Hennes & Mauritz faces up to challenge of online competitors
Swedish retailer looks for ways to provide online services without hitting margins
In the 1980s and 1990s, cheap chic from the likes of Hennes & Mauritz shook up the traditional clothes retailers. But now the disrupters are being disrupted.
H&M, the Swedish group that is the world’s second-largest clothes retailer by sales, faces competition not just from cheaper fashion brands such as Primark but above all internet sellers such as Zalando, Asos and Amazon.
It is a fight that Karl-Johan Persson, H&M’s chief executive and grandson of the founder, is relishing.
“Online is affecting footfall in the physical stores in more mature markets. At the same time we see it as an enormous opportunity. We think it's a great combination to have a great network of physical stores which are also profitable plus a profitable online store,” he says in an interview in the “White Room”, the design hub in H&M’s Stockholm headquarters.
The focus on online sales has led to a change this month in H&M’s financial guidance for the first time in more than a decade. Previously it targeted a 10-15 per cent increase in the number of physical stores it opened as it moved to new markets such as Australia and Chile. But now Mr Persson is targeting 10-15 per cent growth in total sales each year.
The worry for analysts is that H&M — known for its $5 T-shirts and other bargain wares — may become less profitable in pursuing such strong top-line growth by being forced to provide expensive services that online shoppers often demand.
"There is a big question mark as to whether the H&M concept can offer things such as free delivery and returns without a big hit to margin,” says Anne Critchlow, analyst at Société Générale.
H&M’s operating profit margin has almost halved from its 2007 peak and is expected by Ms Critchlow to fall further in the coming years. She estimates that offering free delivery and returns for all online sales — which H&M at present does not do — could shave another 3 percentage points off a margin that was last year 12.4 per cent. Margins at Inditex, which owns the Zara brand and overtook H&M as the world’s biggest clothing retailer by sales six years ago, rose slightly over the same period.
But the 41-year-old Mr Persson, whose family control nearly three-quarters of the votes at the listed company, stresses repeatedly that what H&M is most interested in is “healthy, long-term growth”. He adds that the online business is “as profitable” as the physical stores.
Its status as a family-controlled business gives Mr Persson some leeway with investors looking only at the next quarter’s margins. H&M does not do investor roadshows; instead, analysts and shareholders have to come to Stockholm to see them.
Mr Persson explains: “For us, even though we are listed with all the pressures we have — it’s important to do well in the short term as well — we have always prioritised the long term if the two are in conflict.”
So H&M has invested heavily in its IT infrastructure as it launches online shopping worldwide. It is also trialling various formats to link its physical and online stores including a pilot in the UK of click and collect where customers pick up clothes bought online in a shop.
Other initiatives include allowing returns in store, next-day delivery, and “scan and buy” — a way to scan a product in a shop that they do not have in your size and have it delivered to your home instead. “It’s such an important part of our business: to continually invest,” he says.
It is not just online where H&M is looking to grow. The group has also launched a slew of different brands in recent years including Weekday, Cheap Monday, and Monki. The biggest successes have come with two more upmarket brands, Cos and & Other Stories. Mr Persson says that both could eventually have sales of SKr50bn each compared with the SKr10bn Cos currently does and the SKr192bn H&M did as a group last year.
He adds that each new brand takes several years to turn a profit meaning that in the short term “it’s not good for the business case”. But he adds: “For us to continue to grow 10-15 per cent five years from now, 10 years from now we need to plant new seeds. And with the base continuing to grow, we need more seeds.”
He promises two new seeds this year, one in the next quarter, but declines to give details. H&M Home, a brand focused on furnishings that has been more of a store within the main H&M stores, will also be developed as a standalone concept.
For all the pressure from other retailers — SocGen estimates a basket of nine standard products costs half the price at Primark compared with H&M — Mr Persson refuses to obsess about rivals. “The competitive landscape has changed a lot with pure online players doing very well. But we have most focus on our customers and ourselves. There is still so much we can do to expand ourselves, and that’s our focus.”