said she was buying more from this H&M shop: “It’s much airier. I used to feel like they didn’t have the clothes I liked, or needed, so I went to other places.”
It is a critical time for H&M. From the summer of 2015 until the start of this year, its shares fell by about two-thirds as investors fretted that powerful new online competitors such as Amazon and Zalando would hurt the stalwarts of the industry.
Karl-Johan Persson, the 44-year-old chief executive, is the son of chairman and biggest owner Stefan Persson. He is also the grandson of H&M’s founder, and has been under heavy pressure for years amid rumblings from some shareholders that only his family connections have saved him.
But in recent months there are signs that his four-pronged turnround plan is starting to bear fruit. The shares have rebounded by about two-thirds, although they are still well below their 2015 levels.
Mr Persson, in an interview with the Financial Times, is unsparing of the mistakes that happened. “Complacency crept in and that hurt us in combination with the whole change in the market,” he says.
There are signs that the push to sharpen its stores, its online presence and its clothes is paying off. In the third quarter, pre-tax profit jumped by a quarter to SKr5bn ($520m) while net sales rose 12 per cent to SKr63bn.
Joacim Olsson, head of the Swedish Shareholders’ Association who has been critical of Mr Persson previously, says that the chief executive “now seems to be the right person. Above all, there is no reason to change him now when things appear to be going in the right direction; instead, the company needs some stability.”
Mr Persson certainly seems up for the fight: “If I didn’t believe in what we’re doing then of course I would have left myself, because I care deeply about the company . . . I think a lot of good things will come out of this.”
He has pleased shareholders by disclosing more financial information and holding a capital markets day for investors for the first time. “They are now running it more like a big, listed, company and not as a family business,” says Mr Olsson.
A big part of H&M’s problems for many analysts was how it was being squeezed from both ends of the market — companies such as Primark were attacking it with ultra-cheap T-shirts and hooded tops while its more upmarket customers were being picked off by the likes of Zara, owned by Spain’s Inditex, which replaced H&M eight years ago as the world’s biggest fashion retailer by sales.
Mr Persson is open about the scale of the changes in the industry. “It’s getting tougher. Some competitors, they’re not even competing with profits, they’re making losses. So it’s a completely new competitive landscape.”
The first and perhaps biggest element of Mr Persson’s response to these challenges has been an increased focus on the clothes H&M sells and the way it sells them. H&M had seen a rising need to discount clothes in recent years with its stock levels increasing to 19 per cent of sales last year. Mr Persson says H&M is now selling more full-price clothes.
Another big change is that H&M is opening fewer physical stores than it has for a long time. In 2016, it opened 427 more stores than it closed. This year, it is aiming for just 120, the lowest level since 2004. It is still entering new countries, but the focus is just as much on closing stores, especially where there are lots of shops already.
Refurbishing existing stores — such as the one in Karlaplan — is vital, and is changing the company in more ways than purely the look of the stores. Ms Bergare says: “What it has sparked the most is a mentality to test a lot.”
A new store opened this week in Berlin, offering second-hand clothes, yoga classes, and vegan cosmetics. A bigger test will come in November when one of its flagship stores in Stockholm is reopened with elements from many of its recent experiments.
Online sales are increasingly important and it has been working hard on making relatively expensive things that customers take for granted — such as cheap delivery and in-store returns — work even for its cheapest products.
Improving H&M’s technology infrastructure is the second prong of Mr Persson’s plan, but he concedes that the online focus came at the expense of the experience in its physical stores. “We still believe in physical stores. In terms of inspiration, the look and feel of the store, the amount of garments and the ease of buying to make it more frictionless, it has to improve,” he adds.
The third element of H&M’s revival has been about improving its supply chain. As it has expanded into more countries its supply chain has struggled to keep up. Mr Persson says H&M is looking at different types of suppliers in each region, including notably the need for “speedier collections”.
The final part of the turnround was to explore new business models. The retailer has seven other brands apart from its core H&M chain. It has also made a number of venture capital investments in areas such as fintech and second-hand clothing, and is investing in finding new, more sustainable materials for garments.
For all the pressure and the transformation, some things will not change. The retailer, where the Persson family controls more than three-quarters of the votes, may have opened up more to outside shareholders but its chief executive is clear that if there is a conflict between the short term and long term he “always” chooses the latter.
“Especially during a tougher two to three year period like we’ve had, a long-term perspective is really important. I have a super long perspective, as does the rest of the family, and I hope many shareholders too . . . Because there is no end state in business; it’s an eternal journey,” he says.