Why H&M is in crisis, the second largest fashion company in the world

Why H&M is in crisis, the second largest fashion company in the world

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For H & M, the second largest fashion company in the world, 2018 started on the wrong foot.

During the first week of the year, the company had to apologize for an image posted on its website that featured a black boy wearing a sweatshirt with a sign on his chest reading The Coolest Monkey in the Jungle (“The the coolest monkey in the jungle “).

The announcement led to heavy criticism and attacks on the chain’s stores in Johannesburg, South Africa, and protests in Stockholm, Sweden, which forced the child’s family to move out of the house “for security reasons.”

But the bad news was not there.

Last week, the Swedish parent company made public its plans to lock 2018 around 170 stores around the world, the highest number of closures for at least a couple of decades .

A woman leaves an H & M store.
Copyright of the GETTY IMAGES 
Image caption H & M suffered a drop in sales in the last quarter of 2017.

The company will also open some 390 new stores, which will result in a final balance of 44 closures per 100 openings, a figure that quadruples the average of 12 per 100 registered between 1999 and 2017.

Thus, the net balance of stores opened during the year will be 220, the lowest point since 2010.

H & M in figures

4,700

stores in 69 markets.

  • 171,000 employees worldwide.
  • US $ 232,000 million in sales in 2017.
  • US $ 16,184 million of net profits in 2017.

The closures are part of a new strategy with which H & M tries to weather the turbulence it has suffered in recent times. However, the decision was received with a fall of 9.9% in the value of its shares that were then located at their lowest value since 2008.

“The scale of this reduction will surprise a few today and leave the pessimists wondering why H & M still enjoys the ‘ action with a growth outlook ‘ rating,”wrote Geoff Ruddell and Amy Curry, analysts at Morgan Stanley.

Entrance of an H & M store.
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Image caption Sales at the stock price of an excess of inventory weighed H & M’s results.

The company reported a 4% drop in sales in December during the last quarter of the year, so its growth rate for 2017 was only 4%, according to the Financial Times.

It is the first time in more than two decades that the company ends a year with a net debit balance, instead of a favorable cash flow.

In addition, at the beginning of January, its shares were 55% below their highest level, reached in March 2015.

These results led Karl-Johan Persson, CEO and grandson of the company’s founder, to announce last week that H & M will waive its goal of increasing sales by 10% to 15% during 2018.

But what is happening?

Mistakes

“We have made some mistakes,” Persson told reporters explaining what happened.

“We had too much of certain products and very little of what we should have had,” he added, without offering details beyond pointing out that it was a mixture of factors.

H & M was the leading fashion clothing company when it was displaced by the Spanish group Inditex, owner of Zara.

Karl-Johan Persson.
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Image caption H & M CEO Karl-Johan Persson will reinvest his dividends in the company’s stock.

The analysts coincide in pointing out that behind the difficulties suffered by the Swedish company are the strong changes that the sector is experiencing due to the increase in Internet consumption.

” H & M is not immune to the migration of clothing sales to online channels , a change that has damaged customer traffic to shopping centers and stores, and has led to the bankruptcy of clothing retailers from Aeropostale to Wet Seal. “wrote Andria Cheng in Forbes magazine .

He added that this shift towards Internet consumption has expanded the number of competitors, among which are now included giants like Amazon.

“In comparable H & M stores there was poor performance in many of our large mature markets, which reflects the shift from the traditional to the online market, and we also have to say that we have not improved the shopping experience as quickly as required by the market. Increasing consumer expectations, “Persson admitted at his press conference.

Another element that affects this company has to do with the successful efforts of its competitors to shorten the product cycle – the time it takes the pieces to move from design to the store – a strategy successfully applied in the past by the company Swedish and with which she is now challenged – and sometimes beaten – by her rivals.

Physics and digital

To deal with this crisis, H & M is trying to improve on several fronts.

Critical graffiti with H & M.
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Image caption H & M started 2018 being the target of harsh criticism for an image considered racist.

Thus, for example, the closing of stores planned for this year will take place in mature markets, while the new openings will be concentrated in new markets, which include Uruguay and Ukraine .

The company is testing various redesigns for its stores trying to find formulas that increase the flow of customers.

Persson said it expects the company to be able to offer a more attractive store concept for consumers by 2019.

It also plans to open in March in China one of the largest e- commerce platforms in the world with its main brand H & M and H & M Home.

People walking in front of an H & M store.
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Image caption H & M is testing different redesigns of its stores to try to attract more customers.

In terms of inventory management, one of the aspects in which it faced difficulties in 2017, the company is using artificial intelligence tools to try to improve the quantification and placement of products.

Persson, whose family controls more than 70% of the board’s votes, also announced that it plans to reinvest its dividends in the company, in order to help finance the investments required in technology and data management .

The board of directors plans to ask all shareholders to do the same during the general meeting that will be held in May.

The last element of the strategy is the launch of a new line of economic products, under the Afound brand, mainly from external suppliers.

This bet, however, is viewed with suspicion by some analysts who fear that effort is a distraction that divert H & M’s attention from its core business.

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Rava Desk

Rava is an online news portal providing recent news, editorials, opinions and advice on day to day happenings in Pakistan.

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