Like-for-like sales growth at H&M group has slumped over the past three years, suggesting the Swedish retailer is starting to lose its footing. Drapers examines why it is struggling and what it can do to win back its customers
In the mid-2000s, H&M was at the top of its game. Expansion to the US and Asia contributed to its thousands of store openings during the decade, while a string of highly regarded designer collaborations kicked off with a partnership with Karl Lagerfeld in 2004.
Fast-forward to 2018, however, and a different picture emerges. Operating profit at H&M group dropped by 13% to SEK20.6bn (£1.9bn) for the year to 30 November 2017. Sales grew by 3% in local currencies to SEK232bn (£19.4bn), which CEO Karl-Johan Persson said was “clearly below” expectations.
A poll conducted by Bloomberg in April showed that analysts expected H&M would cut its dividend next year, for the first time since H&M shares began trading in 1974.
Sales growth began to stall in 2016 as more shopper activity shifted online, and heightened competition in the fast fashion sector added pressure.
Analysts have pointed to a variety of problems, but H&M’s core product offering is at the heart of them.
Richard Chamberlain, analyst at RBC Capital Markets, tells Drapers: “H&M has been somewhat stuck in the middle, between value fashion retailers such as Primark, and retailers with more margin for error that can absorb the costs of online development.”
He cites Zara as an example of the latter. It uses centralised distribution from La Coruña, north-west Spain, and can easily adapt to fulfil online orders. H&M, however, operates from local warehouses, necessitating replication of stock.
“H&M, appears to have been caught out by effectively trying to offer something for everyone,” notes Chamberlain. “Cheap prices, but not the cheapest except in Sweden; quality, but not good enough given its pricing; and an uncompetitive online offer.”
“It is leading in sustainability, but unfortunately our surveys indicate that’s only high on the agenda for Scandinavian shoppers. Quality and price are more important in other markets.”
Slow on the uptake
Persson vowed in H&M’s 2017 full-year report to broaden its digital offering, outlining plans to better align its physical and digital stores to improve customer experience. These include services ranging from click-and-collect and scan-and-buy, to online returns in store.
Among these initiatives, H&M is piloting RFID (Radio Frequency Identification) technology, which aims to improve how it can locate items with digital price tags. It will be gradually rolled out across more markets this year.
This is encouraging, but H&M will need to work quickly, says Cedric Lecasble, European retail senior analyst at Raymond James. He adds that H&M is starting to catch up to its rivals but “is not on top of it yet”: “It’s increasingly the norm to offer full online capabilities. H&M was late to the game both technically and in terms of service. It was late on features such as RFID technology. Until very recently it hadn’t changed.”
It also needs to work faster to offer competitive delivery and collection options. Currently, customers pay for deliveries and returns unless a minimum purchase is made. A click-and-collect service, meanwhile, only started in the UK in 2017.
“Offering these services for free might pressure its margins a bit, but it is really a top-line issue. To recover the top line, you should recover volume and traction, and to recover traction you need to be more competitive in what you are offering consumers,” Lecasble says.
Engaging the modern shopper
A predominantly bricks-and-mortar player, H&M’s ecommerce proposition lags behind its rivals when it comes to engaging its customers, who are increasingly shopping online. Its digital strategy is something Persson is hoping to drive – H&M’s latest report for the three months to 28 February anticipates online sales will grow by 25% in 2018.
Martin Newman, executive chairman at ecommerce consultancy Practicology, says that while H&M is “obviously starting to do a better job of joining channels together”, it still has some way to go in building customer confidence online.
For example, it has not taken the step to provide product ratings and reviews, which rivals such as Arcadia’s Topshop offer. Newman says these tactics are important in boosting conversion as they can give customers a feeling of empowerment.
“Even with value price points, people want to know that what they’re buying is ultimately a good purchase and has some durability. It’s that reassurance they can get from other people like them that is missing. It is all about customer empowerment,” says Newman.
H&M’s unsold inventory has been piling up. On 28 February it reported that it had nearly 35bn SEK (£3.3bn) in stock-in-trade – an increase of 7% on the previous year.
In its three-month report, H&M explained the higher-than-planned increase was a result of expansion as well as weak sales development during the quarter. Consequently, increased markdowns are predicted, which has fuelled concerns about a further drop in full-price sales.
Chamberlain says: “H&M has been educating its customers to wait for sales and an inventory overhang will lead to more aggressive markdowns later this summer and in the autumn.
“It can resolve these issues by strengthening its product and omnichannel offer, which should gradually increase its level of full-price sales.”
Driven to distraction
In addition to established fascias H&M, & Other Stories, Cos and Weekday, H&M group has announced a string of launches in recent months. These include the April debuts of online luxury label Nyden and an affordable bridal range. Discount fashion site Afound, meanwhile, will launch later this year.
Although the deluge of new products and brands signals the retailer’s proactive attitude in keeping consumers engaged, analysts are concerned it has left H&M group distracted.
“It seems that every month there is a new brand or fascia. I can see that they’re trying to innovate, and that they’re struggling so they want to find new ways to stimulate new interest, but it’s a little bit of a distraction in getting some of the basics right,” says Kantar Consulting senior fashion analyst Anusha Couttigane. “It clearly has lots of great ideas, but it needs to scale back a bit, and focus on building out some of those ranges.”
GlobalData senior retail analyst Sofie Willmott agrees: “H&M seems like it is dipping its toe in a bit of everything, which is important in keeping shoppers interested, particularly in the competitive young fashion value market, but they need to make it clear what they’re doing.
“Sometimes its product ranges can be overwhelming, so it needs to curate its offer and edit it down.”
With a changing market, demanding shoppers and an expanding portfolio of brands, H&M group has its work cut out, but it finally seems to be addressing the issues that have caused it to lag behind in recent years.
The Drapers Verdict
As customer behaviour leans away from physical stores towards online, H&M’s pledge to expand its digital offering will undoubtedly set it on the right track.
However, there is clearly a plethora of issues that it needs to focus on. It will need to reassure the market on its inventory management and improve its supply chain flexibility to develop a more competitive offering.
Crucially, its vast array of new brands and products indicate it has many impressive ideas, but it must strive not to allow its core H&M brand to suffer as a result.
H&M needs to go back to basics and focus on getting its product and customer service correct if it is to recover its lost market share and compete in an increasingly difficult climate.