Evaluation of H&M's current market strategy and its fit with internal and external environment

1. Current Strategy of H&M Group

Hennes & Mauritz Group (H&M Group) is a clothing manufacturer and retailer in the fast-fashion business. Ever since its inception in the 40s of the previous century, H&M (then known as Hennes) was positioned to offer ‘frequently updated fashion at affordable prices’ (H&M Group, n.d.). While this may not seem like a fresh idea in the Instagram era of online-native fast-fashion retailers, it certainly was 72 years ago, when H&M was founded. Since H&M stayed with this strategy until today, it could be argued that the fast-fashion mindset has been part of their strategy since their very beginning, although how ‘fast’ the fashion was exactly has likely changed over time.

Nowadays, H&M Group is one of the largest apparel manufacturer and retailer in the world (Kohan, 2020), owing to their successful execution of the fast fashion business model (Tun, 2019). Generally speaking, fast fashion can be defined as a business model where lead times are shortened comparing to the standard manufacturing processes, with the idea to meet customer demand more frequently. Customers are offered affordable products (Joy et al., 2012) which mimic the ‘hot trends’ of a given moment (Cachon, Swinney, 2011). Thus, the competitive advantage H&M Group has developed is the ability to produce low-cost, fashionable clothes fast, and to make them widely accessible to consumers all over the world (74 markets in 2020). This choice of strategy for competing in the apparel manufacturing and retail industry has also been reflected in the group’s mission statement: “We are a family of brands driven by our desire to make great design available to everyone in a sustainable way.” Notably, and much due to an avalanche of environmental criticism in the recent years directed toward fast fashion retailers, H&M has incorporated sustainability as one of their core company values. This strategy refinement was reflected in the recycling initiative H&M introduced in 2013 (Stevens, 2020) which allows customers to drop-off any brand’s clothes in H&M stores for recycling, while receiving a 15% discount on their next purchase.

Regrettably, after years of growth, H&M Group’s profits have been sliding ever since 2014, showing only a mild sign of recovery in 2019 (Chart 1).

Chart 1 –Operating profit of the H&M Group worldwide from 2009 to 2019 (Statista, 2020)

To put this into a context and infer the larger trends affecting the industry, H&M performance will now be compared with their key competitors. Firstly, their results will be compared with those of Inditex, a clothing retailer and manufacturer, the owner of a portfolio of fast-fashion brands such as Zara. When comparing financial statements, it becomes apparent that Inditex has been realizing significantly higher revenues and operating margins, year-on-year, during the same period (Chart 2 and 3)

Chart 2 – Revenues of H&M Group and Inditex from 2009 to 2019

Chart 3 - Operating margin of Inditex and H&M from 2008 to 2018 (Hudgins, Naik, 2019)

Similarly, when looking at each group’s core brands, Zara of Inditex has an upper hand over H&M namesake brand (Chart 4).

Chart 4 – The brand value of H&M and Zara from 2010 to 2019 (Shahbandeh, 2020)

Secondly, when analysing the fast-fashion industry as a whole, it becomes apparent that H&M has been losing market share to the new generation of online-native fast fashion companies, the likes of Asos and Boohoo (Financial Times, 2019), shown on Chart 5.

Chart 5 - The compound growth of H&M and its main competitors for the period between 2014 and 2018 (Financial Times, 2019)

To summarize, while H&M remains one of the largest fast-fashion companies, they have been faring increasingly worse than their key competitors during the last 5 years.

Finally, H&M has been noted to have an infamous ‘inventory challenge’ (Kent, Crump, 2019), although they are hardly the only fashion company facing this problem (Lieber, 2018). Their inventory has been estimated at $ 4 billion dollars in 2018, which showed significant deadstock (Kent, Crump, 2019), as H&M was not able to sell a significant portion of the goods they produced. The controversy and the discussions surrounding the H&M overstock served as a reminder to the fashion industry as a whole about the environmental consequences of overproduction (Patron, 2018) and the widespread practice of burning excess stock (Davis, 2019).

The primary reason for H&M Group’s falling profits has been attributed to their slowness to adapt to the change in consumer preferences, namely, the switch to online shopping (Kent, Crump, 2019). H&M has been relatively slow to introduce modern online stores for their brands, which is considered somewhat typical for the traditional brick-and-mortar retailers such as H&M (Martin, 2018). Also, while H&M was focusing on opening more physical stores, the new generation of digital-native companies was already connecting online (Milne, 2020) with Millennials, and increasingly, the Generation Z, the primary target groups of fast fashion retailers. Finally, H&M appears to be too slow for their fast-moving industry. Their lead times were estimated by Goldman Sachs to be twice longer than Inditex’s (Ringstrom, 2017), while the new wave fast-fashion companies the likes of Boohoo are faster than both, speeding the fast-fashion towards ‘ultrafast fashion’ (Coresight Research, 2017).

Motivated by the desire to reclaim their lost fame, H&M decided to change their business strategy and catch up with the competition. They have devised a plan to improve in four key areas: digital platforms, infrastructure of the supply chain & logistics, desirability of its products & physical stores, and finally, future-proofing its business model and operations (Kent, Crump, 2019). H&M introduced this plan and began its implementation not too long before the COVID-19 pandemic struck and heavily affected the fashion retailers, due to their complex supply chains which depend on the normal functioning of cross-border traveling, imports, timely production and sales (Henkel, 2020). Recently, H&M has restated their commitment to executing this plan and weathering the coronavirus industry storm by closing down 250 physical stores and focusing on their online presence (Milne & Provan, 2020) This essay will assess their business strategy and its likelihood of improving their prospects, in the world where COVID-19 has accelerated the previously existing trends such as the switch to e-commerce shopping.

References

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