Founded in 1947, Swedish clothing retailer H & M Hennes & Mauritz AB (STO: HM-B), commonly known as H&M, has grown into one of the most recognizable brands in the fashion industry. As reported by Bloomberg, H&M has almost 4000 stores worldwide and has plans for 7000-8000 more stores in the future. H&M is quickly approaching the level of proliferation that its biggest rival Inditex (BME: ITX), operator of the Zara brand, currently possesses. (For more, see also: H&M Vs. Zara Vs. Uniqlo: Comparing Business Models and The Industry Handbook: The Retailing Industry.)
The Secret to H&M's Success: Fast Fashion
The secret to the success of H&M, Inditex and Forever 21 can be attributed to their “fast fashion” model. As summarized by Forbes, fast fashion is the idea of moving large volumes of merchandise from the designer table to the showroom floor in the shortest amount of time possible. The retailer can achieve this goal by having higher merchandise turnover and by constantly resupplying the product pipeline with the latest fashion trends. H&M’s model also requires a solid marketing team that can quickly determine what their target demographic desires and implement the necessary changes into the supply chain. Of course, the backbone of fast fashion is its low prices, and fast fashion has also been pejoratively labeled “cheap chic,” because H&M and Zara clothes are notorious for their “disposable” quality and easy to manufacture nature.
H&M's Brand of Fast Fashion
While fast fashion is not isolated to H&M, the Swedish brand has a distinct business model. Unlike Zara, H&M does not manufacture its products in-house. H&M outsources its production to more than 900 independent suppliers across the world, mainly in Europe and Asia, which are overseen by 30 strategically located oversight offices.
To incentivize fair working conditions, H&M introduced a pilot program for its Bangladesh and Cambodian factories in 2013, which involved the company purchasing 100% of the factories’ outputs over a five-year span. H&M hoped that by being the sole customer, it is better able to ensure safe working conditions while increasing productivity much more naturally, as opposed to enforcement through routine compliance inspections.
Secondly, only 80% or so of all store merchandise is stocked year round, while the remaining 20% of H&M products are designed and stocked on the fly in smaller batches, depending on the prevailing trend. To ensure timely delivery and fast lead times, H&M relies on its state-of-the-art IT network, which allows integration between the central national office and the satellite production offices. (See also: Zara's Agile Project Management Advantage.)
Caveat Emptor: Store Openings May Not Translate to Stock Value
It is worth noting that despite H&M's lofty ambitions, its stock price is currently 21% off all-time highs made in February 2015 (364 SEK vs. 288 SEK). So what gives? Does this mean that the Swedish retailer is slowly losing its competitive edge? In research notes published by Deutsche Bank (April 2016) and Morgan Stanley (March 2016), the firms noted H&M’s falling like-for-like (same-store sales, adjusted for standardized for normal course of business, also known as “LFL”) sales growth, which have barely outperformed the real GDP growth rate of H&M’s operating countries, as well as growing cost pressures/ falling margins, and the company’s heterogeneous product mix, which relies primarily on the core H&M brand. Moreover, Morgan Stanley warned of a potential drop in the bottom line profits as the company fully matures, and growth begins to wane. The research firm noted that H&M's profit densities (profit per meter squared) have been steadily decreasing since 2007, in part due to expansion into less developed markets, and it is only a matter of time before H&M's steady annual rate of new store openings can no longer compensate this shortcoming.
The Bottom Line
Since its founding in 1947, H&M has grown to one of the largest fashion retailers in the world. The secret to the Swedish retailer’s success is its application of “fast fashion”, which relies on taking advantage of fashion trends as they appear and getting products onto the shelves from the design room floor as quickly as possible. However, despite its consistent store expansion rate, H&M is in danger of facing slowing growth, which comes with maturity, as evidenced by its falling profit densities and LFLs.