Why Is H&M Booming?

In the past five years, the total number of stores in the world has increased from 2776 to 4351, and the number of involved markets has changed from 48 to 64, with the number of employees extending from 72 thousand to 114 thousand. In China alone, there were a net increase of 91 stores in the 2016 fiscal year, with an average of 4 days opening a new store.

The H&M group was handed over the transcript, with 3962 H&M in the world. brand Stores, and nearly 400 COS, &OtherStories, CheapMonday and other brand stores.

If put H&M The group's expansion path is similar to the story that is taking place on other retailers. You can easily feel that it is like a big winner.

Around the world Clothes & Accessories China, Esprit, Eiger and other brands that were once in the ascendant were deeply in the market. Metersbonwe's sharp loss of 1500 stores in three years and its first loss after listing in 2015. In the United States, the old clothing brand AmericanApparel filed for bankruptcy, A&F, AmericanEagle closed shop, layoffs, evacuation......

However, the 2016 earnings report released by the H&M group at the end of January tells people that things are not as good as they seem.

In the past year, the sales volume of H&M group has recorded a growth of 7%, but gross profit margin has dropped from 59.5% in 2012 to 55.2%, and the operating profit rate has decreased from 18.01% to 12.4% - two indicators are the lowest level in five years.

The H&M group's transcript shows that the new consumer demand is not enough to support such a rapid expansion. Therefore, the cost increase caused by expansion has become the most direct factor affecting profit margins. In order to increase the efficiency of single store in radical expansion, H&M group had to stimulate consumption through frequent discount sales, which further lowered profit margins.

Expansion itself is not a bad thing. In fact, the growth of a company is always achieved by constantly exploring new markets and expanding business scale. It does bring benefits to H&M.

For example, by concentrating on opening stores in the US and China, H&M has found a growth point outside the European market, while expansion in South America and other places has allowed it to develop its market ahead of its competitors. By laying extensive sales network, it can reach consumers more, establish brand image, and gain first-hand market data.

Expansion is also conducive to the shaping of brand image. According to the ranking of Market Research Institute MillwardBrown, H&M is currently the most valuable brand in the field of clothing, second only to Nike and Zara, while Interbrand ranked H&M in the twentieth place of brand value in 2016, exceeding Adidas and Pepsi Cola. The exposure of physical stores has played a positive role.

But as the earnings report shows, expansion brings risks at the same time, and investors are not optimistic about it. As of press release, H&M's share price has dropped from 363.8 kronor at the beginning of 2015 to 244.30 kroner.

"If the situation continues, then by 2020, the profits of the H&M group will fall by 40%, which is basically mathematically calculated." GeoffRuddell, an analyst at MorganStanley, said. He also believes that if the situation does not improve, profits will return to zero in 2022.

Such worries of investors have become more vigilant under the influence of global economic slowdown, regional conflicts and global political instability.

At the beginning of last year, the International Monetary Fund reduced its global economic growth from 3.4% to 3.2% in 2016, and the figure is 2.7% in real terms. The global economic growth is expected to be 2.9% in 2017. In China, the growth rate of GDP has dropped to nearly 6% from nearly 10% a few years ago.

According to information from UniversityofDelaware lecturer ShengLu, Ou Rui consulting, the average annual growth rate of China's clothing retail market will be only 6.3% from 2016 to 2020, much lower than that of Chinese women's clothing 15% and men 8% to 10% in 2013 between 2012 and 2016 predicted by ATKearney. The average annual growth rate of the clothing market in the United States from 2016 to 2020 will shrink to 2.7%.

Under such circumstances, H&M group still claims that "to open stores vigorously in China and the United States" is undoubtedly against the trend.

Some optimistic voices are optimistic about H&M's fast fashion industry. According to Quartz, citing data from CreditSuisse, sales of fashion retailers in the US have increased by less than 2% over the past two years, while the growth of H&M and Zara has been between 8% and 10%. In China, UNIQLO recorded sales growth of over 60% and 40% in 2014 and 2015 years respectively.

H&M long queue in front of Beijing store

But fast fashion does not always wear "Golden Bell". Just like the AmericanEagle, A&F and AmericanApparel that were once in the ascendant, fast fashion is not sure when it will be spoiled in the face of changeable consumers.

When expanding to new markets, it is never easy to integrate into the local retail environment and cultural environment. The failure of UNIQLO in the United States and the announcement of closure of all 53 stores in Japan by Gap group in OldNavy2016 announced the closure of 450 department stores in Mango2016, resulting in a sharp decline in the number of stores in the US market to 7, or even the withdrawal of pure electric Asos in the Chinese market. Choosing to expand under uncertain factors will not only increase the burden on the brand, but also make it lose the flexibility of adjusting measures to local conditions.

But no expansion is impossible for H&M group. The group's largest market, Germany, is showing weak sales growth. Sales growth slowed to 3% in 2016, while France, which ranked fourth in terms of market contribution, showed a negative growth of 4% (excluding exchange rate effects).

"Although H&M is still the largest market in Germany, I am not surprised that it will soon be China." H&M group global CEOKarl-JohanPersson said in a recent interview with reporters. You can say that this is a confidence, or a growth that must be sought after the mature market is saturated.

If this sentence is in 2013 or before, the problem may be better. In the past few years, China's business environment has changed, except the slowdown in consumer demand brought by the slowdown. The commercial real estate that once promoted fast fashion growth is entering a period of weakness.

A shopping mall in Hefei preheated for the opening of H&M.

In 2007, H&M set up the first store in mainland China in Shanghai. In the next few years, its opening path closely follows the commercial real estate of China's second tier cities, and has been stationed in Yuecheng City, the Mixc and Wanda Plaza. From 2012 to 2016, the number of H&M stores in China jumped from 134 to 444, among which the important strategy was to follow the opening of the new shopping centre and to sink to the 234 tier city following the "sinking" of commercial real estate developers.

The relationship between fast fashion and commercial real estate is like the relationship between clothing brands and department stores in the past, such as Esprit and agogue, the former needs the latter channel, while the latter needs the former to get the flow of people, rents and sales returns. If either of the two sides has problems, the other side is hard to be independent.

But now, China's commercial real estate has shown a regional bubble after radical development over the past few years. In 2013, investment in China's commercial business space development reached 11945 billion yuan, an increase of 28.28% over the same period last year, but with the vacancy rate of 15% to 20% of shopping centers in Chongqing, Shenyang and Qingdao, the imbalance between commercial development planning and market demand has emerged.

Although it seems that fast fashion is the favorite object of all new shopping centers, luxury goods also want to live next to them. But if the bubble of commercial real estate breaks down, for the fast fashion like H&M, the plan to go down to the three or four tier city following commercial real estate will also be disrupted.

In 2016, the investment scale of China's commercial housing development was 14607 billion yuan, but the increase was only 1.8%. The report of China commercial real estate research center said that the supply of commercial real estate projects in China will peak from 2016 to 2017.

In fact, as early as 2015, Zara had already perceived the problem of commercial real estate in China. The world's top fast fashion announced at that time that when the total number of stores in Greater China was more than 500, shops would be postponed. The reason is, "the early garrison in shopping centers is too urgent. The next task will be to open flagship stores in key cities."

Prior to that, Zara had followed Wanda down to the two or three line city. Now, it has changed its strategy to "opening flagship stores in important cities", including setting up larger stores in Taigu and other high-end business circles, and putting more effort into improving the return rate of single stores.

Zara Chengdu oceanic Taigu three storey single store

The return rate of single stores is precisely what H&M is now sacrificing when it expands in China. According to the earnings data, the average annual sales of H&M single stores in China has dropped from about 40 million kronor in 2012 (about 30 million 170 thousand yuan) to 24 million kronor in 2016. At the same time, Germany's single store annual sales in the largest market of H&M were more than 80 million kronor in 2016.

According to the argument of H&M group CEO "China will soon surpass Germany as the largest market", assuming that this period is five years (assuming that the German market will stop growing for the next five years), this means that the average annual growth rate of H&M China's sales in the future will remain at least 36%, while in the 2016 fiscal year, the growth rate of H&M China's sales will be only 7%. Even if the deadline is extended to 10 years, the growth rate must be above 14.6%.

The electricity supplier is regarded as another path. H&M group has also realized this. At the same time as the annual report of fiscal year 2016 was released, the company announced that the original "annual 10-15% expansion target" was changed to "sales growth of 10-15% per year" as the goal. The difference between the two lies in the latter's share of the electricity supplier business. Although this goal is aimed at the global market, it is even more true for the mobile shopping leading Chinese market.

"The past year is characterized by the shift of the entire industry to an unprecedented online market, and digitalization." Karl-JohanPersson said at an analyst conference.

According to the world clothing and shoe net, in 2015, the scale of Chinese online shopping market was 3 trillion and 800 billion, and clothing accounted for more than 20%. In the future, the penetration rate of clothing online shopping will reach 37.6%.

But H&M China has no advantage over the electricity supplier. In 2014, H&M launched the electricity business in the Chinese market, which is relatively late. Unlike UNIQLO's strategy of entering Tmall at the beginning, H&M chose a self built electricity supplier mode, which means that losing an important traffic entrance is not necessarily a good thing for a brand eager to expand. At the very beginning, Zara also made its own business, but also entered Tmall in October 2014. The main reason is that China's online business is not in line with Zara's expectations, and entering Tmall is obviously a more efficient way.

H&M China e-commerce website

H&M explains this: "Tmall is like a marketplace for online shopping, a portal website. This pattern is also common in the United States and Europe. For us, it's important to focus on the way we provide ourselves, how we can keep in touch with our customers, and provide customers with what they want, or even exceed their expectations. MagnusOlsson, general manager of H&M Greater China, said in an interview with reporters.

This strategy is understandable. Self operated e-commerce means more direct control over consumer data, which will provide clues about location strategy, regional demand, product mix and so on.

According to the H&M group, they are developing the business and digital business in three aspects: the full channel of connecting online and offline businesses (through mobile phone app, mobile phone scanning code, etc.), supply chain optimization (including the opening of logistics in some markets), and higher level data analysis capabilities. And the development of "data analysis capability" refers to the insight and analysis of the electricity supplier data.

According to the planning of H&M group, they will launch 1 to 2 new brands in fiscal year 2017, without announces the cities that they will enter. However, at present, H&M group has set up 20 COS stores in China, emphasizing the simple and neat display and store experience while making a difference in product mix. This is also a way to improve the efficiency of single store and to create topics. However, for now, H&M group's bigger growth in China still lies in its H&M brand.

COS Losangeles store

345 the low level cities will always be considered to have huge growth potential in the future. At present, H&M has a total of 92 stores in the four first tier cities of North Guangdong and Shenzhen, accounting for 1/5 of the total number of stores in the mainland of China.

As mentioned earlier, commercial real estate has already started to bubble. If not, the 345 line is also a consumer market which is quite different from that of the first tier cities. Local brands, including Metersbonwe, have created their own consumer groups by means of setting up franchises, lowering prices, naming variety shows, and asking celebrities to endorse, and these marketing methods are usually not in line with the style of international brands.

However, changes may have taken place. H&M has launched the new spring series for several years, and since 2015, Xun Zhou and Gao Shengyuan, Liu Wen and Choi Siwon, Fan Bingbing and Li Chen have been identified as spokesmen for the new spring series. For past H&M, which is mainly represented by European and American celebrities, you can hardly say that this is not a test of the effect of Star Marketing in China, especially on the 234 line market.

But one thing that can be basically determined is that it is obviously not so easy to grow faster than before, in the face of economic slowdown, lower consumer demand and commercial real estate bubbles.

Not just for H&M, but for all fast fashion brands.

More interesting reports, please pay attention to the world clothing shoes and hats net.