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ICMR Center for Management Research

H&M’s Supply Chain Management Practices

This case was written by Perepu I, under the direction of Gupta V, ICMR Center for

Management Research (ICMR). It was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective or ineffective

handling of a management situation.

2008, ICMR Center for Management Research

ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India

Email: info@icmrindia.org.

www.icmrindia.org

2

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H&M’s Supply Chain Management Practices

“H&M has a formula; it’s based on the recognition that retailing is essentially theater. There’s a

stage and it must change continuously to hold the interest of the consumer.”1

- Kurt Barnard, President of Barnard’s Retail Consulting2 Group, in 2007.

“A short lead time is not an end in itself, since it is always a matter of getting the right balance

between price, time and quality.”

- H&M Annual Report, 2006.

INTRODUCTION

In late 2002, one of the buyers from Sweden-based apparel retailer Hennes & Mauritz AB (H&M) on a trip to South Asia, chanced upon a college student wearing a peasant blouse and gypsy skirt. The dress caught the buyer‘s fancy and she immediately took photographs of it and sent them to the company‘s design team at Stockholm, which was working on new concepts and styles for the coming season. The designers approved the new concept, decided on the fabric and colors, and orders were placed with a supplier in India to make the garments available in time for the spring-summer collection.

The dresses were on the shelves of some of H&M stores across the world by February 2003 and were lapped up by customers in quick time. The company was able to meet the growing demand for the dresses on time by replenishing the stocks within three weeks. Heeding customers‘ demands, H&M went on to embellish the peasant blouse with sequins and lace, and brought out skirts in new colors. Seeing that the dresses were really popular, H&M also introduced them in several other markets.

H&M was among the pioneers in fast fashion, and apart from introducing its own styles, it also scouted around the world for styles and fashion that could click among customers. The clothes from H&M were reasonably priced, stocks were replenished every day, and no item remained on the shelves for more than a month. Customers therefore made it a point to repeatedly shop at H&M. The secret of H&M‘s success was a well-integrated supply chain – the clothes designed by the headquarters at Stockholm were made by more than 600 suppliers located in 22 countries in Europe and Asia. After the garments were manufactured, they were shipped to stores across the world. H&M decided on the suppliers depending on the lead time. The products with higher lead times were made in Asia, and those that were in high demand were made in Europe. All the products were distributed across the world to its 1,345 stores, located in prominent shopping districts in 25 countries across the world.

According to Florence Müller, Professor, French Fashion Institute, ―H&M has gone from being a distributor to being a fashion label. H&M stores and those of its competitors have a much larger role than you might think, they‘ve become places for fashion followers where one goes to see confirmation of the trends for the season.‖3

1 Nicola Saminather, ―How H&M‘s Coping with Retail Travails,‖ BusinessWeek, January 04, 2007. 2 Kurt Barnard, economist, specialized in retail and consumer behavior launched his own firm Barnard

Retail Consulting in 1984. He publishes Barnard‘s retail trend report. 3 ―Hennes Celebrates 60 Years of Low Cost Fashion,‖ www.thelocal.se, September 14, 2007.

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BACKGROUND NOTE

H&M was founded by Erling Persson (Persson), a salesman from Västerås4, Sweden. In 1947, on a visit to the US, Persson was attracted by the concept of clothes stores selling stylish garments at low prices. Following a similar concept, he opened a store selling clothes for women in Västerås in 1947, and named the store ‗Hennes‘ (hers in Swedish). The low prices immediately attracted customers. The stores were expanded during the 1950s and the 1960s. Persson was confident that the concept would work as well in other countries, and in 1964, the company ventured overseas by opening a store in Norway. This was followed by a store in Denmark in 1967.

In 1968, Persson acquired Mauritz Widforss, the store chain that primarily sold hunting guns in Stockholm, Sweden. With this purchase, Persson expanded his business further into Stockholm. The stores also stocked men‘s clothing. Persson then decided to change the name of the stores to Hennes & Mauritz. Subsequently, H&M added children‘s clothes to its collection. In 1972, Stefan Persson (Stefan), Persson‘s son, joined the business. In 1974, H&M went public and the company‘s shares were listed on the Stockholm stock exchange.

H&M began selling cosmetics in 1975. In 1976, a store was opened in the UK at Oxford Circus, London. However, entering and making its presence felt in non-Scandinavian countries was a bit of an uphill task for H&M. In 1977, clothes for teenagers were introduced, followed by clothes for babies in 1978. In 1980, H&M acquired Rowell‘s mail order company after which it started selling clothes through catalogues (Refer to Exhibit I for H&M‘s international expansion through the years).

During the 1980s, Stefan made efforts to change the company‘s positioning, which till then had had a low-end image. According to Stefan, ―When I joined in 1972, H&M was all about price. Then we added quality fashion to the equation, but everyone said you could never combine successfully. But we were passionate that we could.‖5 In 1982, Stefan became the Managing Director. He concentrated on improving quality, bringing in new designs, and reducing operating costs, and on advertising. In 1987, Margareta van den Bosch (Bosch) joined the company as design director.

In 1998, H&M began selling clothes through the Internet in Sweden. In that year, the total turnover reached SKr 26.6 billion6. In 1999, this service was extended to Denmark and Finland and to Norway in 2001. In spite of the growing popularity of sales through its website, H&M continued to bring out four main catalogues every year, two during the spring-summer season and two during the fall-winter season. H&M also brought out several supplementary catalogues.

By the end of the 1990s, H&M had become one of the top players in the apparel retail market. As of 2002, H&M‘s outlets were selling around 550 million items a year. By 2004, the number of stores had reached 1,000 with H&M opening a store at Boulogne-sur-Mer in France.

As of 2006, H&M had a presence in 24 countries around the world through 1,345 stores. During the year, H&M closed 16 stores and opened 168 new ones (Refer to Exhibit II for H&M‘s stores countrywise as of 2006).

From September 2006, H&M began selling through a franchise Alshaya7, in the Middle East. Even while operating through the franchises, H&M chose the location of the store, decided on the merchandise to be sold, and trained the staff. It opted to operate through franchisees in the Middle East as it was not possible to operate wholly-owned subsidiaries in that region. However, H&M did not plan to use franchises to expand further in other parts of the world.

4 Västerås is a city in Västmanland, central Sweden. Västerås is one of the oldest cities in the country. 5 Capell, Kerry, ―Hip H&M,‖ BusinessWeek, November 11, 2002.

6 1 US$ = SKr 6.471 as of October 08, 2007. 7 MH Alshaya & Company founded in 1890 is involved in several businesses like real estate, construction,

hotels, automotive, and general trading in several Middle Eastern countries. The retail division was

started in 1983, with a franchise for Mothercare. As of 2006, Alshaya operated more than 40 retail

concepts in the Middle East, Cyprus, Turkey, and Russia. These included Next, Debenhams, Clarie‘s,

The Body Shop, Estee Lauder, Clinique, Starbucks Coffee, and Pizza Express.

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The women‘s wear in H&M had a wide range of fashion wear. The main collection was of two types – tailored classics and current fashion garments. The other products in women‘s wear included a denim collection, classic casuals, H&M sport, plus sizes, and nightwear. A wide range of accessories formed a part of each of these collections. The men‘s collection included knitwear, T-shirts, seasonal fashion garments, a tailored collection (in select stores), classic casuals, nightwear, socks, ties, and accessories. Clothes for teenagers were sold under the label Divided. This consisted of denim and street fashion wear.

For children, H&M offered clothes and accessories under different concepts, which included babies, children, and H&M young. Baby wear was for children below 18 months. Children‘s wear was for children below eight years and emphasized comfort and functionality. H&M Young was for children below 14 years and consisted of seasonal garments, which emphasized comfort, functionality, and safety.

H&M also offered a wide range of cosmetics, which included make-up, and skin care products. This range was enhanced constantly with new products. Make-up and skin care products were sold under the By-H&M range. The range also included body care products, and accessories.

H&M expanded through organic growth and financed the expansion with its cash reserves. Every year, the company opened several new stores. The cornerstone of H&M‘s business model was its turnaround time. A new garment could travel from the design studios to the shelves of the stores within 21 days. This required a supply chain that functioned with clockwork precision. H&M did not own any production facilities; instead, production was carried out by third party suppliers located mostly in Europe and Asia.

IDEA GENERATION AND DESIGN

Initially, H&M sourced the products mostly from its agents in Asian countries and sold them through its stores. In the late 1980s, after Bosch joined the company, H&M began building a design team to take to the stores the products that customers were demanding.

The design department at H&M created and planned all the company‘s collections centrally in Sweden, where the decisions about upcoming trends were made and collections finalized. The department had over 100 in-house designers, and received cooperation from around 100 buyers and 50 pattern

designers. The company essentially concentrated on three factors – fashion, quality, and price and achieved a fine balance among the three while bringing high fashion garments to the customers. Theme, colors, fabrics, and designs were decided on the basis of customer demands.

The ideas were generated and given a final shape in the famed ‗White Room‘ at the company‘s headquarters, under the supervision of Bosch. She was of the view, ―If it‘s too complicated on a hanger and if it‘s too avant-garde, maybe it‘s not us. You can have everything, but you have to think about the right quantities.‖8 The designers had highly sophisticated design software and color matching tools at their disposal and used these to design new collections.

The team of designers, whose average age was 30, included designers from several European countries and also from the US and Africa. The designers were required to constantly observe the trends in the fashion industry, street fashion, college fashion, and events, encounter different cultures, travel, visit exhibitions, flea markets, and films, and keep an eye on television and the Internet. However, copying designs from catwalks was not encouraged. The designers were required to have a good knowledge of the history of fashion and cyclical trends. They came up with some original designs and new concepts when needed. According to one of the designers, Ann-Sofie Johansson, ―We travel a lot. You need to get out, look at people, new places. See colors. Smell smells.‖9

8 Sarah Raper Larenaudie, ―Inside the H&M Fashion Machine,‖ www.time.com, February 09, 2004. 9 Ariane Sains, ―Seeking Next Fall‘s Fashion in the Subway,‖ BusinessWeek, November 11, 2002.

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On the design team and design process at H&M, Bosch said, ―First you have to understand that the

design team at H&M is put together from the same fashion colleges that feed the designer studios.

Secondly, our earliest new-season collections are in production by the time the international

catwalk collections are shown. We look to the catwalk to confirm rather than to dictate the H&M

collections. We are all exposed to the same influences: film, street culture, media. We can afford to

be experimental, but not whimsical. For example, we need to know when our customer is ready to

embrace a trend and crucially when they don‘t want a trend to die.‖10

Inputs from the employees were considered to be crucial for designing new garments and arriving

at new trends. The designers on their travels interacted with the store managers to find out why

certain designs did not work out in that particular country or region. Feedback was obtained from

the merchandise managers present in all countries where H&M had stores. These managers

constantly interacted with the customers. Managers at H&M stores across the world were also

asked to report on the latest trends. They reported to headquarters on the new trends in the place

where they were located and about the new collections introduced by competitors. The store

managers were required to carry out competitor surveillance and customer analysis periodically.

Every year, H&M brought out two main collections, one during the spring and one during the

autumn season. Within each season, several sub-collections were released. Designing for each

season started with a brain-storming session involving all the designers, buyers, and pattern

designers. They deliberated on the styles and designs that had been successful the previous year

and the designs which had failed to attract customers‘ attention. The design team then decided on

the look for the year and the designers drew the sketches. The group of designers concentrated on

designing clothes that were stylish but not too complicated. Not all the finished sketches received

approval and most often, only half of the total sketches made it to the stores. They tried to arrive at

a fine balance between clothes that were viable and those that presented the latest designs.

According to Bosch, ―Whether it‘s Donna Karan, Prada, or H&M, we all work on the same time

frames. But we can add garments during the season.‖11

The range for the season comprised collections for men, women, teenagers, and children. While

designing the range, a mix of basics and high fashion was considered. The assortment was planned

depending on the demands from different markets and stores. Some high fashion garments were

sold only in select stores in big cities. The line known as modern basics comprised garments in

high demand in a particular season. They were made in different colors and sent to all the stores.

Each of H&M‘s concepts like Men, Women, Kids, Divided, and Denim had its own team of

designers, buyers, pattern makers, assistants, and controllers who together produced the garments

according to demand. Different concepts had a different number of people working for them. For

instance, more people were involved in the women‘s line while the teams working on the teenager

concepts were smaller.

In early 2004, H&M started collaborating with well-known designers to design limited collections.

In June 2004, collaboration was announced with designer Karl Lagerfeld12 (Lagerfeld). Products

designed by Lagerfeld were sold through 991 H&M stores in November 2004. This was followed

by collaboration with popular designer Stella McCartney13, in November 2005. In 2006, Dutch

10 ―Fashion & Style: ‗We‘re not Fashion Slaves‘,‖ The Independent, July 11, 2002. 11 Kerry Capell, Gerry Khermouch ―Hip H&M,‖ BusinessWeek, November 11, 2002. 12 Karl Lagerfeld, one of the most influential fashion designers, collaborated with different high-end fashion

labels including Cholé, Fendi, and Channel. 13 Stella McCartney, English fashion designer, has designed for Cholé, Gucci, etc. She also owns the

skincare line called Care. She has designed clothes for famous personalities like Madonna, Annie Lenox,

and Jude Law. In 2004, she entered into partnership with Adidas.

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designers Viktor & Rolf14 brought out a collection designed for H&M. In 2007, a new collection

‗M by Madonna‘ was launched. This was designed in association with Madonna15, and comprised

tops, lumber jackets, blazers, shirt dresses, and accessories, among others.

In June 2007, Roberto Cavalli16 agreed to create a collection for H&M, which was to be available

in its stores from November 2007. According to Richard Hyman, Chairman of London-based retail

consultancy Verdict Research, ―To be a successful retailer you need to get people to come into

your store frequently by convincing them that every time they visit they will see something

different. By adding big name designers and high-profile collaborations they are able to add a bit

of spice to the mix.‖17

PRODUCTION

Initially, all the production activities of H&M took place in Sweden. In the 1960s, production was

carried out in other Scandinavian countries and in the UK. In the late 1960s, some of the production

activities were shifted to southern European countries like Italy and Portugal. By the early 1970s, H&M

was also producing in Hungary, Poland, and erstwhile Yugoslavia. In 1978, H&M ventured into the Far

Eastern countries with a production office in Hong Kong. As of 2000, H&M had 21 production offices,

of which 10 were in Europe, 10 in the Far East, and one in Africa.

The buyers, who were a part of the design process, were in contact with 22 production offices.

H&M did not own any factories or manufacturing units, and clothes were procured from more than

700 independent suppliers located in Europe and Asia. H&M did not have any production facilities

of its own, as the company believed that having internal manufacturing facilities, would mean the

capital being tied up. H&M had 10 production offices in Asia, 10 in Europe, and one each in

Central America and Africa.

One of the reasons why H&M had initially decided to go in for incorporating production offices

was that there were often differences between the design suggested and the final product because

of a miscommunication. Slowly, as the suppliers understood the requirements, the role of the

production offices changed to that of quality maintenance. The manufacturers were constantly

monitored by the quality controllers at the production offices.

H&M sourced more than 60% of its finished products from Asia, of which half were from China.

The purchasing office in Shanghai was opened in 1994, before which the sourcing was carried out

mainly through private agencies. In China, H&M had around 100 suppliers. From China, the

company preferred to procure Chinese clothes that had higher lead times.

The liaison office in India was opened in 1992 in Delhi and as of 2003 had around 60 suppliers.

According to Roland Arvidsson, General Manager at the India production office of H&M, ―India

is a strong market. 10 per cent of our demand is met from the Indian market, counting around 40-

45 million pieces per year. Woven makes the strongest demand from India accounting for around

45- 50 per cent of the total supply from the country. This is followed by knits 35-40 per cent, and

rest is fulfilled by the accessory products‖18

14 Viktor & Rolf was founded in 1993 by designers Viktor Horsting and Rolf Snoeren in Amsterdam. Both

of them studied at Amhem Art Academy and moved on to designing clothes. They went to Paris and

worked for several brands before coming up with their own line of clothes. The men‘s wear was sold

under the ‗Monseiur‘ label. They also produced women‘s wear, neckties, scarves, etc. 15 Madonna is an American pop singer, actor, and producer and is the most successful female recording

artist of all time, according to Guinness World Records. 16 Italian fashion designer Roberto Cavalli designed clothes, and accessories like shoes, handbags,

sunglasses, timepieces, etc. for men and women. He also launched a line for kids. 17 Kerry Capell, ―H&M Moves up with Madonna,‖ BusinessWeek, December 13, 2006. 18 ―H&M: Touching New Heights,‖ www.imagesfahion.com, May 2003.

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The employees in the production offices were selected locally. The main task of the production

offices was to mediate between the internal buying department and independent suppliers. These

employees kept in regular touch with the suppliers. The main responsibilities of the production

office included identifying new suppliers, placing orders with the right suppliers, negotiating price,

ensuring suppliers maintained quality, minimizing transport times, etc. According to an employee

at the production office in Shanghai, ―The production office makes sure we have suitable suppliers

that offer low-cost services and produce top quality goods.‖19

All the suppliers of H&M were required to follow the code of conduct for suppliers as stipulated

by the company. The code of conduct was based on ILO conventions and the UN Convention on

rights of the Child. H&M came up with its Code of Conduct in 1997. (Refer to Exhibit III for

H&M Code of Conduct).

Whenever H&M selected a new supplier, a comprehensive audit was carried out in association

with the factory managers. The main objective of the audit was to identify the areas for

improvement and to arrive at a plan to achieve the improvements. Long-term and short-term goals

formed a part of the plan for improvement, and the time frame to achieve the goals and the people

responsible to carry them out were identified.

The auditors who were a part of the production office, conducted surprise audits on the suppliers

from time to time. Around 40 employees around the world were involved in conducting audit of

the suppliers and providing them with advice on how to improve the conditions so as to adhere to

the Code of Conduct. According to one of the auditors in India, where the Code of Conduct was

implemented in 1998, ―To begin with the factory owners were a little unused to the idea of being

inspected like this. Now they understand that unannounced visits are part and parcel of the way we

work, and few are surprised when we turn up out of the blue.‖20

The auditors carried out checks pertaining to safety, hygiene, and the working environment. The

auditors also checked the documents pertaining to employment, payroll, production, etc. They

checked if the suppliers had implemented the improvement plan as suggested during their previous

audits and if all the processes were as per the legal requirements. The auditors then documented

the visit and reported it to the CSR department at the headquarters.

To maintain quality, sample garments were tested and later on, garments from the production line

were checked. Laundry tests were carried out as a part of the quality tests, and included tests for

shrinking and colorfastness. Durability tests were carried out on zippers and press studs. All the

production offices had quality controllers who helped in checking the supplies in the factories and

ensuring that they adhered to the company‘s quality standards (Refer to Table I for details of some

of the tests conducted by H&M).

Production offices also had an R&D team and product developers to support the designers and

buyers in Sweden. The buyers communicated to the production offices about the designs, number

of garments required, material to be used, and other specifications. The production offices browsed

through the list of suppliers to decide on the ones who had the facilities to produce the required

garments. The chosen suppliers were given the specifications and 24 hours‘ time to make the

samples as specified by H&M and send them back. In case a supplier was not able to meet the

deadline, the order was given to another supplier. As one of the suppliers, Hu Hongxia, of

Worldbest Knitting Fashion Company Ltd. said, ―When H&M sends us the patterns by email we

first make samples for confirmation. After we receive their approval, we start producing

promotional samples, usually a little over 20 pieces. Then after H&M reconfirms, we can start

producing the whole batch.‖21

19 Li Li, ―Fashion Magnets‘ Supply Chain Contest,‖ China Business Feature, May 08, 2007. 20 ―Our Responsibility,‖ About H&M and Social Responsibility, www.hm.com. 21 Li Li, ―Fashion Magnets‘ Supply Chain Contest,‖ China Business Feature, May 08, 2007.

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The production offices provided the buyers at Stockholm with the list of suppliers who could

deliver the specified garments along with the samples. The buyers then placed the order taking into

consideration different factors like price, quality, time to deliver, and the location. According to

one of the employees of the company, ―The choice of production base for one style of clothing

should take both cost and efficiency into account. If one style of clothes needs to be quickly put on

the market, we will choose the production base that is nearest to this market.‖22

Table I

Quality and Security Tests Carried Out By H&M

Zipper tests: These tests were carried out to test the durability of zippers.

Flammability tests: The flammability of the fabric was tested.

Chemical tests: These tests checked whether the garments contained chemicals that could harm

the skin and cause allergies, cancer, or irritation.

Button test: These ensured that the buttons were attached properly, especially to children‘s

clothing.

Measurement test: Seams and measures of the garment before and after washing were tested.

Nickel test: This test ensured that jewelry, buttons, zippers, etc. did not have nickel.

PH test: To avoid skin irritation, it was ensured that PH value was neither too high nor too low.

PVC test: None of the garments from H&M contained PVC and tests were conducted to ensure

that this was the case.

Salt and chlorine bleaching test: Swimwear was tested to ensure that color did not change due

to bleaching or due to salt.

Washing test: These tests were carried out several times during the production to ensure

shrinking, color fastness, etc. were within the stipulated limits.

Source: www.myspace.com.

While placing the order, the prime consideration was the location at which the goods could be

manufactured cost effectively. The next consideration was the distance to the market. Other criteria

were also considered when the orders were placed. For example, for clothes that were fashion sensitive

and required to be replenished quickly, H&M used the suppliers in Europe. If there was a demand for

some garments only from a particular country or store, suppliers located in close proximity to that

country or store were given the order. For trendier products, H&M preferred to procure from Turkey.

European locations were considered for fashion-sensitive garments.

Most of the suppliers, in–turn, had their own suppliers, to provide them with the raw material,

dyes, etc, as required by H&M. After the suppliers received confirmation from H&M, they

immediately procured the required raw material and started the process of production. Suppliers

were keen to work with H&M as the company gave them large orders running into thousands of

pieces. The staff from the production office visited the suppliers from time to time, in order to

ensure the quality of the finished goods and to monitor the progress of production.

To keep up with the latest trends, the collections were brought out on an ongoing basis, with

different lead times for all the products. The basic items, which would have high demand in the

upcoming season, were ordered about six months in advance, and their production was scheduled

accordingly. The garments which were in vogue had to be designed, produced, and placed on the

store shelves within a matter of just a few weeks, and were planned accordingly. For high volume

garments like basic wear and children‘s wear, H&M placed orders in advance.

22 Li Li, ―Fashion Magnets‘ Supply Chain Contest,‖ China Business Feature, May 08, 2007.

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Way back in the early 1960s, H&M was making purchases 12 times a year, against the conventional

four times a year, in order to accommodate fashion changes in its collections. The trend continued and

buying was carried out all through the year, and by bringing about changes in buying patterns, H&M

was able to reduce the lead time by 15-20%. The company aimed at finding the right supplier so that it

would be able to achieve optimal time in bringing the product to the shelves.

H&M essentially operated through two supply chains in order to optimize time and cost. The first

chain took care of the cost component and the manufacturing was done mainly in Asian countries.

The second one termed ‗rapid reaction‘ was used for fashion-sensitive garments, and was based in

Europe. For the suppliers based in Asia, H&M offered a follow-up system, wherein the

communication was carried out through email and work was monitored by the production offices.

DISTRIBUTION

A large part of the finished products that were manufactured were shipped using external contract

companies to the central warehouse in Hamburg, Germany, which served as the transit terminal.

Logistics was managed centrally from the company‘s headquarters in Stockholm. Most of the

goods from the production centers across the world passed through this transit terminal on their

way to the destination country. The transit terminal received the goods from all the suppliers

across the world.

H&M‘s logistics department employed around 3,200 people. Almost every stage of the logistics

was handled by the company, including imports. Stock management was handled by the company

in-house.

In all the countries in which H&M operated, a distribution center was set up. As of 2002, H&M

had 13 distribution centers in Europe and Asia and one distribution center in the US. When goods

arrived from the transit terminal to the distribution center, they were sorted as per the stores,

checked for quality, and pressed. Depending on the demand, they were either sent to the stores or

kept in a warehouse called the call-off warehouse, a centralized room which held the stock and

was a part of the distribution center. The merchandise was delivered to stores from the distribution

center in daily shipments. Items were replenished from the ‗call-off warehouse‘ according to the

trends reported from the stores.

The goods from the Asian countries were shipped by sea in order to minimize costs. When the

orders from a particular store were large, the shipment was sent directly to the stores. If the

garments were in demand only in a particular country, then they were sent directly to the

distribution center in that country.

When H&M entered a new market, it did not immediately set up logistics and distribution centers

in that country. Instead it used those in the neighboring countries. For example, when H&M

expanded into Poland, the distribution facilities in Germany were used and when it entered

Portugal, the facilities in Spain. Similarly when expanding into the Czech Republic, the Austrian

distribution center was made use of and for Italy, the facilities in Switzerland were used. Thus,

H&M was able to avoid the high initial costs associated with entering new markets. These

facilities were used until the volume in the new markets reached economies of scale. According to

Nils Vinge (Vinge), Head, Investor Relations, H&M, ―In our business model, in order to get

efficiency of sales when it comes to logistics and infrastructure, we need a certain number of stores

to reach critical mass.‖23

In 2006, in order to ease the supply of goods, H&M began using the concept of regional grouping.

Through this system, it planned to bring the goods to be distributed in a group of countries, rather

than each country individually. To facilitate this, H&M worked on a new group structure, wherein

23 Constance Haisma-Kwok, ―Throngs Turn Out for H&M‘s Hong Kong Opening,‖ Women‘s Wear Daily,

March 13, 2007.

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some of the centralized functions like designing, buying, production, logistics, etc, were to be

detached into another buying company. Other initiatives in this direction included a new logistics

facility in Poznan, Poland. This distribution center catered to the market in Poland as well as the

distribution of goods purchased online and through catalogues in non-Nordic markets. A new

distribution center was planned in Hamburg, to take care of the existing logistics functions in

Germany and the Netherlands. A new shared logistics facility for France, Belgium, Italy, and

Greece was also planned. The mail order operations were managed by separate warehouses – one

in Sweden and one in Norway, and were operated by the company.

STORE MANAGEMENT

Before opening new stores or before entering a new market, H&M conducted extensive research

on the demographics of the consumers, spending power, competition, and other factors that could

contribute to the success of the international venture. Other factors that were considered before

finalizing the location were local shopping areas, their size, traffic flow, and availability of public

transport. H&M did not go in for test marketing, choosing instead to open about five to six stores

in the market to gauge the response. In countries where it found a huge potential, H&M expanded

by acquiring local chains. If the response to the initial stores was positive, it quickly developed the

stores in order to achieve economies of scale in terms of logistics and marketing.

The corporate headquarters analyzed the best locations that were available for setting up the stores

and waited until the desired location was available, rather than opening the new stores at any

available location. H&M chose the best available locations for its stores, in the main shopping

districts of major cities and towns where it operated. For example, in London, the store was

located at Brent Cross Shopping Center and Oxford Street, Fifth Avenue in New York, Rue de

Rivoli in Paris, and Beverley Center in Los Angeles. In some of the European countries, including

Germany and Switzerland, H&M acquired several stores at low prices during the recession.

As the stores were located at prime locations, it was important to decorate the store windows in

such a way as to attract customers. Mannequins in the windows displayed the new collections and

the shop windows reflected the seasonal trends. All the stores were self-service stores, and the

garments were placed in a way that made it easy for customers to find the things they were looking

for. According to Francoise Sackrider, a retail specialist at the Institut Francais de la Mode, in

Paris. ―The high level of goods and the sophisticated environment at these stores wiped out any

complexes shoppers had about less expensive stores.‖24

To ensure a uniform look for the stores across the world, the visual department in Sweden

provided guidelines pertaining to display and garment exposure. During every season and for

every new campaign, a new environment was created and was communicated to all the stores.

Some of the stores, especially those in big cities and those catering to teenagers, were renovated

frequently to maintain their novelty and appeal.

All the H&M stores were designed to promote self-service. The stores were decorated in a way

that would encourage the customers to select the garments and accessories that reflected their

style. There were several displays and mannequins within the stores which helped the customers

mix and match the collections.

H&M had stores in all ranges from full range stores to concept stores. The 200-700 sq meter

concept stores enabled the company to use the small sites available in some of the busy shopping

areas around the world. H&M had concept stores for men, women, teenagers, children, and for

accessories.

24 Sarah Raper Larenaudie, ―Inside the H&M Fashion Machine,‖ www.time.com, February 09, 2004.

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The stores were stocked every day. Most of the restocking was done between 7 am and 9 am.

Sometimes, as in the case of new store openings when demand was very high, the stores were

restocked several times a day. In some of the stores, where demand was high (for example, the

store at Paris‘ Boulevard Haussmann), restocking was done three times a day.

No item stayed in the stores for more than a month, and so customers were keen on visiting the

stores more often. Items that did not sell quickly were marked down, to make way for new items.

According to one of the customers at the stores in New York, ―I have told all my friends how cool

and inexpensive the store is. I keep coming back because there is always something new to buy. I

like that the clothes here have their own style. They just don‘t do knock offs.25

H&M was of the view that franchising and joint ventures would jeopardize the uniformity that was

necessary, especially in the clothing retail and fashion sector. This was one of the reasons why

H&M preferred to own all its stores. As most of the stores were owned by the company, it could

maintain control over the activities of all the stores. It also helped in maintaining a uniform store

concept across the world.

Most of the personnel in the stores were recruited locally, and they were considered to be

important in understanding the local market and in deciding the strategy to be implemented. H&M

carried out most of the recruitment and training processes internally. All the new recruits were

required to undergo a three-week introduction course after which each was assigned to a mentor.

Job rotation was practiced in H&M, and in the stores, the employees were required to carry out

various duties like cash desk, displaying, customer assistance, etc.

The staff from the stores was taken for positions like production coordinators, quality controllers,

auditors, etc. Staff from the corporate office and production offices was sent to stores from time to

time to maintain contact with the customers.

When a new store was opened, experienced employees from H&M stores in other locations were

relocated to recruit and train the staff. This process helped in inculcating the culture of H&M in the

new location. The same practice was followed even when H&M entered a new country. In such

cases, staff from other countries was transferred to a new country, to transfer knowledge and skills.

CONCLUSION

The entire operations in H&M right from the designing to the store management were IT

enabled. The production offices and the central office were connected and the central office

distributed the designs and sketches to the production offices through the Internet. As most of the

stores were owned by the company, they shared a common IT platform. Through this, the sales

data was communicated all through the supply chain, making it easy for the company to keep tabs

on sales and demand, and to react quickly to changing trends. The feedback loop between the

stores, warehouse, procurement department, and production office was IT-enabled. Every day, the

buying department analyzed the sales data, taking into consideration sales by item, country, store,

type of stores, etc. (Refer to Exhibit IV for flow of products and information in H&M).

Due to the short length of time it took for a garment to move from the designers‘ tables to the shelf

(an average of 21 days), H&M was able to add the looks that were not a part of the collection it

had released for the season. This enabled the company to reflect trends better as compared to its

competitors. H&M was also able to produce garments that were in vogue and were selling well in

the market and to stock them in the stores to meet demand.

25 Marianne Wilson, ―Disposable Chic at H&M,‖ Chain Store Age, May 2000.

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Though compared to its competitor Zara26, H&M took more time to deliver the clothes, the extra

time gave the company a cost advantage and clothes at H&M were 30-50% cheaper compared to

those at Zara.

For 2007, H&M planned to add around 170 stores to its existing stores, mainly in the US, Spain, Italy,

Germany, the UK, and Canada, taking the total number of its stores to over 1,500. In cooperation with

Alshaya, H&M planned to open stores in Qatar. H&M was also looking at expanding its reach to new

countries like Greece and Slovakia by the end of 2007 and to Japan by mid-2008. H&M opened stores

in Hong Kong in March 2007 and in Shanghai, China, in April 2007.

By spring 2007, H&M planned to offer footwear in all its stores. Other plans for the year included

the launch of high-end brands for women and men through a new stores ‗Collection of Style‘. The

first store was opened in Regent Street, London, in March 2007. According to Vinge, ―The

collection will be modern, and chic, and high quality in everything from fabric to fit to the

shopping experience.‖27 H&M planned to open similar stores in Hamburg, Berlin, The Hague, and

Brussels. The main reason behind choosing these locations was the size of the markets, and

existing logistics network.

By September 2007, H&M planned to sell home textiles through catalogues and online. The new

collection called H&M Home included bedspreads, curtains, comforters, towels, sheets, window

coverings, etc.

However, industry analysts pointed out that the picture was not all rosy for H&M as most of the

countries in which the company had a significant presence and from where it derived most of its

revenues were mature markets. They were of the opinion that H&M was expanding its operations

too quickly in the US market. Also, they felt that the stores in the US were too big and should be

scaled down. Besides, they required a revamp, as the layouts were confusing to the Americans. In

H&M‘s most important market, Germany, the sales in 2006 went down by 4%, with several

competitors like Zara, Mango, Kenvelo, etc, making their presence felt in the market.

Analysts were of the view that H&M was excessively dependent on the independent third party

manufacturers. Two of these manufacturers accounted for 25% of the production, and any

problems with them could have an adverse effect on H&M‘s ability to deliver the garments on

time something that was crucial for the success of the company.

H&M faced competition not only from clothing retailers like Zara but also from the likes of Wal-

Mart and Target. With Target bringing in renowned designers to design its collections, it proved to

be a formidable competitor to H&M.

In mid-2006, Zara replaced H&M as Europe‘s biggest fashion retailer. In March 2006, H&M reported

that sales had fallen by 8% compared to the previous year, though the number of stores had increased

(Refer to Exhibit V for H&M‘s five year financial summary). Inconsistent weather in Europe was said

to be one of the reasons for H&M‘s poor performance. Across Europe, especially in H&M‘s largest

market Germany, and Austria and Switzerland, winter and sub zero temperatures prevailed even

through March. By then, H&M had its spring collection ready but was not able to place the garments

which were in demand at that time in the stores. On the other hand, Zara, with its nimbler supply chain,

was able to replenish the stores with the right kind of products on time.

26 Zara is the largest division of Spain based Inditex Group, one of the largest fashion retailers in the world.

Compared to the average period of nine months taken by most of the designer stores to bring in new

collections, Zara brought in new collections every two weeks. In 2006, Inditex recorded revenue of €

8.196 billion and net income of € 1.010 billion. 27 ―H&M Moves Upscale,‖ Retailing Today, March 2007.

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Unlike the Zara stores, H&M‘s stores did not have an up-market feel about them. According to

Sally Bain, Retail Consultant, The Chambers28, ―This is one of Zara‘s strengths: it has very glossy

stores but mainstream prices and therefore it over delivers the promise. H&M‘s stores have been a

mess but it‘s making the environment more enticing and stylish though the prices are still lower

than Zara‘s.‖29

Some analysts were of the view that H&M did not always maintain trends. Libby Thomas, Search

Media Analyst, Microsoft ad Center UK, said, ―I think H&M is miles better than Zara but it can be

really inconsistent. You go into H&M one month and you want so many items, then you go in the

next month and it‘s just a big load of pap. It‘s probably because the brand‘s so trendy; sometimes

it gets it right and sometimes it doesn‘t.‖30 Some of the customers found it difficult to find the right

kind of garments at H&M‘s stores. According to one of the shoppers, ―H&M is good for cheap,

interesting clothes. The quality isn‘t amazing you won‘t find any impeccably cut cashmere

here, however it‘s great for whatever is so trendy that you just realized you had to have it five

minutes ago.‖31 A similar view was echoed by a customer from New York, who said, ―The

merchandize is trashy and cheap. It‘s really not my style. But I bought two sweaters anyway. The

prices were great.‖32

Critics of fast fashion also claimed that trend spotters were describing small influences as new

trends and were rushing the products to the stores. This reduced the longevity of the trend. They

were also of the view that these companies did not play any role in setting trends and were more

interested in just spotting the trends. As designer Zac Posen pointed out, ―It‘s a very fine line of

what is a copy and what is inspiration. In some way, it just gets the idea out there, because when

you‘re a growing brand you don‘t produce that many of them.‖33

According to Julian Sanchez, Contributing Editor, Reason Magazine, ―In an industry rife with

―interpretation‖ and ―homage,‖ designers had long adopted a relatively laissez-faire attitude

toward downmarket copying. Three overlapping trends have begun to change that. The first is the

increased speed with which the Internet — and, less obviously, but more importantly, flexible

supply chains and just-in-time inventory — allows at least rough copies to appear in stores at the

same time as their high-end templates (rather than a season behind the curve). The second is the

rise of ―masstige‖ lines at such retailers as Target and Kohl‘s, designed by the likes of Marc Jacobs

and Vera Wang but aimed at the mass market. Finally, there‘s the popularity of ―high-low‖

aesthetics.‖34

28 UK-based retail consultants, The Chambers, provides consultancy services in brand marketing, retail

strategy, innovation etc. Some of its prominent clients included B&Q, Hilton, HMV, Marks & Spencer,

Mothercare, Sainsbury‘s, and Tesco. 29 ―Slow Sales,‖ Brand Strategy, May, 2006. 30 ―Slow Sales,‖ Brand Strategy, May, 2006. 31 Posted by a user on http://chicago.citysearch.com/, on February 27, 2007. 32 Marianne Wilson, ―Disposable Chic at H&M,‖ Chain Store Age, May 2000. 33 ―High Fashion Battles Knockoffs,‖ www.women24.com, September 28, 2007. 34 Julian Sanchez, ―Thou Shalt Not Knock Off,‖ The American, September 14, 2007.

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Exhibit I

H&M – International Expansion

Year Markets

1947 Sweden

1964 Norway

1967 Denmark

1976 UK

1978 Switzerland

1980 Germany

1989 Netherlands

1992 Belgium

1994 Austria

1996 Luxembourg

1997 Finland

1998 France

2000 USA, Spain

2003 Poland, Czech Republic, Portugal, Italy

2004 Canada, Slovenia

2005 Ireland, Hungary

2006 Franchisee (Dubai & Kuwait)

Source: Facts about H&M, 2007.

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Exhibit II

H&M Stores Country Wise (2006)

Country No. of Stores Sales 2006 (SEK Million) No. of Employees

Germany 303 20,181 9,302

Sweden 123 6,690 4,142

USA 114 5,109 4,383

UK 112 6,769 3,617

France 85 5,943 2,486

Netherlands 81 4,990 2,023

Norway 79 4,840 1,481

Spain 68 3,845 2,568

Denmark 58 3,293 1,238

Switzerland 56 4,045 1,412

Austria 54 4,286 1,839

Belgium 50 2,777 1,308

Poland 35 1,208 978

Finland 33 1,988 731

Canada 26 1,027 608

Italy 18 996 474

Portugal 14 425 324

Czech Republic 13 513 239

Luxembourg 7 310 126

Ireland 5 327 170

Hungary 4 93 54

Slovenia 3 354 95

Franchise 4 72

Total 1,345 80,081 39,598

Source: Facts about H&M, 2007.

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Exhibit III

H&M – Suppliers’ Code of Conduct

H&M considered it important to take responsibility of all its actions. This became necessary due

to the thousands of people involved in its production process. In order to clarify its stand on

issues like child labor and human rights etc, H&M developed a Code of Conduct, which all its

suppliers and sub contractors were required to follow.

Legal Requirements: The suppliers had to follow the national laws of the countries in which

they operated.

Child Labor: The child labor policy of H&M was based on the UN Convention on The Rights

of the Child article 32.1. H&M did not accept child labor, and if a child was found working in

any of the factories producing garments for H&M, the company requested the factory authorities

to take the necessary steps to find a solution considering, age, social situation, and education of

the child. Instead of dismissing the child from work, the factory had to take adequate steps to

improve the situation of the child and ensure that children would not be employed any more in

the factory. In case the suppliers did not accept the company‘s policy, H&M would stop

cooperating with the supplier.

Safety: The safety of workers was of prime importance to H&M and the suppliers were not

allowed to operate from unsafe buildings and with hazardous equipment. The factories had to

have clearly marked exits, which were easily accessible. The workers had to be educated about

fire safety equipment, emergency exits, first aid, evacuation plans, etc. Medical facilities had to

be made available in close proximity to the factories, and the supplier had to bear the medical

expenses of workers in case of injury inflicted while working at the factory.

Workers’ Rights: All the workers working for H&M had to have basic rights, and the company

did not accept bonded labor, illegal workers, and prisoners. In case of foreign workers, they had

to be employed on their will. Corporal punishment and other forms of disciplinary punishment

were not allowed to be used. Workers were to given the freedom to join any association. The

workers were not to be discriminated on the basis of race, gender, ethnic background, religion,

etc. All the workers with equal experience and qualification were to receive equal pay for work.

All the workers were entitled to an employment contract. Wages had to be paid on time,

following the minimum wage policy in the country. Other parameters pertaining to working

hours had to be followed, and overtime had to be compensated. The workers had to be granted

leave as stipulated.

Factory Conditions: The factory environment had to be clean and free from pollution. The

temperature levels had to be tolerable, with adequate ventilation, with facilities like heaters and

fans. Proper lighting had to be provided. The sanitary facilities also had to be clean.

Housing Conditions: If a factory also provided housing facilities, they had to have the required

safety and sanitary conditions. All the workers had to be given living space as per the stipulated

requirements.

Environment: The suppliers had to comply with the environment laws of the country in which

they operated. Use of solvents and hazardous chemicals in producing the garments was not

allowed. All the suppliers had to commit themselves to not using restricted chemicals as

specified by the company.

Adapted from H&M’s Code of Conduct, www.hm.com.

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Exhibit IV

H&M Product and Information Flow

Source: www.eurofound.europa.eu.

Exhibit V

H&M Five Year Financial Summary

(In SKr Million)

2006 2005 2004 2003 2002

Sales (incl. VAT) 80081 71886 62986 58550 53332

Sales (excl. VAT) 68400 61262 53695 48238 45522

Operating Profit 15298 13173 10667 9223 8259

Depreciation 1624 1452 1232 1126 1051

Profit after Financial Items 15808 13553 11005 9609 8629

Profit after Tax 10797 9247 7275 6386 5687

Earnings per Share 13.05 11.17 8.79 7.72 6.87

Source: H&M Annual Report, 2006.

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Suggested Readings and References:

1. Hennes & Mauritz the ‘MTV’ of Fashion. Chain Store Age Executive with Shopping

Center Age, Special Issue 1993.

2. Knickers to the Market. Economist, February 28, 1998.

3. Catherine Curan, Swede Smell of Success, Crain‘s New York Business, April 02, 2001.

4. Emily Scardino, H & M: Can it Adapt to America's Landscape? DSN Retailing Today,

September 17, 2001.

5. Catherine Curan, Swedish Retail Emissary. Crain‘s New York Business, October 15, 2001.

6. Marianne Wilson, Disposable Chic at H&M, Chain Store Age, May 2000.

7. Fashion & Style: ‘We’re not Fashion Slaves’, The Independent, July 11, 2002.

8. Kerry Capell, Gerry Khermouch, Hip H&M, BusinessWeek, November 11, 2002.

9. Ariane Sains, Seeking Next Fall’s Fashion in the Subway, BusinessWeek, November 11, 2002.

10. H&M: Touching New Heights, www.imagesfahion.com, May 2003.

11. Sarah Raper Larenaudie, Inside the H&M Fashion Machine, www.time.com, February 09, 2004.

12. Betsy Kroll, Designer Dresses for Less, Time Canada, July 26, 2004.

13. Karen Raugust, Hennes & Mauritz, Advertising Age, November 01, 2004.

14. How Star Retailers Turn Fast, Women‘s Wear Daily, November 10, 2004.

15. Truly Fast Fashion: H&M's Lagerfeld LineSells Out in Hours. Women‘s Wear Daily,

November 15, 2004.

16. Kerry Capell, Dan Beucke, Attention, Frugal Fashionistas, BusinessWeek, June 06, 2005.

17. Sharon Edelson, H&M Said Adding 5th Ave. Site, Women‘s Wear Daily, August 10, 2005.

18. Brand Therapy - H&M: Fast Fashion, Slow Sales, Brand Strategy, May 2006.

19. Miles Socha, Viktor & Rolf Walk Down Aisle with H&M, Women‘s Wear Daily,

September 28, 2006.

20. Sarah Kohl, Madonna shines on Fifth Avenue. Display & Design Ideas, December 2006.

21. Robert Murphy, H&M to Enter Japanese Market, Women‘s Wear Daily, December 12, 2006.

22. Kerry Capell, H&M Moves up with Madonna, BusinessWeek, December 13, 2006.

23. Nicola Saminather, How H&M’s Coping with Retail Travails, BusinessWeek, January 04, 2007.

24. Robert Murphy, How Swede It Is: H&M Profits Up 17%, New Formats on Horizon,

Women‘s Wear Daily, January 26, 2007.

25. Brent Felgner, H&M to Enter Home Textiles Category, Home Textiles Today,

January 29, 2007.

26. Samantha Conti, H&M’s New Collection a Step Upmarket., Women's Wear Daily,

February 14, 2007.

27. H&M Moves Upscale, Retailing Today, March 2007.

28. Constance Haisma-Kwok, Throngs Turn Out for H&M’s Hong Kong Opening,

Women‘s Wear Daily, March 13, 2007.

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29. Pop Goes Madonna: H&M Launch Lures Fans Around the Globe. Women‘s Wear

Daily, March 23, 2007.

30. Lisa Movius, H&M Heads East With First Unit in Shanghai, Women‘s Wear Daily,

April 17, 2007.

31. Li Li, Fashion Magnets’ Supply Chain Contest, China Business Feature, May 08, 2007.

32. Simi Horwitz, Place to Shop for Clothes: H&M, Back Stage East, May 10, 2007.

33. Kathleen Kingsbury, H&M Sets Up Shop in China, Time South Pacific (Australia/New

Zealand edition), July 16, 2007.

34. Georgia Lee, H&M Headed to Atlanta, Women's Wear Daily, August 10, 2007.

35. Hennes Celebrates 60 Years of Low Cost Fashion, www.thelocal.se, September 14, 2007.

36. Julian Sanchez, Thou Shalt not Knock off, The American, September 14, 2007.

37. High Fashion Battles Knockoffs, www.women24.com, September 28, 2007.

38. Our Responsibility, About H&M and Social Responsibility, www.hm.com.

39. Facts about H&M, 2007.

40. www.myspace.com.

41. www.hm.com.

42. www.eurofound.europa.eu.

43. H&M Annual Reports, 2002-06.