H&M’s Approach to the Fashion

Apparels Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Background

Erling Persson founded H&M in 1947 in Sweden when he opened his first store, which sold
womenswear under the name 'Hennes' (Swedish for hers). His initial business concept focused on
offering fashion and quality at the best price and H&M has stayed true to this concept ever since. Over
the last 63 years, H&M has evolved significantly. With the acquisition of the hunting and fishing
equipment store Mauritz Widforss in 1968, the company changed its name to Hennes & Mauritz and
expanded its product portfolio to include menswear and childrenswear. Today, H&M offers a variety
of different products within clothing, accessories, shoes, cosmetics and has recently made major strides
with the launch of H&M Home.

H&M is a global fashion retailer with more than 87,000 part- and fulltime employees. The company
distributes its products through more than 2,200 stores located in 37 countries in Europe, North
America, Asia-Pacific and the Middle East.

H&M is headquartered in Stockholm and is listed on the Swedish Stock Exchange. However, it remains
family-owned and is controlled by the Persson family who hold the majority of the voting rights. In
July 2009, the founder's grandson, Karl-Johan Persson, took the seat as CEO of the company. He now
faces the challenge of running one of the world's largest apparel retailers and realizing a growth target
of 10-15 % in the number of stores per year - and thereby continuing to outgrow the global apparel
retail.

With a solid and stable financial background, H&M has been able to pursue the ambitious growth target
and buy when others could not afford. And although the company's latest financial results did not live
up to the analytics expectations.

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

H&M’s Product Offerings

H&M offers a number of different concepts under its parent name. These concepts are collectively sold
in H&M stores: Trend, Everyday, Divided, L.O.G.G., and Mamma to name a few. The concepts are
diverse and aimed at different target groups across taste, sex and age groups. Any given H&M store
sells a combination of these concepts and the specific store offering is adapted to demand in the specific
location e.g. the Trend concept is the most fashionable, aimed at more high fashion consumers, and is
therefore only offered in the largest flagship stores in big cities. H&M is constantly looking for new
product categories and concepts that can complement the existing product portfolio and create
additional value for its customers.

H&M's Five Brands

THE H&M GROUP owns four additional brands: COS, Weekday, Monki, and Cheap Monday. These
brands cater to different customer segments than the H&M concepts and are sold in their own stores.
Customers are not meant to associate these four brands with H&M and many are unaware that these
brands are actually owned by H&M. Head of Business Development, Björn Magnusson underlines that
"the four additional brands are standalone offerings. Customers don't perceive these brands as H&M -
these brands are something else." To ensure that each brand maintains its creative core and unique
identity, all customer-facing activities such as design, store appearance, and marketing activities are
kept separate while administration, logistics, sourcing, IT and other non-customer facing activities are
integrated to exploit economies of scale. H&M has concluded that this separation yields greater benefits
than the potential economies of scale achieved by full supply chain integration. By separating the brands
the company hopes to limit cannibalization between its brands and to reach a wider target group.

The Apparel Retail Industry

The apparel retail industry is characterized by rapidly changing consumer preferences, a high degree of
product differentiation and large variations in growth across regional markets. These industry
characteristics increase the demand of the individual retailer to be ever more flexible and adaptable to
pursue new growth opportunities across markets and customer segments.

The global apparel industry covers all sales of womenswear, menswear, childrenswear and clothing
accessories. The global market is expected to grow with a CAGR of 5.9 %, a rate significantly higher
than previous years.

The industry can be divided into several different segments depending on price position and market
segment – spanning from hard discount retailers to luxury retailers. The main category of players in the
industry is the fashion retailers including H&M, Zara and Gap who offer affordable fashion apparel in
the middle price segment. Brand loyalty is much less frequent for the fashion retailers compared to
luxury retailers in the highest price segment, because brand loyalty is mostly linked to a designer and
not a brand. This presents a challenge to companies such as H&M.

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

The global competitive landscape is characterized by low switching costs and a high degree of product
differentiation. This has led many companies to enter the industry and thereby creating a high level of
rivalry in the market.

An interesting aspect of the apparel industry is the individual retailer's heavy reliance on its competitors
to attract customers to its store. This has created a tendency to cluster similar stores within a shopping
district. As Danish County Manager Christel Fritz-Mikkelsen expresses this characteristic:

"We would be very sad if Zara closed down its store in Central Copenhagen. We here at H&M want an
attractive market place surrounding our stores. The combined offering of the market place is what
attracts more customers and there might also visit our store. We therefore welcome competition."

Since the fashion retailers appeal to consumers with low brand loyalty there is a number of parameters
the retailers can adjust to create a convincing offering and win over a customer. The buying decision is
based on a combined customer experience of product offering, price, in-store service, and product
presentation.

Figure 1: Development in global apparels market

Figure 2: Market share per customer segment

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Segment Trends
The global market shares between the different customer segments have been relatively stable, and little
change has occurred in the last 5 years. Although a small decrease in market share, womenswear is still
the largest segment with close to 38 % of total global sales within the apparel industry. Both menswear
and childrenswear are very stable in size, however a small increase can be seen within menswear, which
now accounts for more than 30 % of the market.

Although market shares within segments have been stable on a global scale, different trends apply at
country level. For example menswear has been the largest segment in China since 2008 and this trend
is predicted to continue in the future. Contrary, womenswear continue to be the largest segment within
Western countries such as Germany, France and the US.

Historically, H&M's greatest strength and focus has always been the womenswear segment, whereas
the focus on menswear has been limited.

The growth initiatives in recent years have mainly been targeted to women and although H&M wants
to focus on this segment in the future, the company sees great potential in new areas such as menswear
and childrenswear as they pursue future growth.

Past Geographical Trends of “The H&M Adoption”

In 2005, the Americas, led by the US, generated close to 40 % of global demand, while Western Europe
and Asia-Pacific generated close to 30 % and 27 % respectively. However, this trend has changed. The
American markets have been declining since 2007 where the financial crisis hit the US market severely
and led to a decrease in demand. Similar trends are seen in Western European markets, where market
shares has been falling from 29 % to 25 % during the period 2005 - 2010E. Reversely, the Asia-Pacific
region has grown in size and the market share is estimated to be close to the Americas in 2010. These
trends thus change the global market opportunities.

The Asia-Pacific region was projected to outgrow the global industry with a total CAGR of 9 % from
2010 to 2013 compared to the global industry's CAGR of 5.9 %. H&M entered the Asia-Pacific region
in 2007, but relative to their other markets they do not hold a strong position in this region yet - only
3.6 % of total 2010 sales (incl. VAT) was generated in Asia Pacific, primarily in Japan. H&M is
currently operating 59 stores in the Asia Pacific (47 in China, 10 in Japan and 2 in South Korea), but is
planning to add several more in the forthcoming years.

The total European market had an expected CAGR of 3.3 % from 2010-2013. However, Eastern Europe
was expected to show similar high growth rates as Asia-Pacific and has an expected CAGR of 8.9%.
Comparatively, Western Europe has a CAGR of only 2.4 %. Although the Western European market
is a low-growth region, it is also H&M's strongest and most familiar market. The European market
generates nearly 90 % of the company's total sales with Germany as the biggest market which accounts
for nearly 30 % of H&M's European sales.

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Figure 3: Regional Market Share in the Apparel Industry

Figure 4: H&M’s sales split in 2010

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

H&M has always been “THE BRAND”

H&M'S business idea is to offer fashion and quality at the best price. The company has stayed true to
its initial business concept and brand offering, which has brought the company through half a century
and placed H&M in the top of the global retail industry. The consultancy firm, Interbrand, ranked H&M
as the 21st most valuable global brand with an estimated brand value of USD 12.16bn in 2010. This
makes H&M the highest ranked fashion retailer in the survey.

The brand has proven its strength with the company emerging from the financial crisis in a stronger
position in most of its markets. The Country Manager for H&M in Denmark, Christel Fritz-Mikkelsen,
explains: "We have a strong brand with a broad appeal in upturn as well as downturn periods. This
makes us very attractive to customers. We have a long history in many markets and a high penetration
rate, and this has established high brand awareness."

All branding activities aspire to create consumer preferences for H&M's brands by optimizing the
complete customer experience. The customer experience is best defined as the collective feelings a
customer holds when buying an H&M product. Every parameter is carefully planned and designed to
provide the customer with the feeling of fashion at the best price without compromising garment quality
or production standards. Since H&M relies on production outsourcing there is a solid focus on keeping
up standards for the environment, the workers in all production facilities and to make sure that
competitive prices are not achieved through exploitation of these resources.

All H&M's advertisements are produced centrally at the head office in Stockholm. This means that the
advertisements are largely the same in all markets, but the media mix is adapted to local needs and
circumstances. The centralized, organizational structure ensures a uniform branding of H&M in all
markets. This means that customers will get the same H&M experience whether they enter a store in
Berlin, San Francisco or Shanghai.

While H&M engages consistently with consumers on Facebook, YouTube and Twitter to drive traffic
to its online stores as well as the physical stores which continue to be H&M's most important channel
of communication, as they give customers an immediate sense of what H&M is all about. H&M uses
its online media more and more to communicate its activities externally.

H&M's current brand portfolio is comprised of brands with modern and trendy fashion profiles in the
lower middle and middle range of the fashion retail industry. But H&M has recently started to broaden
its upscale offerings by launching luxury collections in collaboration with guest designers such as Karl
Lagerfeld, Stella McCartney and Jimmy Choo. This initiative is pushing the H&M brand towards the
higher range of the industry. With the addition of luxury products the company might be facing a
challenge concerning which way to focus its brand in the future. Although H&M does not feel that
these new initiatives conflict with the company's existing offering, Christel Fritz-Mikkelsen explains:
"We are offering high-end designer clothes but at H&M prices. It might be that the prices are higher
than for traditional H&M concepts, but we are still providing our customers with a luxury designer
product at a significantly lower price than the original guest designer's brand."

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

H&M’s Brand Positioning Strategy

H&M ranks as the second largest fashion retailer in the world (measured on annual sales) only surpassed
by Spanish Inditex and closely followed by American GAP. However, this ranking does not give an
accurate picture of the competitive landscape, which is highly influenced by regional and local matters.
Even though minor, regional competitors are unable to compete on global sales figures, they can still
affect H&M's position in a given market. This means that H&M's competitive landscape differs
significantly across its markets. In new and unfamiliar markets such as the Middle East and South-East
Asia, local competition, low brand recognition and unknown consumer preferences are some of the
challenges that H&M faces in its attempt to successfully establish itself. In established and more
familiar markets such as Sweden and Western Europe, H&M holds a strong position and instead has to
focus on maintaining its position in markets with low growth rates.

The complexity of local and global competition makes it difficult to define a given market and thus to
calculate H&M's market shares. Björn Magnusson elaborates on the complexity of H&M's competitive
landscape: "It is a big challenge to identify our competitors, because they are so different depending on
the market in question. The difference in ranking of companies in each market makes it very difficult
to identify an unambiguous main competitor." The complexity grows additionally when all of H&M's
product categories are included.

Magnusson continues: "It is all related to the question of how we define our market. Should we include
cosmetics, sportswear, luxury, and department stores? Well yes, but then all of a sudden it affects our
perception of our main competitors."

Figure 5: H&M’s Brand Positioning Map

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Conclusion: Where would H&M go from here?

In some ways, the challenges facing H&M were like those discussed about myriad companies and
industries in business school classrooms around the world. Amidst rapid changes in global retail
markets, H&M was faced with the choice to either adapt its strategy or be outpaced by competitors.
The shifting regional market dynamics, evolving consumer preferences, digital transformation, and
intensifying competition from both global and local players added further complexity to the situation.

For its part, H&M remained publicly focused on growth opportunities, even as the brand navigated
significant market transitions. As evidenced by their strategic initiatives in both established and
emerging markets, they sought to balance their traditional strengths with new opportunities.

How could H&M become the preeminent global fashion retailer in the new digital retail era? What
would be the implications on their multi-brand strategy? Market expansion choices? Price positioning?
The answers would shape the future of global fashion retail.

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Exhibit 1: H&M’s Income Statement from 2005 to 2010

Exhibit 2: Net Sales and Operating Margins

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H&M’s Genius Strategy to Disrupt the Fashion Industry
Amit Gupta, Aryan Yadav, Priyanshu Sharma, Priyanshu Singhvi, Rahul Gupta

Exhibit 3: H&M’s Market Overview

Exhibit 4: Store Growth

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