H&M:

A Passion for Fashion

Diego Andia
Liangyu Liu
Yuqing He
Daniel Rezaie
Sam Simon
Fashion Industry 2

Overview of the Company: H&M 3

The global expansion 4
The development of brand and product category 4
The primary business of H&M 5
E-commerce on H&M 6

Business model and corporate strategy of H&M 6

Competition 9
Porter's Five Forces Analysis 9
Principal Competitors 9
Competitive Strength & Weakness of H&M (Mostly compare with ZARA) 10

Retail Market Strategy 12

Target Audience 12
Brand Image 12
Location Strategy 13
Merchandising Strategy 13
Pricing Strategy 13

Trends in the Future 15

Industry 15
Company: H&M 16

Summary and Suggestion 16

1
Fashion Industry
The fashion industry, which is dedicated to the business of making and selling clothes, is
one of the past decade’s rare economic success histories1. According to the McKinsey
Global Fashion Index, the fashion sector would be the world’s seventh-largest economy
if ranked alongside individual countries’ GDP (now be worth an estimated $2.4 trillion).

This sector involves the design, manufacturing, distribution, marketing, retailing,

advertising, and promotion of all types of apparel (men’s, women’s, and children’s) from
the most rarefied and expensive haute couture (literally, “high sewing”) and designer
fashions to ordinary everyday clothing2. Fashion is well defined as the style or styles of
clothing and accessories worn by groups of people at any time.

The Business of Fashion, together with McKinsey, developed a survey to obtain the
sector's expectation for 2017: 40 percent of respondents expect conditions for the
industry to improve this. However, it is important to mention that 37 percent of
respondents expect conditions to get worse and a significant number of fashion
heavyweights do not foresee any kind of recovery in 20173.

Companies must be able to adapt to external factors, which include aspects such as;
consumer characteristics, technology, government influence and the economy4. In the
same way, macro-environment factors will determine the ability to differentiate from
key competitors and overall success.

1
https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion
2
https://www.britannica.com/topic/fashion-industry
3
https://www.businessoffashion.com/articles/intelligence/10-fashion-trends-define-agenda-2017
4
http://smallbusiness.chron.com/macroenvironmental-factors-affecting-clothing-industry-37254.html
2
Last year (2016), the fashion industry was one of the industry's toughest years,
different events in France, Brexit vote in the United Kingdom, and the volatility of the
Chinese stock market have created shock to the global economy. At the same time,
according to McKinsey, consumers have become more demanding, more discerning, and
less predictable in their purchasing behavior, which is being radically reshaped by new
technologies.

The most important points are included in the following table:

Consumer factors must be understood by retailers in order to
create new styles. For example, H & M will understand factors
Consumer Factors
such as culture, lifestyle, demographics, among others to
generate a competitive advantage in each country.

Technological factors affect the industry since it includes several

Technological points, among them; availability of resources, demand and
Factors production. H & M is introducing new tools, including online
sales, to try to be closer to the customer.

The factors can have both positive and negative effects on the
garment industry. During periods of economic boom, people have
Fashion Industry more income and thus have more resources to buy clothes.
However, McKinsey has shown that in periods of uncertainty,
people generate a greater demand for accessories.

Overview of the Company: H&M

Hennes and Mauritz (H&M) is a Swedish multinational clothing retail company, known
for its fast handling of fashion clothing logistics for men, women, teenagers and children
with quality at the best price to everyone. H&M has more than 4,300 stores in 64
different countries worldwide. They are able to do it in a sustainable way today,
tomorrow and in the future through the brands H&M, COS, Monki, Weekday, Cheap
Monday and & Other Stories brands, along with home interiors at H&M Home.

The main driver for H&M is the customer-focused, which is supported and related to the
DNA of the company: fashion, fun and action. They also develop a creative and
responsible fashion strategy, with the intention to be different in a competitive market.
For example, the culture, values and guidelines (“H&M Spirit”) are reflected in their
daily work along with policies and guidelines. With this purpose, each worker is able to
express the “H&M way”, so each one encourage new talents as they grow5.

5
https://about.hm.com/content/dam/hmgroup/groupsite/documents/en/hm-way/HM%20Way_en.pdf
3
The global expansion
The history of Hennes & Mauritz (H&M) can be dated back to 1947. In the beginning,
Erling Persson just opened a shop exclusively selling women’s clothing, which is called
Hennes ​(Swedish for "hers"). In the 1960s, Hennes covered most areas of Sweden and in
1964 and 1967, Hennes expanded its market to Norway and Denmark, two of the
neighboring countries of Sweden. In the 1980s and 1990s, the foundation is laid for
global expansion, as H&M opened new shops in Germany, Netherland, France and etc.
Until 21 century, H&M began to step out Europe and expand their market to North
America, Asia, the Middle East, Africa, South America, and Australia.

The development of brand and product category

In 1968, Hennes began to expand its target market, by acquiring the hunting apparel
retailer ​Mauritz Widforss​, which is the start of offering of men's and also children's
clothing, leading to H&M offering clothes for the entire family. And since then, the name
changed to Hennes & Mauritz. In 1973, H&M starts selling underwear. The same year,
ABBA-member Anni-Frid Lyngstad becomes the first "supermodel" to be photographed
for the company, wearing make-up from the new cosmetics range.

In 1974, Hennes & Mauritz is listed on the Stockholm Stock Exchange. The same year,
the stores are rebranded with the abbreviation “H&M”. In 2007, the H&M Conscious
Foundation is founded as a non-profit global foundation and in the same year COS, a
new brand belonging to H&M Group, is born. And in 2008, Weekday, Monki, and Cheap
Monday are welcomed to the H&M group through the purchase of FaBric Scandinavien
AB. Home styling becomes more fun thanks to the launch of H&M Home in 2009.

And in the following years, the independent brand & Other Stories, H&M Sport (selling
fashionable sportswear in functional fabrics for the entire family), H&M Shoe, H&M
Beauty (providing a full range of specially designed makeup, body care and hair styling
products), new brand ARKET selling essentials were continuously launched. Since then,
the product of H&M ranges from clothing for the whole family, shoes, accessories,
cosmetics, underwear to furniture.

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The primary business of H&M

The major brand of H&M Group is H&M, which has 64 markets for physical stores, 35
for online stores, and 3962 stores around the world until 2016, accounting for about
91% of total stores of H&M Group.

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 6

E-commerce on H&M
It should be stressed that there was a development of retailing format from physical
stores to multi channel. In 1998 H&M started operating E-business and the first online
market is Sweden. And in 2013, the online store in the US is launched. With the
existence of online stores, H&M operates in multi-channels7.

H&M in the last 5 years has been implemented and enhancing its online channel. The
Swedish group adds about 35 online markets, where the CEO of the company,
Karl-Persson rescues the following: ​"was characterized by a change in the industry
towards the growing e commerce and digitalization”.​ In this sense, the brands COS, &
Other Stories, Monki, Weekday and H&M Home have benefited from the channel to
ostensibly increase their sales8.

Lastly, H&M occupies the second position in the ranking developed by SEMrush on the e
commerce with the most Internet traffic in the world. Asos ranks first, while Macy's is in
third place9.

Business model and corporate strategy of H&M

H&M’s business concept is to offer fashion and quality at the best price in a sustainable
way, which can also be regarded as the value proposition of H&M.

Fast-fashion model
The secret to the success of H&M can be attributed to their “​fast fashion​” model, which
means the idea of moving large volumes of merchandise from the designer table to the
6
https://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/cision/2017/01/18
69818.pdf
7
http://about.hm.com/en/about-us/history.html
8
https://goo.gl/9aTLeU
9
https://goo.gl/ygwdEG
6
showroom floor in the shortest amount of time possible. The retailer can achieve this
goal through having higher merchandise ​turnover and by constantly resupplying the
product ​pipeline​ with the latest fashion trends.

In order to do that, H&M requires a solid marketing team that can quickly and
accurately get the market information of latest fashion, determine what their target
market desires and implement the necessary changes into the ​supply chain​.

The application of multi channel and global expansion can help them to understand the
customer's preference in a better way. As we show above, H&M already has 4351 in
2016 covering more than 60 markets across 6 continents. H&M also e-commerce
platform to reach its customers in more than 30 markets. Such broad customer base
helps H&M get the information and preferences of customers from different countries.
And thus with data analysis, H&M can predict the change of market more accurately.

An important enabler to H&M’s ability to react quickly is its network of 20 to 30

production offices, which are placed close to its suppliers. These offices work with both
the buyers in Sweden and the production facilities, reviewing samples, checking quality,
and choosing the suppliers, which will handle each order​.

In addition, flexible and fast supply chain helps H&M to manage a short lead time and
implement the latest changes to respond quickly to market changes. H&M makes their
supply chain more responsive with the use of a well-developed IT system which
integrates its production chain and allows real time communication. Stores are
connected to logistics and warehouses by a Central Inventory Management Software
that makes it easier to order and replenish the stores. This central inventory
management system is used by the head office to monitor the sales trends and make
production and design decisions on its basis. This kind of centralization can make
decision-making process more efficient.

Cost efficiency to provide lower-price products

The backbone of fast fashion is low prices. H&M are trying to form a long-term
sustainable relationship with suppliers, by increasing the trust, transparency and
responsibility. Such effort can help H&M acquire low-cost and sustainable material
resources, which can reduce the cost and reduce the risk of market changes.

The company does not manufacture its products ​in-house but outsources its production
to ​suppliers across the world​, 60%10 in Asia and the rest in Europe. As we know,
nearshore outsourcing in Europe can have higher labor cost and shorter lead time than

10
https://www.forbes.com/sites/gregpetro/2012/11/05/the-future-of-fashion-retailing-the-hm-approach-
part-3-of-3/#6166ea914a60
7
offshore outsourcing in Asia. And through tradeoff between lead time and cost, H&M is
trying to optimize the outsourcing strategy.

In addition, in the distribution sector, to transport its goods from factories to stores,
H&M relies on rail and sea as a means to promote efficiency within its internal ​logistics​.
As for the inventory strategy, ​only 80%11 or so of all store merchandise is stocked year
around​, while the remaining 20% of H&M products are designed and stocked in smaller
batches, depending on the prevailing trend, which can not only reduce the inventory
cost, the possibility of stockout and markdown, but also make supply chain more
reactive.

Provide products with quality and sustainability12

H&M strives to create clothes that will have a long life, with materials that can be
recycled. Sustainable materials such as organic cotton, recycled polyester and recycled
wool are being included across H&M’s product range to produce sustainable fashion.
Garments that can be combined in lots of different ways and enjoyed over many seasons
also extend the fashion life cycle. In 2013, H&M launched garment collecting initiative
worldwide. People can drop off unwanted garments in H&M stores across the globe, no
matter what brand and what condition. And H&M will sort the garments into three
parts: rewear (clothing that can be worn again will be sold as second hand clothes) ,
reuse (old clothes and textiles will be turned into other products, such as cleaning
cloths) , and recycle (everything else is turned into textile fibres, and used for things like
insulation).

Coverage for wider market to appeal more customers

Multi-brand strategy helps H&M cover several targets market to get as more customers
as possible. As we know above, H&M Group has several brands including H&M, COS, &
Other Stories, Monki, Weekday and Cheap Monday. Each of them has different price
ranges and unique styles, which lets customers explore their own personal style. For
example, H&M offers good quality and sustainable fashion at affordable prices while
Cheap Monday are more influenced by street fashion and youth subway culture13. In
addition, global expansion can also help H&M reach wider markets.

11
​https://www.investopedia.com/articles/investing/041216/hm-secret-its-success.asp
12
http://sustainability.hm.com/content/dam/hm/about/documents/en/CSR/2016%20Sustainability%20r
eport/HM_group_SustainabilityReport_2016_FullReport_en.pdf
13
h​ ttps://www.cheshnotes.com/2017/03/business-model-of-hm/
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Competition

Porter's Five Forces Analysis

Currently, there are several retail companies in the market

where H&M is present. However, within the industry there
Threat of new
are regulations within each market, so the investment capital
entrants
is usually high. Finally, fashion products tend to have a high
margin of recovery

A negative point in low-cost fashion is the lack of loyalty that

exists on the part of the consumer. In addition, the price is a
Power of buyers very important variable for customers. Finally, the purchase
volume is small (usually), that is, a single buyer is little
relevant to the company.

The companies are able to offer a better price-quality ratio

because the factories are located in countries that provide
Power of supplier better facilities, among them; low labor costs. On the other
hand, retailers can impose conditions because they have
more power than suppliers.

In the market there are many existing local, national and

international competitors. Also, the price is an important
Threat of Substitution variable when considering evaluating alternatives (at the
moment of buying). Finally, in this market, the good image of
the brand throughout the world is very important.

Existing Competitors ZARA, UNIQLO,​ ​GAP

Principal Competitors
There are four biggest fast fashion companies around world now, which are ZARA,
H&M, GAP and UNIQLO.

Zara, founded in 1975, is a ​Spanish clothing and accessories retailer based in ​Arteixo​,
Galicia​. It is the main brand of the ​Inditex group, the world's largest apparel retailer. The
fashion group also owns brands such as ​Massimo Dutti​, ​Pull&Bear​, ​Bershka​,
Stradivarius​, ​Oysho​, ​Zara Home​, and ​Uterqüe​. Zara as of 2017 manages up to 20 clothing
collections a year.

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GAP​, founded in 1969, is an American worldwide clothing and accessories retailer. The
company operates five primary divisions: Gap (the namesake banner), Banana Republic,
Old Navy​, Intermix, and Athleta. Gap Inc. is the largest specialty retailer in the United
States, and is 3rd in total international locations, behind ​Inditex​ Group and ​H&M​.

UNIQLO is a ​Japanese ​casual wear designer, manufacturer and ​retailer​. The company
has been a wholly owned subsidiary of ​Fast Retailing Co., Ltd.​ since November 2005.

Competitive Strength & Weakness of H&M (Mostly compare with ZARA)

1. General comparison with main competitors

14

As we can see from the annual report of the 4 companies, ZARA has been the market
leader with H&M competing behind. Followed are UNIQLO (Fast Retailing) and GAP.
Even though H&M has sales slightly behind ZARA, it wins the highest growth rate in
sales. We can consider ZARA and H&M the two strongest fast fashion brands in the
world now.

15

According to 4 companies’ annual report, ZARA has the most physical stores all around
the world, followed by H&M. This can also be an indicator of the ranking of 4 fast

14
Annual report of UNIQLO, ​http://www.fastretailing.com/eng/ir/
15
2016 Annual Report of four brands
10
fashion groups. We can also see that GAP is the only brand that has a decrease in stores,
which may also indicates its not good performance.

2. General comparison with main competitors

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H&M
and ZARA are both fast fashion brands, bringing totally new business model. As you can
see from the chart above, they have different strategies from traditional clothing brands.

Zara seems trying to do things totally different: Price much more lower than traditional
one, with least advertisement and most new product every year, they are trying to
respond fastest to the market and bring fashion to every customer. In this case, they
only try to produce limited number of clothes for each style and has the most SKU,
which can bring the lowest turnover and stockouts.

H&M also get the point of fast fashion, trying to offer more styles of clothes with
acceptable quality in low prices. However, it is kind of ‘In the middle’, trying to find a
balance between traditional brand and ZARA. As we can see on the chart above, H&M
(the orange line) is always between the other two lines, such as number of new
products, economics of scale, turnover and stockouts.

16
Rolf-Christian Wentz “Business Model Innovation”
11
Retail Market Strategy

Target Audience
Demographics and psychographic segmentation are used for H&M to reach all their customers.
H&M is spread throughout the world. This means that the company targets many religions,
culture and lifestyle. Therefore, their marketing has to be done differently in different areas.

1. Segments by class: H&M strategy is offering high fashion at low prices, typically
targeting working class, lower middle class and students (The Average income
Sweden €3100).
2. Segments by class/home: The most popular segment is women aging between 15
and 30 years, either still living at home, in student dorms, or in their first house in
urban regions
3. Segments by age: The most popular segment is women aging between 15 and 30
years commonly known as generation Y, ambitious with high buying power.
4. Segments by family life: Typical college to graduate females life at home single, on
their own in dorms or in their first home, either single or as a young couple
without children.

(Influences: Cultural, social, personal and psychological influences result in a lifestyle and
personality.) This group is looking for affordable fashion and typically shop at more than one
store. They are fashionable consumers whose shopping as a social activity providing pleasure in
their daily lives. They buy clothes each season, want to follow trends and are very up-to-date.

The target audience is very similar to their biggest competitor Zara which has a slightly younger
and more fashionable main target audience.
In general Zara is seen as the more exclusive brand of the two. Zara’s higher concentration on
fashion both in clothing as well as in-store design is reflected in the slightly higher pricing of
their products.17

Brand Image
H&M wants its brand to be seen as a sustainable, high fashion but yet affordable for the majority
of people. ​They spend 3% of annual sales on advertising their brands with recognizable
celebrities and enters collaborations with more exclusive brands in their new collections.
Comparing to Zara which only ​spends 0.3 per cent of sales on advertising and a market average
of 3.5 per cent.18

17
​https://simconblog.wordpress.com/2015/12/19/h-n-m-brand-analysis/
18
​https://www.slideshare.net/SavannahKuang/hm-imc-campaign

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Location Strategy
Being close to the customers is key to success and even more important as the physical and the
digital world become increasingly integrated. The stores that they are opening have very
favourable and flexible leases, are in good locations and are profitable with a short payback
period. 19

Merchandising Strategy
H&M utilizes approximately 800 suppliers who in turn use subcontractors. In all, around 2,500
production units and hundreds of thousands of people are involved in the manufacturing and
supply chain of their merchandise.20

H&M offers roughly 2800 different products every year in their portfolio. While most clothing
retailers manufacture and offer to the public for sale 2,000 to 4,000 different articles of clothing,
Inditex production has been markedly higher, at over 10,000 pieces produced per year. This
unique feature of the company's strategy has allowed Inditex to appeal to a broader number of
customers with unique tastes.21

Financially the gross margin is mostly affected by the decisions that H&M takes in line with its
strategy to always have the best customer offering in each individual market – based on the
combination of fashion, quality, price and sustainability their merchandise strategy reflected in
numbers will show us that. 2016 gross margin is 55,2% (57%)22

Pricing Strategy
The major competitors of H&M are GAP and Zara. As compared to both of these brands, H&M
products have relatively lower prices as a part of its marketing mix pricing strategy. This is due to
lower cost of manufacturing and transportation costs by H&M (Main focus is given on cost
minimization). On an average H&M products have prices at $25 whereas that of Zara’s are $45. High
quality and considerably lower prices attract the youth and hence leads to increase in sales for the
company.

H&M spends roughly 3% of their annual sales on advertising. Comparing to Zara which only​ ​spends
0.3 per cent of sales on advertising. Market average of 3.5 per cent of competitors. The amount may
seem to be greater but H&M advertisement is more expensive due to their physical presence in the
inner city as compared to Zara who advertise more through social media.

19

20
https://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/cision/2017/01/18
69818.pdf
21
https://www.investopedia.com/articles/markets/120215/hm-vs-zara-vs-uniqlo-comparing-business-m
odels.asp
22
https://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/cision/2017/01/18
69818.pdf

13
 - The Pricing, which is an effect of their low manufacturing cost is one of the biggest
competitive advantages compared to their biggest peers.
- The customer loyalty is very low and their image might not live up to what Inditex owned
Zara has. It’s not a big difference but big enough for some fashionable customers to pay a
little bit of a premium.

Financial Analysis

Above are the income statement and key financial indicators for H&M and two of its
most prominent competitors, Gap and Inditex (Zara). H&M’s numbers are most
comparable with Inditex, both of which have much better sales and profitability
statistics than Gap. H&M has a gross margin of 55.2%, well above Gap’s and just under
Inditex’s. They have a very healthy operating margin as well at over 12%, and the
highest return on assets at a very high 18.9%. HM’s GMROI is slightly above Gap’s, while
below Inditex, however all three are relatively high, displaying a large sales volume
versus average inventory over the past year. This is also represented in their inventory
turning over 6.1 times per year.

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These indicators demonstrate that H&M does a great job of projecting expected demand
and sale, and managing their inventory supply. Their revenue growth from 2015 to
2016 is a very healthy 6.3%, however it is well behind industry leader Inditex, whose
market strategy has proved to be unique and has helped them gain a large market share.
Given H&M’s growth and statistics, it would be best for them to continue to invest in
improving their products, marketing, and industry position. A substantial investment in
product development and marketing could initially see their profitability metrics take a
slight dip, however it would serve to increase their volume of sales to close in on
competitor Inditex and further increase future growth metrics. These investments could
also increase their earnings per share, which is currently ahead of Inditex and behind
Gap, which could potentially increase investment in H&M, inflate their share price, and
leader to increase future profitability.

Trends in the Future

Industry
In the short time, the industry has the chance to improve and make betters results.
Forbes mention that the fashion industry would undergoing significant change at the
hands of the digital revolution23. McKinsey mentions that over the next few years it
would be three trends that will shape the fashion industry: the global economy,
consumer behavior, and the fashion business model.

Related to the consumer behaviour, companies will have to learn to provide a better
service and adjust it to a shifting demographic profile. Therefore, brands will need to
deliver emails that appear to speak to consumers as individuals, based on their habits
and behaviours. The relationship between companies (B2B) have been doing well for a
while, but the opportunity to improve is inside the relationship between companies and
customers (B2C).

According Salesfloor’s 2016 Omnichannel Retail Associate Study, 87% of shoppers say
that sales associates influence in-store purchasing decisions, more than half of shoppers
feel that service is lacking online24. The same source add that younger generations
increasingly expect customer service over social media and mobile apps means that
brands need to be on those channels and ready to supply content and information.

23
https://goo.gl/cr3KBB
24
https://insights.newscred.com/fashion-content-marketing-2017-top-trends-leading-brands/
15
Company: H&M
H&M has invested and will continue investing in the digitalisation and infrastructure of
IT systems that could bring them development and new revenue.
1. Omni-channel strategy: H&M has a clear omni-channel strategy that they are
trying to integrate the digital and physical world in order to offer customers a
more seamless shopping experience. This includes online purchases and online
returns in stores, click & collect, mobile payments, further development of the
customer club and use of the mobile in stores for increased service. Such
development can help H&M adapt to the trends of fashion industry.
2. Supply chain: H&M are upgrading their supply chain to make it faster and more
flexible. In order to do this, H&M invests a lot in technology such as RFID and
automated warehouses. H&M are also adding new delivery options for
customers, such as next day delivery which are already offered in five markets,
and time-slot deliveries in Japan.
3. Advanced analytics provide an important support for operations. The algorithms
H&M haS started to use will contribute to improvements within everything from
assortment planning and logistics to sales. 25

Summary and Suggestion

When taking an overview of the H&M retailing strategy, we can see that it is doing quite
well which has been a key factor of their success. Throughout its history, H&M has
developed a very clear strategy, being able to engage different types of markets with
different proposals. Also they have been able to expand their proposal through new
formats, including the online sale.

Firstly, H&M’s business concept is to offer fashion and quality at the best price in a
sustainable way. In this case, the success of H&M is attributed to their “fast fashion”
25
Annual report of H&M, 2016
16
model which is based on a solid marketing team, including the participation of famous
designers. Furthermore, they are able to determine the desires of the main customer
and implement the necessary changes into the value chain.

Secondly, H&M has healthy earnings and profitability metrics although they trail
Inditex, the current industry leader. In order to increase sales volume and gain some
market share from Inditex, H&M could further invest into product development and
their marketing strategy. This may initially hinder profitability margins, but could lead
to an increase in future growth and help them catch Inditex in terms of sales volume,
while continuing to increase EPS.

Regarding the retailing strategy H&M is spending a lot more on advertising to reach out
to its target audience. A more cost efficient supply chain management have let them
press down prices more than their rivals. Finally H&M is focusing a lot of recourses to
create a user friendly cross channel between their physical and online-stores.

Looking back to the main purpose of the H&M, we believe that there will be certain
changes or new trends in the future. On the one hand, we believe that there will be
changes within the fashion industry thanks to new trends in technology. In addition,
consumer behavior will be increasingly personalized so that H&M will have the
opportunity to improve the business relationship (B2C).

Lastly, the company should be open to new changes regarding to their main strategy.
We consider that H&M is doing well in terms of omni-channel strategy, supply chain and
advanced analytics information. The investments in these areas ensure that we are well
positioned for continued long-term and profitable growth.

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