The World War on Retail clothing: H&M, Zara and Shein

Swedish fashion giant Hennes & Mauritz (H&M) reacts to the dominance of Chinese online retailer Shein with faster product launches. In the future, new products will be able to be on the customer shelves or homes just six weeks after the idea was conceived, group CEO Daniel Erver (Daniel Ervér) told Handelsblatt. Previously, this required several months. To this end, H&M has concluded new partnerships with textile plants in Turkey and Central America in order to shorten transport times to customers in Europe and the USA. Until now, the group had its products sewn mainly in Asia. At the same time, the Swedes want to stand out from competition with premium stores, more modern clothes, more sustainable production and fair price. “At this moment, it is important to focus even more ambitiously on our strengths,” says Erver, who has been in his place for ten months and talks for the first time in German media. In terms of sales, H&M was for years the clear number one in fashion, because the Swedes had managed to follow fashion trends, selling products at prices affordable to the masses. But now there’s pressure on all sides. Low-cost suppliers, such as Shein, quickly gain market share because they detect trends in demand online and bring new products to the market at a fast pace. H&M was also surpassed by Zara during the pandemic. While the Spaniards managed to increase their sales to over 26 billion euros today, H&M’s sales remained stagnant under 21 billion euros. With a 20% profit margin, Zara is also significantly more profitable than the Swedes (7.3%). “H&M is in dilemma,” says an old industry expert. Like all companies, H&M suffers from the fact that consumers save fashion in times of inflation. McKinsey’s partner and fashion expert Felix Rölkens expects only small growth in the fashion sector under the luxury category even next year. Shein’s rise endangers H&M Only Shein grows rapidly – and has become the largest fashion company. Sector experts estimate its turnover at $45 billion (42.8 billion). According to estimates, Singapore-based Shein reaches nearly 90 million users, compared to fewer than three million in 2017. According to Morgan Stanley, H&M is one of the companies for which Shein’s rise is more dangerous. This is because digitization of Shein’s entire supply chain reduces time from designing a product to arriving at the customer in just a few weeks. Six to twelve months is the usual in industry. Erver criticizes unequal competitive conditions. For European fashion companies, there are justifiably strict rules on matters such as sustainability and taxation, in order to transform the industry. “This makes it very difficult for us to compete fairly with companies from Asia,” he said. In fact, Shein usually sends her products by air in low-value packages so that they remain under customs radar. Experts also criticize product quality and bad environmental standards. No cooperation with Shein Shein tests whether a new product has a good reception from customers with small units of 100 to 200 pieces. If demand is high, production is rapidly increasing. Deliveries are made directly by the manufacturer in China – without store or intermediary. This strategy reduces surpluses. According to Shein, it can produce 20% to 40% cheaper – and offer T-shirts from just two euros. “People with a small budget who want to be modern will find what they are looking for there – even if they know it is not sustainable at all,” says Christiane Beyerhaus, a professor at the International School of Management. H&M wants to stand out from it with most of its 500 designers. In this way, customers can be surprised with unusual creations that they may not even have sought, Ervér says. Nevertheless, following Shein’s example, she wants in the future to better evaluate the behaviour on social networks and the three billion visitors of his own online shop worldwide, so that he recognizes trends earlier. H&M does not want to copy new competitors, but to be inspired by them, Ervér says. However, he doesn’t want to work with Shein. “We currently have no relevant plan”. In an interview with Handelsblatt in September, Shein’s boss, Donald Tang, offered to take over management of the supply chain for fashion companies. The chips could focus on the plans. H&M wants to reduce its number of stores in Germany Erver considers that the brick and store business, which represents 70% of H&M’s sales, is a huge advantage, saying: “The store business is more important than ever after the end of the pandemic, if you can offer customers an experience”. He wants to achieve this with the restructuring of 250 stores this year, including in New York, London and Stockholm. On Friday, Erver inaugurated a remodeled premium store in Munich. With wide corridors, large windows and high quality wood, stone and steel materials, the goal is to create a feel of boutiques. In Germany, H&M’s most important market, 10 to 15 % of the total 360 stores are to be renovated – more than anywhere else, announces Central European chief Olduz Mirzaie. In Germany, the number of stores will decrease, but “we have never invested as much money per store as we do now.” On the one hand, Erver reduces the number of stores. Only this year 160 stores were closed in established markets such as Spain in order to reduce costs. According to experts, H&M had opened too many new stores. H&M has 4300 stores, while at its peak a few years ago it had more than 5000. On the other hand, this year the group opened 100 new stores in developing markets such as Poland, India and the Dominican Republic. The first store is expected to open in Brazil next year. Zara is faster than H&M H&M’s competitor, Zara, the main brand of the Inditex fashion group, has also reduced the number of stores to just under 2,200, but extends the sales venues to create more space in individual stores. Despite coronavirus, inflation and low-cost competitors, Zara has more than doubled its sales and profits since 2015. This is also due to the fact that Zara has been producing more in Europe and North Africa for some time – and can therefore react faster to trends. According to sources in the industry, 85% of H&M’s production takes place in the Far East, compared to 60% of Index. In addition, Zara initially distributes only a few new items in the stores – and then delivers the products where they sell best, explains an expert in the industry. The brand also quickly removes old goods from its range. “As a result, Zara must make fewer price reductions and has less pressure to sell than H&M”. One reason for Zara’s highest profit margin is also the highest selling price. According to experts, Zara is 20% – 30% above the market average, while H&M 20% below. “Zara has evolved away from simple fast fashion – more in the direction of an affordable premium brand,” says Deutsche Bank analyst Adam Cochrane. This would allow the Spanish brand to stand out better than Shein’s low prices. H&M also wants to address a more affluent clientele However, H&M does not want to increase the prices of the entire series. “Because of inflation, the retail price of clothing is extremely important for consumers,” Erver says. Price increases would be a deterrent. Instead, the director plans to extend the range of prices upwards with new, highly high quality products in order to address more affluent customers. A collection with higher prices should also increase the profit margin. According to some observers, the fact that the profit margin varies in one-digit numbers is one of the reasons why Erver’s predecessor, Helena Helmerson, was forced to leave in late January. Although profitability increased recently again, Erver was forced to abandon his goal of increasing it to 10% by the end of the year. “The subversive changes in the industry and today’s multiple crises caused profit margins to fall in many fashion companies and led to bankruptcy,” he says. H&M also suffers from the weak exchange rate of the Swedish crown, as the company pays most of its invoices in dollars due to its production in Asia. In order to become more profitable, H&M wants to reduce the number of strategic suppliers, but to enter into long-term contracts with the rest in order to achieve better market conditions. Erver also wants to get rid of areas without growth prospects. A few weeks ago, H&M therefore discontinued the Afound opportunity platform and closed down the Monkis sub-Mark stores. H&M wants to stand out with sustainable fashion For Erver, who joined H&M in 2005 after a practice and in the meantime worked in Germany, becoming the company more sustainable is an important goal. As of 2019, H&M has managed to reduce CO2 emissions by 22% and the goal is to reduce them by 56% by 2030. H&M is considered by many customers to be one of the pioneers in terms of sustainability. However, only this year a non-governmental organization revealed that the company uses cotton grown in illegally deforested areas of tropical forests. Viola Wohlgemuth, a circular economy expert working for Greenpeace, also states: “H&M makes no progress on sustainability, but risks taking a step backwards since Erver took over”. Instead of producing fewer fabrics or replacing plastic, H&M will increasingly rely on chemical recycling, in which the plastic in clothing is cremated using a lot of energy. Erver replies that H&M focuses mainly on sectors such as the exemption from carbon emissions across the supply chain and innovation in materials, where it sees the greatest leverage. According to the company, it invests several hundred million euros in more than 20 start-ups and joint ventures in order to develop and scale new materials, for example. H&M also offers more and more second-hand products. “We see that consumers are interested in sustainable fashion,” says European company leader Mirzaie. “We do not just want to fulfill our responsibility in this way – we also see it as a competitive advantage.”