H&m in fast fashion continued success

H&M in fast fashion: continued success? Patrick Regner and H. Emre Yildiz

This case examines the role of resources and capabilities in building competitive advantage and the issues to consider while evaluating the sustainability of competitiveness. H&M has enjoyed a leading p tion in the global fashion and apparel market thanks to its unique concept, business model and ability combine elegant designs with affordable prices. Key competitors, however, have challenged that posi and H&M needs to evaluate the sustainability of competitive advantage derived from its resources capabilities. The case explores the areas and functions in which H&M has enjoyed advantage vis-a competitors and how, if at all, this advantage can be sustained in the long term.

Introduction

The apparel retailer H&M has made an incredible journey, from a single store established by the founder Erling Persson in Sweden in 1947 to a pioneering 'fast fashion' business with 3700 stores in 61 countries and more than 132,000 employees worldwide. 'Fast fashion' refers to a quick response to new trends and fashion items that are made available in stores immediately thereafter. By the time Persson's 34-year-old grandson Karl-Johan Persson took over as CEO in 2009, H&M had become global leader in the 'fast-fashion' segment with a distinctive business approach that challenged most competitors. The business model, commonly referred to as 'cheap-and- chic', emphasised high fashion at prices significantly below those of competitors, with the fundamental prin- ciple being 'Fashion and quality at the best price'.

As the CEO of the company, Mr Persson emphasised the importance of maintaining the company's growth- based strategy, as he stated in the 2014 annual report:

'2014 was a very good year for H&M, with strong sales and profitability. We are continuing to add value for our customers and to invest for an even stronger H&M. We will open a net total of 400 new stores and nine new online markets in 2015.'

H&M opened another 379 new outlets in 2014 with the addition of flagship stores in key locations such as Milan, Munich and New York, as well as expansion into new markets like Australia and the Philippines. However, H&M was being seriously challenged by Zara, the prime retail brand of Spain's Inditex, which had already over- taken H&M to become the world's biggest fashion

retailer by market capitalisation, based on Zara's r =: : expansion, particularly in emerging markets, increased competition, and the fact that margins started to erode due to increased cotton prices rising production costs in Asia, put the H&M r fashion/low-price formula and aggressive exparts* under scrutiny. Investors had come to trust H&K model that relied on a set of unique resources am* capabilities, but Zara's success questioned the sus:~rr- ability of the formula.

The increased competition for consumer spend "£ <r the fast-fashion business was further intensified b. r e poor economic situation. With 70 per cent of sharer- voting rights controlled by the company's f o L - : n | Persson family, H&M's chief executive Karl-. :~at Persson tried to calm investors and emphasised the :TE- term view:

'We have great respect for the economic climate • this situation it is extra important to have a long-m perspective and to always make sure we give the sec combination of fashion and quality for money in = > s» market.'1

' . . . we are investing for the future and we always have ae customers in focus. Despite increased purchasing :rsr. we have continued to strengthen our customer offe- - for example, by not raising our prices to customers

H&M continued to emphasise the long-term view - m expansion strategy. For 2015, 400 new stores *se planned, with China, the USA and the UK expectec ~ a the largest growth markets. They also planned to erwm new markets including Taiwan, Peru, Macau. > : L »

This case was prepared by Patrick Regner and H. Emre Yildiz of the Stockholm School of Economics. It is intended as a tsss w class discussion and not as an illustration of good or bad pactice. © Patrick Regner and H. Emre Yildiz. Not to be repon « • ! without permission.

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H&M IN FAST FASHION: CONTINut : 5_ : ll-. [ '

frica and India. Despite these aggressive expansion ans, analysts had some doubts:

'There are fears that the product is not good enough, brand appeal is fading or that prices have been undercut by an even cheaper competitor. These are big questions.'

Adam Cochrane, analyst at UBS 3

he apparel industry

he total market size of the global apparel retail industry i 2014 was $l,317bn (£856bn, €l,014bn),4 but with - annual growth rate of just 3.8 per cent for the period 310-14.5 This slow growth increased competition, nich was further intensified by a large number of small ayers, although the large international incumbents,

including Inditex (Zara), Gap and H&M, continued to be the market leaders (see Table 1). An example of the new and vibrant smaller players was the Japanese company, Uniqlo, which had started to expand aggressively. Moreover, fashion is, by its very nature, unpredictable and fickle - trends are prone to sudden changes, which makes competition uncertain. End consumers have an enormous selection of garments to choose from and will quickly adopt new trends. In the 'fast-fashion' category they are also extremely cost conscious and will seek out bargains.

Some of the players in the industry are both produc- ers and retailers. For example, Gap Corporation and Indi- tex both manufacture their own products and sell them in their own stores. Other retailers have a multitude of suppliers to choose from. As international trade liberal- ises, the number of suppliers increases and competition

able 1 H&M and its multinational competitors

Positioning and segments Business model Key figures Financials

&M H&M is a retailer of fashion apparel, cosmetics, accessories and shoes for women, men, teenagers and children. Collection of Style (COS) offers customers a combination of timelessness and distinctive trends, for both women and men. The Monki stores provide innovative collections and an inspiring fashion experience characterised by playfulness and colourful graphic design. Weekday sells its own brands but also commissions design collaborations with independent fashion labels. The Cheap Monday stores combine influences from street fashion and subcultures with a catwalk vibe. The latest addition is the luxury store concept & Other Stories.

Tditex (Zara) The flagship brand of the company is Zara. Zara also operates Kiddy's Class stores, which specialise in junior fashion. The Pull and Bear format offers casual clothing. It caters primarily to young males and females and offers a range that starts from sophisticated urban fashions to casual wear. Bershka stores are large and spacious. They are intended to be meeting points for street fashion, music and art. Massimo Dutti stores are located in prime retail locations and offer basic, contemporary styles in next-generation fabrics including high-quality garments. Stradivarius is aimed at young fashion- conscious customers, offering international fashion with the latest designs. Oysho offers fashion trends in women's lingerie and undergarments.

The business is operated from leased store premises, through internet and catalogue sales and on a franchise basis. H&M does not own any factories. Production is outsourced to independent suppliers. H&M's growth target is to increase the number of stores by 1 0 - 1 5 % per year, and at the same time increase sales in comparable units. This growth is entirely self- financed. The collections are created by 140 in-house designers. With an in-house design and a tightly controlled factory and distribution network, the company has the ability to take a design from drawing board to store shelf in just two weeks. That enables Zara to launch new items every week, which keeps customers coming back again and again to check out the latest styles. The company also has a policy of zero advertising and instead invests its revenues in opening up new stores.

At the end of 2014, the company had 3261 H&M stores, 114 COS stores, 92 Monki stores, 22 Weekday stores and five Cheap Monday stores as well as 130 franchise stores. The group outsources product manufacturing to 700 independent suppliers through its 16 local production offices in Asia and Europe. The company employs more than 132,000 people.

Zara is present in 87 countries, with a network of 1991 stores located in major cities throughout the world. Pull and Bear has opened 853 shops in the main streets and shopping centres of 63 countries. Massimo Dutti operates 665 stores in 63 countries. The Bershka sales format has 954 stores in 66 countries. There are currently 858 Stradivarius stores in 56 countries. There are currently 549 Oysho stores in 39 countries.

The company recorded revenue of $20,137m in the fiscal year ending November 2014, an increase of 3 . 8 4 % compared to fiscal 2013. Its net income was $2,691m in fiscal 2014, representing a slight increase compared to a net income of $2,620m in the preceding year.

The company recorded revenue of $20,480m in the fiscal year ending January 2015, which represents a decrease of about 1 0 % compared to fiscal 2014. Its net income was $2,826m during 2014, compared to a net income of $3,212m in the preceding year.

(continued)

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H&M IN FAST FASHION: CONTINUED SUCCESS?

Table 1 H&M and its multinational competitors (continued)

Gap

UNIQLO

Positioning and segments

Under the Gap brand, the company offers an extensive range of apparel at moderate price points. Banana Republic was acquired by the company in 1983. This brand offers sophisticated, fashionable collections at higher price points than the Gap brand. The Old Navy brand was launched in 1994 to address the market for value-priced family apparel. The brand Athleta offers customers performance-driven women's sports and active apparel and footwear for a variety of activities.

The company is a retail chain operator specialising in in-house designed casual clothing for men and women. The company operates stores under the name of UNIQLO. The company is the leading clothing retail chain in Japan in terms of both sales and profits. UNIQLO is a member of Fast Retailing Group, which also operates other chain stores under the franchise names Theory (fashionable basic clothes that suit a contemporary lifestyle), Comptoir Des Cotonniers (the brand nurtures a sense of natural authenticity and flattering femininity), Princesse tam.tam (corsetry, lounge wear and swimwear brand) and G.U. (an entirely new business model for a company offering extremely low- priced clothing in the Japanese market).