H&M: The Secret to Its Success

Founded in 1947, Swedish clothing retailer Hennes & Mauritz AB (STO: HM-B), commonly known as H&M, has grown into one of the most recognizable brands in the fashion industry. H&M has more than 5,000 stores worldwide and employs 120,000 people.

Not surprisingly, the COVID-19 shutdown had an impact in 2020. The company reported strong growth in online sales but overall sales still came in 5% down in September 2020 over the same period one year earlier.

The company said it would permanently shut down 350 stores starting in 2021, but that doesn’t mean it’s giving up on brick-and-mortar. Its executives seem to have concluded that the real world and the online world work best in tandem. “More and more customers started shopping online during the pandemic, and they are making it clear that they value a convenient and inspiring experience in which stores and online interact and strengthen each other,” said CEO Helena Helmersson. “We are increasing digital investments, accelerating store consolidation, and making the channels further integrated.”

The Secret to H&M’s Success: Fast Fashion

The secret to the success of H&M and its rivals like Zara and Forever 21 can be attributed to the fast fashion business model.

Fast fashion relies on moving a large volume of merchandise from the designer table to the showroom floor in the shortest amount of time possible and at a reasonable price. Aimed at young, fashion-conscious urban consumers, their products are trendy and they’re cheap, bordering on disposable.

That naturally has gained them some criticism from advocates of sustainable and ethical consumerism.

Fast fashion retailers make their profits by having a high merchandise turnover and by constantly resupplying the product pipeline with the latest trends.

H&M’s model also relies on a solid marketing team that can quickly determine what the target demographic desires and get it into the supply chain fast.

H&M’s Brand of Fast Fashion

While fast fashion is not limited to H&M, the Swedish brand has a distinct business model. Unlike Zara, H&M does not manufacture its products in-house but outsources its production to more than 900 independent suppliers around 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 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 more naturally, as opposed to attempting 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 small 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 satellite production offices.

H&M Stock

By mid-2021, H&M appeared to be recovering from the pandemic, but not without some difficulty. In June 2021, the company reported sales jumped 25% from the year before but were down 4% from its 2019 numbers.

China seemed to be a problem area. Sales in that nation fell 23% after the retailer was booted off its popular Tmall website and some domestic phone app stores in response to H&M’s expressions of concern about alleged human rights abuses. China accounts for 5% of the retailer’s total sales and is one of its top suppliers.

American investors can follow Hennes Mauritz via its American Depository Receipt, Hennes Mauritz ADR (HNNMY), which is listed on the NASDAQ.

Shares closed on Aug. 13, 2021, at $4.13. Its 52-week range was between $3.04 and $5.22.

The Bottom Line

Since its founding in 1947, H&M has grown to become the world’s second-largest fashion retailer, after Inditex, owner of the Zara stores.

The continued success of both retailers depends on their application of fast fashion, which relies on spotting fashion trends as they appear and getting inexpensive copies of them into their stores as quickly as possible.