What Went Wrong with H&M? (2024)

Once known for its lightning-fast production and affordable trendy products, H&M is no longer the fast fashion powerhouse they used to be. It’s no secret they have been struggling for the past two years, losing out to competitors such as Zara and ASOS.

In Q4 2017, H&M experienced its lowest level of sales on record since 2005 and in Q1 2018 H&M operating sales fell 62% versus the year before. The weak profits have caused key investors to sell off stock, resulting in a 20% plummet in share prices.

Right now, H&M’s online sales only total 22% of its profits. They have been falling behind e-commerce fashion disruptors such as ASOS, Boohoo, Missguided and Zalando who are winning over Gen Z and Millennial consumers in the online shopping scene.

Though we don’t think H&M is going anywhere soon. Their business model and possible errors in judgement are worth mentioning to serve as a cautionary tale for all.

Many fast fashion brands have focused their sourcing closer to home to increase efficiency and turnover rates. For example Zara, based in Spain, sources from Spain, Portugal, Turkey and Morocco. This has allowed quick turnovers from concept to store within two weeks for repeat orders and five weeks for new products. Including 10 logistics centers in Spain allowing them to deliver anywhere in the world within 48 hours.

On the other hand, H&M has been falling behind in speed and innovation. Karl-Johan Persson, chief executive of H&M said that the company’s supply chain practices remained the same while the world had changed. By sourcing from Asia, H&M was able to keep costs low. But this meant longer lead time, varying from a few weeks to six months.

This hindered their ability to adapt to consumer demands and changes as quickly as Boohoo, ASOS and Missguided that update their websites with up to 100 to 4,500 products daily. Altogether, H&M loses out on the idea of “newness” that defines the fast fashion industry.

As stated above, H&M’s supply chain resulted in a longer lead time, affecting their ability to react to changes and keep up with trends as quickly as their competitors. This issue contributed to a vicious cycle of unsold garments and heavy discounting. Currently, H&M is sitting on 4.3 billion worth of unsold inventory. So how did H&M end up with this much unsold inventory during this climacteric time where the term “retail apocalypse” is etched as every retailer’s fear?

The first graph above shows that though H&M has been decreasing their new in products but the continuous increase of SKUs suggests a larger issue here they have yet to solve. The second graph illustrates the consistent decrease in sellout rates, demonstrating that consumers are indeed losing interest in purchasing from H&M. The lowest sellout rate of 15.2% in June 2018 said it all.

After Q4 2017, H&M had hopes to turn the situation around by implementing aggressive sales meant to clear inventory to set a better structure for the next year. But in January 2018 the unseasonably warm weather in Europe and the sudden cold climate in February left H&M with high levels of unsold Spring garments. CEO Karl-Johan Persson said the company made the mistake of narrowing its assortments last year due to the weak sales in Q4 2017. H&M could not keep up with the sudden climate change to adjust their assortments in time. This has caused consumers to seek other fashion brands that have more trendy options aligned with current trends.

H&M is now stuck with implementing heavy discounts and promotions to clear the heaps of unsold inventory. But this aggressive strategy has stockholders and analysts worried about the brand image being tarnished. In a previous article about discounting strategies, we discussed the consequences of heavy discounting on the brand and its consumers. It’s not unusual for retailers to implement discounting strategies to clear out old stocks but this risks consumers getting accustomed to purchasing only discounted garments and perceiving a lower value for them. In the long run, consumers might even associate heavy discounts with H&M and will only pay for low-priced items. Ultimately, it will cause unsold inventory to pile up once more, making this cruel cycle of the retail industry not one to easily escape from.

Besides that, H&M’s flawed expansion strategy played a huge role in this issue. In 2017, H&M had plans to open 500 new physical stores around the world with 4,300 existing stores. In South Africa, H&M was seen rapidly expanding physical stores at a faster than usual pace to compete with Australian brand Cotton On.

“Their ambitious plan to expand physical stores around the world was ill-advised as it would ultimately contribute to the pile of unsold garments to be spread across thousands of warehouses and stores across the world,” said New York Times fashion writer Elizabeth Paton. Instead, they should have diverted their resources and attention to expanding and improving online sales in 2017.

However this year, they have shifted their focus online and altered their expansion strategy. The company said it plans to close 170 stores and open 390 new stores in countries with growth potential. That’s a ratio of 44% between closures and openings, meaning for every 44 stores closed, H&M will open another 100.

In the early 2000s, H&M dominated the fast fashion industry with affordable and trendy clothing. There were few competitors offering the same service that H&M provided. Fashion and quality at the best price was the motto they were able to live up to before consumers had better options online and globally.

In their prime days, H&M was known for their affordable and fashionable clothing. Today, they are neither the cheapest nor trendiest.

Affordable pricing used to lay within H&M’s realm, leaving them unchallenged for most of the 1990s and 2000s. Their supply chain model allowed them to capitalise on economy of scale to churn out affordable clothing to an eager audience. Today, many brands have surpassed H&M’s affordability, causing them to be less appealing to price-conscious consumers. Now, let’s compare the pricing strategy of H&M, Forever 21 and Uniqlo to illustrate the difference.

Analysing the price architecture data above, we can concur that H&M is not the most affordable fast fashion retailer in the market. The most popular price range for these three retailers is USD 0–50. And the most affordable retailer here is Forever 21 with 97.7% of their products sold within that range. Uniqlo followed at 97.2%, then H&M at 91.8%. Not surprisingly, H&M has the highest amount of products sold within the USD 50–100 bracket in comparison to the other two retailers.

As such, fast fashion consumers, being known as fickle-minded and driven by cost, can no longer associate the brand with a higher value, thus dropping off once H&M stops offering the cheapest option.

Moreover, consumer buying habits have changed dramatically with the rise of Millennial and Gen Z consumers who prioritise quality over quantity. “But quality is not a trait that H&M portrays in the eyes of consumers, further reducing their popularity and losing out to other brands known for their good standards such as Zara, Topshop, Uniqlo and ASOS” said Milton Pedraza, Chief Executive of Luxury Institute.

Despite being the second largest fashion retailer in the world, H&M struggles to keep themselves afloat in a saturated market. They are facing extreme challenges from every aspect of the industry; whether it’d be pricing, quality, fashion or distribution. It takes all of the following factors to work in harmony to build a successful brand today. A minor slip up can cause months of hard work to falter into a snowball of salvation just as what H&M is experiencing now. Consider the importance of timing in the fast fashion industry — the ability to react to trends, demands, climate changes and mistakes often make or break sales performances. This is where data can be utilised, allowing one to efficiently plan ahead and adjust to sudden changes immediately.

Though H&M’s current state is looking bleak, it may not be over for them just yet. But in order to recover from this turmoil, H&M will have to instill a major shake-up on the company’s business model and strategies.

This post was originally posted on Omnilytics’ blog. Like to see more? Visit our website or blog to learn more about market intelligence.