h&m

Hennes & Mauritz (H&M) AB in Retailing

December 2009

© Euromonitor International

2

Retailing - Hennes & Mauritz

• This global company profile covers the following products focusing on the year 2009:

Scope

Scope of the Report

Retailing: US$10,430 billion

Store-based Retailing:US$9,829 billion

Clothing & Footwear Specialist Retailers:

US$791 billion

Non-Store Retailing: US$601 billion

Homeshopping: US$190 billion

Internet Retailing: US$243 billion

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accuracy and reliability, Euromonitor International cannot be

held responsible for omissions or errors

Figures in tables and analyses are calculated from

unrounded data and may not sum. Analyses found in the

briefings may not totally reflect the companies’ opinions, reader discretion is advised

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3


Strategic Evaluation

Competitive Positioning

Geographic Opportunities

Category Opportunities

Brand and Operational Strategies

Recommendations




4


H&M’s robust performance in battle with

Inditex

• The world’s second largest clothing and footwear

specialist retailer in 2009, behind Inditex, and

ahead of Gap, H&M continued to record strong

sales growth in 2008 and 2009. This was

achieved partly thanks to a strong performance in

its largest market, Germany, with sales in local

currency terms up by double-digits.

• Inditex’s and H&M’s battle for the world’s largest

clothing and footwear retailer position is closely

fought, while Gap, which was the world’s largest

player in this channel until 2007, has been

significantly left behind by the leading two.

H&M’s profits remain healthy

• H&M registered sales excluding VAT of SEK88.5

billion (US$13.7 billion) in 2008, an increase of

13% over the year, with profit after tax also up

13% to SEK15.3 billion (US$2.4 billion), which

highlights the group’s high margin.

• Its major rival, Inditex, recorded revenue of

EUR10.4 billion (US$14.5 billion) in 2008, up

10% on the previous year, with net profit up 0.2%

to EUR1.3 billion (US$1.8 billion). Gap registered

sales of US$14.5 billion, down 8% in the year, as

it suffered from poor conditions in its core US

market, though the company’s net profit grew by

16% to US$967 million, helped by cost savings.

Key Company Facts


Hennes & Mauritz (H&M) AB

Headquarters Stockholm, Sweden

Regional Involvement

Asia Pacific, Eastern Europe,

North America, Western Europe,

Middle East and Africa

Sector Involvement

Clothing and footwear specialist

retailers, homeshopping, internet

retailing

World clothing and footwear

specialist retailers share

1.7% (2009)

1.5% (2008)

Retail sales value growth

(US$)

-4.1% (2009)

17.2% (2008)

6,000

8,000

10,000

12,000

14,000

16,000

18,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2004 2005 2006 2007 2008

SE

K m

illio

n

SE

K m

illio

n

Hennes & Mauritz (H&M) AB - Sales excl. VAT vs Profit After Tax

Sales excl VAT Profit after tax




5


Resilient performance, with sales driven by store network expansion

• H&M’s sales excluding VAT grew by 13% to SEK23.6 billion (US$3.4 billion) in the third quarter ending August 2009. Group profits after tax continued to rise, up by 4% to SEK3.5 billion (US$506 million).

• However, same-store sales declined slightly in local currency terms, with consumer sentiment remaining subdued and hindering sales of non-grocery retailers, especially in the US, while the German market was resilient and strong gains were made in Italy.

• For the nine months to August 2009, sales were up by 18% to SEK73.4 billion (US$10.6 billion), with growth boosted by new store openings. Profits after tax were up by 0.2% to SEK10.2 billion (US$1.5 billion). Low inventory levels were a major factor contributing to keep costs down.

Inditex records lower sales growth than H&M

• Inditex recorded revenues up by 7% to reach EUR4.9 billion (US$7.1 billion) in the six months to July 2009. Growth in Asia’s emerging markets continued to boost revenues, especially in China and Hong Kong, offsetting a negative economic environment in its Spanish domestic market where it saw a strong decline in like-for-like sales.

• Although impacted by the recession in Europe, Inditex’s profits were resilient, helped by efficient cost controls. The group recorded net income down by only 8% on the previous year to EUR375 million (US$550 million), despite sustained investments in network expansion.

Q3 results: Resilient Performance, Continued Expansion


Hennes & Mauritz (H&M) AB – Q1 to Q3

Sales excluding VAT (SEK billion)73.4 (2009)

62.2 (2008)

Profit after tax (SEK billion)10.2 (2009)

10.2 (2008)

Net margin (%)13.9 (2009)

16.4 (2008)

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

50,000

52,500

55,000

57,500

60,000

62,500

65,000

67,500

70,000

72,500

75,000

2008 Q1 to Q3 2009 Q1 to Q3

SE

K m

illio

n

SE

K m

illio

n

Hennes & Mauritz (H&M) AB - Net Sales excl VAT vs Profit After Tax

Net sales excl VAT Profit after tax




6


Strengths

Opportunities

Weaknesses

Threats

A strong control of the

whole logistics process

helps H&M achieve low

costs, while low inventory

contributes to maintain

margins.

Operational efficiency

Combining style innovations

and low prices are staple

attributes of the H&M brand

on which it has built strong

consumer recognition. High

profile advertising and

collaboration with designers

help make stores shopping

destinations and raise the

desirability of its ranges.

Brand recognition: low

price and style

Despite being a global

player present in 33

markets, H&M has

developed its presence in

Europe and North America

mostly, unlike Inditex

operating in over 70

countries including many

emerging markets.

Modest presence in

emerging markets

The reliance on production

outsourcing, unlike other

rivals such as Inditex, puts

H&M at greater risks of

damaging its reputation in

terms of product quality and

poor labour conditions in

developed countries.

Reliance on outsourcing

The rapid growth of clothing

and footwear sales through

internet retailing is expected

to continue and give H&M

opportunities to reach a

wider audience, especially

in its core demographic

target, teenagers and

young adults, whose

purchases are often

influenced by the internet.

Internet retailing

Urbanisation, increased

disposable incomes and

changing lifestyles making

the population more aware

of fashion trends give major

growth opportunities in

large emerging markets

such as China and Russia.

There is also potential in

markets where H&M is

absent such as Turkey and

Romania.

Untapped potential in

emerging markets

H&M faces a growing threat

from a number of direct

competitors with

increasingly global

ambitions at the low-priced

end of the market such as

Associated British Foods

with Primark, Fast Retailing

with Uniqlo and Marks &

Spencer, alongside a

resurgent Gap.

Fast fashion becoming

more competitive

Hypermarkets and mass

merchandisers including

Carrefour, Target, Tesco

and Wal-Mart are set to

continue developing their

offer of non-food products

and compete directly

against H&M in the value

segment of clothing and

footwear retailing.

Non-food expansion of

grocery retailers

SWOT – Hennes & Mauritz (H&M) AB





7


Although growth in internet retailing sales is particularly

promising for clothing and footwear retailers, H&M has

been a late entrant and will struggle to seize the

opportunities offered by this channel.

It has left numerous other retailers including pure play

internet retailers such as Amazon and Asos and the

homeshopping specialist Otto take a lead. Hence, it will

be difficult for H&M to target these consumers and

generate traffic to its websites, although it could rely on

high-profile advertising and innovative sites to succeed.

Collaborations with designers will need to be continued

and reinvented to make products more desirable, make

stores more popular shopping destinations and

strengthen the emotional bond with consumers and H&M.

Distinctive store layout has been used successfully by

Inditex with its Zara chain to convey the desirability of its

clothes, and this is a strategy that H&M could also

implement to make the store designs a more important

aspect of its strategy. This could allow H&M to maintain

an advantage over smaller rivals with increasing global

ambitions for their brands such as Primark and Uniqlo.

Fast product turnaround, flexibility and speed to market

are major elements determining fast fashion retailers’

operational efficiency. H&M’s record is strong comparable

to Inditex in most aspects, although Inditex has an

advantage regarding speed to market, as a result of its

vertical integration business model.

In the midst of the global economic crisis particularly

affecting clothing and footwear specialists, H&M chose to

avoid heavy discounting in order to maintain its margins

and profits. However, more aggressive price wars may

force it to discount more and hit its margins.

H&M’s presence in emerging markets is less important

than Inditex’s, which has a major store network in Latin

America and more stores in the Middle East and Africa.

Expanding in emerging markets remains a priority for

H&M, although growth prospects remain strong in

developed markets such as Canada and the US where it

can enter numerous new cities, especially in Southern

States where it has a modest presence. H&M’s CEO Karl-

Johan Persson appointed in July 2009 restated the

group’s global expansion targets, although it appears to

be slower than expected, with around 160 new stores

likely to be opened out of 225 initially planned for 2009.

Speed to market and price strategyOngoing international expansion with a focus on

emerging markets

Maintain brand image and increase desirability Late entry into internet retailing

Key Strategic Objectives and Challenges





8







Recommendations




9


• International expansion and fashionable product assortment led to strong growth for H&M and its main rival Inditex,

despite a marked slowdown in 2009 due to the global economic crisis and the strength of the US dollar.

H&M Performs Strongly but Growth is Matched by Inditex


-12

-8

-4

0

4

8

12

16

20

24

28

2005 2006 2007 2008 2009

% y

-o-y

gro

wth

Clothing & Footwear Specialist Retailers - World - Retail Value RSP excl Sales Tax - US$ - % Year-on-Year Growth

World Hennes & Mauritz (H&M) ABC&A Mode Brenninkmeijer & Co Gap Inc, TheINDITEX - Industria de Diseño Textil

A – H&M’s sales record strong

growth, on a par with C&A, thanks

to global store network expansion.

However, Inditex outperforms

H&M thanks to more aggressive

network expansion not only in

Western Europe, but also in

emerging markets.

.

B – Gap under-performs its main

rivals, hindered by a strong

reliance on its low-growth domestic

market and a less aggressive price

strategy than H&M. Gap’s image

also suffers from a product

assortment perceived as more

staid than H&M’s and Inditex’s.

C – The rise of the US dollar against

other global currencies in 2009 is

causing a fall in value sales for all

retailers. H&M’s low-priced

positioning and its wide global

presence helps the company remain

resilient in a challenging environment

for non-grocery retailers.

A

C

B




10


Gap loses its crown• Gap saw declining sales in 2007

and 2008, due to unfavourable economic conditions in its US domestic market, which accounted for 81% of its global sales through the clothing and footwear specialists channel.

• Compared to H&M, Gap’s higher price positioning hindered its sales, especially in 2008 and 2009 as the global economic crisis dampened consumer spending.

Fast Retailing and Shinamurarising• Japan-based Fast Retailing posted

a strong performance among the top 10 global players, helped partly by the strengthening of the yen to the US dollar. Competing with a similar price positioning to H&M, Fast Retailing expanded outside Japan, especially in China and South Korea, and announced at the end of 2008 its intentions to open stores in European markets and in the US.

• As Japan’s second largest clothing and footwear retailer, Shinamura’sranking was also boosted by favourable exchange rates, but also thanks to new store openings.

Strong growth for H&M, overtakes Gap but is surpassed by Inditex• Strong sales growth for H&M over the 2005-2008 period enabled it to

overtake key rival Gap. H&M’s business model based on low-priced fast fashion proved highly popular with consumers.

• However, Inditex recorded a stronger performance than H&M, thanks to a more aggressive expansion strategy, especially in emerging markets. The latter was partly helped by a greater reliance on franchised outlets. Although H&M’s new store opening strategy was also ambitious, its presence in emerging markets remained modest compared to Inditex’s.

• Inditex also benefited from a vertical integration business model enabling it to renew collections more frequently than its main rivals, including H&M.

Competitive Context: Inditex and H&M on the Rise


World – Top 10 Clothing & Footwear Specialist Retailers 2005-2009

Company name5-year

trend2005 2006 2007 2008 2009

2009 %

share

INDITEX - Industria de Diseño

Textil 3 3 2 1 1 1.7

Hennes & Mauritz (H&M) AB 2 2 3 2 2 1.7

Gap Inc, The 1 1 1 3 3 1.5

C&A Mode Brenninkmeijer & Co 4 4 4 4 4 1.4

Ross Stores Inc 6 6 5 5 5 0.8

Fast Retailing Co Ltd 8 8 8 6 6 0.8

Shinamura Co Ltd 12 14 11 11 7 0.5

Limited Brands Inc 5 5 7 7 8 0.5

Benetton Group SpA 11 12 10 8 9 0.5

Burlington Coat Factory

Warehouse Corp 10 10 12 14 10 0.4

Note: 2009 provisional data




11


• Although both companies saw their

retail sales in US dollar terms hit by

the fall in the value of the euro

against the US dollar, they retained

their lead over Gap. The latter’s

strong dependence on the US market

proved a disadvantage, as it suffered

disproportionately from the recession

in its domestic market in 2008 and

2009, which it could not offset with

expansion in emerging markets,

where it remains absent.

• In addition, Gap adopted a less

aggressive pricing strategy than its

peers, thus losing share rapidly to

H&M and Inditex, but also to players

in other channels in the US such as

mass merchandisers Target and Wal-

Mart.

• H&M and Inditex have both been highly successful in the clothing and footwear specialists channel over the 2004-

2009 period. Their positioning based on low-priced fast fashion enables them to appeal to a wide range of

consumers, especially since 2008 and with the major world economies entering recession. Their fast fashion

business model also gives the two players the flexibility to change collections rapidly to adapt to consumer tastes,

although Inditex has the edge over H&M in this respect.

• International network expansion was also a major part in driving sales of both companies, although Inditex has a

greater presence in emerging markets, especially thanks to a wide reach in Latin America. Thanks to its greater

reliance on franchising, new market entry requires fewer resources and entails less risk for Inditex than for H&M,

which is more biased towards company-owned outlets.

H&M and Inditex Neck-and-Neck


0

2,500

5,000

7,500

10,000

12,500

15,000

2004 2005 2006 2007 2008 2009

Reta

il va

lue

sa

les r

sp

excl ta

x (

US

$ m

n)

World - Retailing Sales 2004-2009

Hennes & Mauritz (H&M) AB INDITEX - Industria de Diseño Textil




12


Modest growth in sales per outlet for most players, including H&M

• The growth trend in sales per outlet broadly matches the trends in overall sales growth for the top four global

retailers, with H&M and Inditex outperforming C&A and Gap. Higher sales per outlet for H&M compared to Inditex

largely reflects H&M’s larger average outlet size.

• Downward price pressure and prevalent discounting in apparel retailing, accompanied by the growing reliance on

production outsourcing to low labour cost countries in the clothing industry, contributed to the stagnation or slight

decline in sales per outlet for most retailers, especially for C&A and Fast Retailing.

Sharp contraction for Gap

• Gap’s higher-priced positioning and its relative resistance to discounting led to a sharp drop in sales per outlet, as it

opted to maintain its margins at the expense of overall sales growth.

Overall Stagnation in Sales per Outlet


World – Top 10 Clothing & Footwear Specialist Retailers – Sales per Outlet 2004-2009 – US$ Fixed

Exchange Rates

Company name 2004 2005 2006 2007 2008 2009% growth

2004/2009

INDITEX - Industria de Diseño Textil 3,130,909 3,222,196 3,245,793 3,374,326 3,291,002 3,267,473 4.4

Hennes & Mauritz (H&M) AB 7,103,455 7,072,943 7,102,853 7,194,397 7,279,016 7,303,864 2.8

Gap Inc, The 5,233,467 4,976,290 4,882,942 4,648,360 4,180,204 3,753,935 -28.3

C&A Mode Brenninkmeijer & Co 7,658,816 7,435,090 7,276,803 7,195,536 6,979,826 6,843,244 -10.6

Ross Stores Inc 6,571,607 6,719,945 6,967,172 7,136,890 6,784,922 7,238,611 10.1

Fast Retailing Co Ltd 5,663,966 4,185,028 3,720,254 3,884,908 4,520,068 5,203,178 -8.1

Shinamura Co Ltd 3,168,427 3,129,442 3,222,800 3,196,295 3,201,177 3,163,917 -0.1

Limited Brands Inc 2,541,956 2,686,424 2,799,494 2,778,019 2,636,235 2,543,005 0.0

Benetton Group SpA 916,038 911,815 896,071 913,342 949,993 960,191 4.8

Burlington Coat Factory Warehouse Corp 8,482,203 9,062,259 9,090,081 9,032,800 8,904,762 8,068,446 -4.9

Note: 2009 provisional data




13







Recommendations




14


• Among H&M’s top 10 global markets in 2009, all of them were located in Western Europe apart from one, the US.

This highlights the company’s modest presence in emerging markets. Western Europe will account for 84% of the

group’s sales in 2009. This proportion exceeded 90% in 2005, which illustrates H&M’s relative success in expanding

its presence globally in order to offset the maturity and saturation in Western Europe’s clothing and footwear

retailing.

• The company’s largest market, Germany, will account for 26% of world sales in 2009. No other market had a share

of global sales exceeding 10%, while the domestic market, Sweden, accounts for 5%, which shows that H&M is not

overly dependent on the economy of a single market. In comparison to H&M, Inditex is more dependent on its

domestic market, which will generate 37% of its world sales in 2009. Both companies seek to extend their global

reach, especially in emerging markets, although Inditex has a clear lead in this respect. Hence, H&M operates in 33

markets as of October 2009, compared to around 70 markets for Inditex.

A Global Player Still Dependent on Western Europe


Germany

United Kingdom

France

Spain

Netherlands

Sweden

USA

Austria

Switzerland

Norway

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0 25,000 50,000 75,000 100,000 125,000 150,000 175,000

%C

AG

R 2

00

9-2

01

4

Market Size 2009 (US$ mn)

Hennes & Mauritz (H&M) AB - Clothing & Footwear Specialist Retailers (Company's 10 Largest Markets)

Bubble size shows company sales in market, range displayed: US$536 - 3,497 mn

Opportunity Zone




15


• H&M has a wide presence covering most Western European markets, in which its two main competitors are Inditex

and C&A. All three companies have seen their share increase over the 2004-2009 period at the expense of smaller

players, especially those with a national presence only.

• The shares of H&M and Inditex were driven by aggressive continuous network expansion across most markets. H&M

has seen major ongoing store network expansion in most major European markets in 2008 and 2009, especially in

France, Germany, Italy, Spain and the UK. Its business model has proved to be relatively recession-proof, thanks to

its low prices.

• C&A has been distanced by the two largest operators. Positioned as a value retailer targeted at families, C&A lost

ground thanks to a less fashionable image and an inferior international presence. The company is absent from major

European markets including Italy and the UK, and over 50% of its sales in Western Europe are derived from the

German market.

Western Europe: Ongoing Expansion for H&M and Inditex


0

1

2

3

4

2004 2005 2006 2007 2008 2009

% v

alu

e s

ha

re

Clothing & Footwear Specialist Retailers: Retail Value RSP excl Sales

Tax - Company Shares by GBO

C&A Mode Brenninkmeijer & CoHennes & Mauritz (H&M) ABINDITEX - Industria de Diseño Textil

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009

% v

alu

e s

ha

re

Hennes & Mauritz (H&M) AB Company Shares - Top 6 Markets - Clothing &

Footwear Specialist Retailers - Retail Value RSP excl Sales Tax

France GermanyNetherlands SpainSweden United Kingdom




16


Primark expends beyond the British Isles to emerge as a new European player

• Primark, owned by Associated British Foods, only recently expanding outside Ireland and the UK with its first outlets

in Spain in 2008 and Portugal and test stores in Germany and the Netherlands in 2009, has ambitions to develop a

wide pan-European network. A new market entry is planned in Belgium in 2010. The success recorded by its first

stores in Spain indicates that it could become a major Europe-wide player.

• With a strong brand image based on low prices and trendy collections following fashion trends closely, Primark

targets teenagers and young adults, thus competing directly against H&M in terms of demographic and price

positioning.

Western Europe: Primark Emerges as New Major Player


0

1

2

3

4

5

6

WE - Hennes & Mauritz (H&M) AB

WE - Associated British Foods Plc (ABF)

UK - Hennes & Mauritz (H&M) AB

UK - Associated British Foods Plc (ABF)

% v

alu

e s

ha

re

Clothing & Footwear Specialist Retailers - Western Europe and United Kingdom-Retail Value RSP excl Sales Tax - Company Shares by GBO

2005 2006 2007 2008 2009




17


• Although geographic expansion has been a central feature of H&M’s strategy, it has focused until recently on Europe

and North America, in contrast to Inditex venturing in several markets in Latin America and Asia Pacific and C&A’s

major presence in Brazil. Recent new market entries in Japan in September 2008 and the planned entry in South

Korea in spring 2010 confirm H&M’s adoption of a strategy to be less dependent on Europe and North America.

Successful new entry in Japan in 2008

• With its first store in the upmarket shopping district of Ginza in Tokyo, H&M’s market entry was successful. Initial

reception was very favourable to the new chain, with around 50,000 shoppers visiting the Ginza store over the first

week of opening, and a second Tokyo store was opened in November 2008 in the trendy district of Harajuku. The

Harajuku outlet was the first H&M worldwide to sell the fashion label Comme des Garçons, with a collection designed

by the Japanese designer Rei Kawakubo. This strategy helped create anticipation ahead of the new store opening

among fashion-conscious consumers and gives H&M a more exclusive image in Japan than it has in other markets.

• Two more outlets in Tokyo are planned by the end of 2009 and a fifth is due to open in 2010, in Osaka. In order to

expand faster in the mature Japanese market and to match the scale of its larger rival Inditex, H&M is considering

acquisitions to be a possible expansion strategy.

Intense price competition in Japan

• In a market hit by severe recession in 2009, price competition for clothing and footwear items has intensified. This

was highlighted by mass merchandiser chains Justo (Aeon), Ito-Yokado (Seven & I) and Seiyu (Wal-Mart) starting to

offer jeans at around ¥1,000 in 2009. Among H&M’s most direct competitors in terms of price and image, the

dynamic player Fast Retailing with the Uniqlo chain combining low price and fashionable ranges, followed a similar

price move in 2009. However, regardless of price H&M has an advantage in terms of fast fashion in being able to

source and offer new products and refresh its collection more frequently than Fast Retailing.

South Korea – following in the footsteps of Inditex

• Following its successful entry in Japan, H&M plans to open its first outlet in South Korea in March 2010 at a flagship

store in Seoul’s business district of Myungdong. In a market less saturated than Japan’s and with fewer major

international clothing and footwear specialist chains, H&M is expected to be successful. However, similarly to Japan,

H&M enters after Inditex has already established a footprint in 2007 and expanded rapidly since.

Recent and Planned Market Entries: Japan, South Korea





18


• With little presence in emerging markets, H&M is attempting to catch up with rivals, especially by expanding in large

emerging markets, especially in China and Russia.

Ongoing expansion in China to continue

• Following market entry in Hong Kong in 2007, H&M expanded rapidly in 2008 and 2009 with new stores in mainland

China. Sales in China accounted for almost 1% of global sales in 2009. The first outlet in Beijing was opened in April

2009 south of Tiananmen Square, with H&M becoming the first foreign retailer to be present in this newly renovated

part of the city. In order to create more anticipation around the store opening among consumers, it coincided with the

launch of a new collection in collaboration with the designer Matthew Williamson. H&M’s presence in China is

expected to continue expanding rapidly through new store openings, both in existing cities and by entering new cities

where it can target the rapidly growing number of middle-class urban consumers.

• Among H&M’s global rivals, although Inditex expanded in China and Hong Kong earlier than H&M and has a

stronger presence with more outlets, it has a less developed supplier network in Asia than H&M, and as a result it

can struggle to offer competitive prices to compete against H&M and also against local players, which may lead to

the adoption a more differentiated positioning than in other markets.

• With Gap planning to enter China in 2010, it is likely that a greater number of international clothing and footwear

specialist retailers will enter the market. Competing in a similar price segment to H&M, Fast Retailing announced at

the end of 2008 its long-term objective to have 100 Uniqlo outlets in China.

Russia – untimely entry but sound long-term prospects

• H&M opened its first store in Russia in Moscow in March 2009. However, suffering from a fall in gas and oil

revenues, the country’s deep recession in 2009 is worse than previously anticipated and makes H&M’s market entry

untimely. Rival Inditex has developed a major presence in Russia over several years, which has allowed the group to

take advantage of the booming economy until 2008 to expand and establish a wide customer base. Longer term,

H&M is set to emerge from the recession relatively unscathed thanks to its low-priced positioning and to have major

growth prospects.

Further Growth in Large Emerging Markets: China, Russia


Key point: With no presence in Latin America unlike C&A and Inditex,

H&M could benefit from entering the large markets of Brazil and Mexico

where its low prices should help build a major customer base.




19


Middle East and Africa expansion set to gather pace

• H&M’s presence in the main Middle East market, the United Arab Emirates, continued to increase rapidly in 2009

thanks to the franchise agreement signed in 2006 with the Kuwait-based company MH Alshaya Group.

• Opting to expand through franchise stores and using a similar growth model as Inditex represents a major new

development in H&M’s global expansion strategy in emerging markets, which is likely to help accelerate its global

expansion.

• Thanks to the partnership with Alshaya Group, H&M entered the markets of Bahrain and Oman in 2009, and also

opened its first two stores in Egypt in the second half of the year. H&M is likely to enter other new markets in the

Middle East and Africa by the end of 2009, or in 2010, including Lebanon.

• Under another franchise deal signed with the local company Match Retail, H&M plans to enter Israel in 2010.

Dedicated store concept for Saudi Arabia

• As store concept adaptation is an important ingredient in the success for foreign retailers operating in the Middle

East and Africa, and require close attention, franchise partners are in a better position than H&M to implement new

concepts.

• For example, in order to comply with local sharia law that forces shops to have segregated areas for men and for

women, for its market entry in Saudi Arabia in autumn 2008, H&M opted to adapt its store concept to be only open to

women and staffed by women.

Franchise Deals Give New Middle East Opportunities





20







Recommendations




21


• H&M’s sales through the clothing and footwear specialist retailers channel will account for around 97% of its sales in

2009. This channel is forecast to record modest growth over the 2009-2014 period. While channel sales were

hindered by the global economic crisis in 2008 and 2009, they are likely to recover to some extent, although they will

remain affected by low price pressures on clothing prevailing within this distribution channel as well as in other

channels. H&M has stronger prospects than most other clothing and footwear specialist players thanks to its wide

international presence and low-cost and flexible business model allowing the group to undercut most rivals while

remaining at the forefront of fashion trends.

• The remainder of H&M’s sales is accounted for almost equally by homeshopping and internet retailing, although the

latter is increasingly supplanting the former, mirroring the wider industry trend. Expanding internet retailing presence

will help offset the growing saturation of clothing and footwear retailing. Unlike Inditex, which is also present in the

furniture and furnishings stores channel in a number of markets under the Zara Home brand, H&M does not operate

other store-based formats.

Modest Growth Forecast for H&M’s Main Channel


Clothing & footwear specialist retailers

Homeshopping

Internet retailing

-1

0

1

2

3

4

5

6

7

8

9

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

% C

AG

R 2

00

9-2

01

4

Market Size 2009 (US$ million)

Hennes & Mauritz (H&M) AB - Global Retailing Presence & Prospects by Channel

Bubble size shows company sales in this channel (2009). Range displayed: US$169 - 13,118 million




22


Grocery retailers and mass merchandisers increase price pressure on clothing and footwear

specialists

• Clothing and footwear specialist retailers are increasingly seeing more intense competition from rivals operating

mostly in other store-based channels, such as mass merchandisers and hypermarkets. As H&M is positioned in the

low-priced segment in clothing and footwear retailing, it is vulnerable to the direct competition from these channels

and needs to cultivate its clear competitive advantage in terms of fashion and desirability.

• An example of the intensifying competition affecting clothing and footwear retailers is the price war between Fast

Retailing (Uniqlo) and mass merchandisers Aeon (Jusco) and Wal-Mart (Seiyu) in Japan to sell jeans at around

¥1,000 in 2009. In the US, Gap’s sales have been eroded by the success of mass merchandiser Target’s

aggressively priced clothing ranges.

• In Western Europe, the expansion of major hypermarket operators including Auchan, Carrefour, Tesco and Wal-Mart

into non-food products is set to continue as they seek to improve margins. Although this trend has slowed down to

some extent in 2008 and 2009 due to the global economic crisis, with grocery retailers refocusing at least temporarily

on more recession-proof food items, the longer-term trend is expected to see hypermarkets attempting to be more

competitive in their offer of clothing and footwear, with more appealing ranges to compete more directly against

specialist non-grocery retailers.

• In the UK, Wal-Mart’s Asda chain, thanks to the increased sales of its George apparel range in 2009, threatens to

overtake Marks & Spencer and Associated British Foods’ Primark chain to become the country’s largest clothing

retailer.

• Tesco saw clothing sales improve in the first half of 2009 alongside growth in non-food sales, up by 8%. Meanwhile,

Sainsbury’s is planning to increase space allocated to non-food ranges in 2010 and 2011 and widen the reach of its

successful TU range of clothes by offering it at more stores.

Battling Against Hypermarkets and Mass Merchandisers





23


H&M and Inditex both rise to the challenge and plan to develop internet retailing• Beyond store-based rivals, clothing and footwear specialist retailers are increasingly battling against internet retailers

and most of them react by developing or expanding their own online retailing activity. With consumers’ familiarity with ordering online generally on the rise, coupled with efforts from internet retailers to make their websites more visually appealing and user-friendly, consumers’ confidence in ordering clothes via the internet has been strongly boosted.

• Major homeshopping retailers which are also leading players in clothing, for example, Otto, are increasingly moving online. Similarly, H&M’s homeshopping sales in Austria, Germany, Netherlands and the Nordic countries are gradually migrating to internet retailing. The company’s significant experience in homeshopping in these markets prepares it well to tackle the logistics aspects to make internet retailing operations efficient across European markets.

• Both Inditex and H&M made announcements in 2009 indicating that they are gradually joining the fray and expanding online in most European markets. Inditex will start operations in major European markets by early 2010, while H&M will launch its website in autumn 2010 in the UK. Thanks to its wide product assortment, the vast choice increases H&M’s chances of success in internet retailing although this requires the site to be designed in a way to be easy to navigate.

• However, H&M is a late entrant in the channel and appears to have made a protracted move, with a plethora of major other operators including Amazon, Asos, the John Lewis Partnership, Marks & Spencer and Tesco having already obtained a strong foothold in UK online clothes retailing. Rival Gap also plans to launch its own website in the UK, following its earlier initiative in 2009 to sell its products on the Asos.com website. In the US, Gap has a multi-brand website and offers combined delivery on cross-brand orders.

Aggressive expansion from internet retailing specialists and grocery retailers• Major grocery retailers have high ambitions for online clothes sales, as shown by Tesco’s relaunch of its UK clothing

website in September 2009 offering private label and brands, and with Wal-Mart’s Asda offering the George label at Asda Direct since 2008. Websites of grocery retailers also often offer the added convenience of click-and-collect services. Among specialist internet retailers, Amazon’s acquisition of the US online clothes retailer Zappos for US$850 million in August 2009 signals its ambitions in apparel retailing, and its low prices and high number of visits from customers give it key competitive advantages.

Internet Retailing: H&M’s Late Entry


Key point: With internet retailing making price comparisons between retailers easier, H&M should focus on

advertising its low prices and promotions on its transactional website, while also emphasising the more fashionable

design of its clothes in order to differentiate its website from Amazon and the grocery retailers.




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Recommendations




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Strong brand awareness and image

• H&M’s strong brand image is associated with value and stylish collections, helped by the collaborations with famous designers. The latest example is the creation of the Jimmy Choo collection to be launched in November 2009. Such events create a great amount of publicity and media coverage to generate added footfall.

• In a similar way to Inditex, H&M relies on opening stores at a few flagship locations in major cities in order to build its brand image. Examples of such stores include the Harajuku store in Tokyo and the Champs Elysées store in Paris planned for 2010.

• Highlighting the H&M brand’s high level of awareness, it was ranked 21st among the top 100 most valuable global brands according to Interbrand in 2009, with a value exceeding US$15 billion. In comparison, Zara ranked only 50, while Gap came in at number 78. High-profile advertising with celebrities is widely used by H&M, unlike Inditex. H&M spends around 5% of its revenues on advertising.

Brands other than H&M gain greater importance

• The more upmarket COS successfully launched in the UK in 2007 enabling the group to target wealthier customers and potentially increase its margins. It was subsequently extended to other markets: Belgium, Denmark, Germany and the Netherlands.

• The Swedish chain Monki, acquired in 2008 and known for its sophisticated and colourful store designs, is not being re-branded and was expanded outside Sweden in 2009 with two stores in Denmark. This should allow H&M to diversify its customer base.

Multi-brand approach from Inditex

• In sharp contrast to H&M’s almost exclusive reliance on its eponymous brand, Inditex has adopted a strategy based on building a vast brand portfolio including Bershka, Massimo Dutti, Pull and Bear, Zara and Zara Home.

• The key competitive advantages resulting from this company’s multi-brand strategy is its ability to target a wide range of consumer groups with brands and products tailored to various tastes in order to bring exclusivity and differentiation.

• The level of independence of the company’s major brands is also an important aspect of Inditex’s capacity to adapt quickly to changing market conditions. Group synergies are ensured thanks to the group's vertical integration, which also contrasts with H&M’s strategy of outsourcing.

H&M: A Widely Recognised Global Brand


H&M Brand geographic

involvement

Asia Pacific, Eastern

Europe, Middle East and

Africa, North America,

Western Europe

Brand channels Clothing & footwear

specialist retailers

World ranking & share

in clothing and footwear

specialist retailers

1 and 1.6% (2009)




26


Production outsourcing vs.. vertical integration

• H&M sources around 70% of its product assortment from Asia and over one third is purchased from China. It relies

heavily on outsourcing production, with over 21 production offices worldwide (10 in Europe, 10 in Asia and 1 in

Africa) liaising with over 750 factories. In contrast, Inditex sources the majority of its products from Europe, and most

of its production is made in-house in order to cut the time lag between product design and in-store availability.

• Although production in Asia helps H&M undercut Inditex on price, it also makes it more vulnerable to currency

fluctuations, with the value of the US dollar strengthening in 2009 against European currencies and making imports

from Asia more expensive in its main market, Europe. This reduced at least temporarily the scale of its competitive

advantage over Inditex.

Low inventory levels

• H&M’s operational efficiency is reflected in the level of inventory being usually low thanks to the frequent renewal of

its collection. However, the focus on reducing inventory in order to protect margins has been detrimental to sales in

some months in 2009, especially over the summer, when the company had relatively few items available for

markdowns. Although H&M generally achieves low inventory costs, it is likely to be often surpassed by Inditex in this

respect. As one of the pioneers of the fast fashion business model with new ranges being introduced every two

weeks, Inditex is particularly efficient in incorporating feedback from stores daily into the development of new

products, thanks to vertical integration and as such, H&M cannot replicate this model.

Private label ranges under various names

• All of H&M’s product assortment consists exclusively of private label. Private label ranges have various names to

target different genders and customer types. For example, Hennes is targeted at 25-35 year-old women, L.O.G.G. is

a casual sportswear label and MAMA is a maternity range.

Operations and Private Label Strategies


Key point: As European consumers’ awareness of ethical issues increases, H&M is vulnerable to negative publicity

surrounding working conditions at factories producing its clothes in Asia. Since it outsources a greater share of its

products from Asia than Inditex and has less control over its supply chain, H&M’s auditing of factories must be strict

and transparent to limit the chances of poor labour conditions being publicised and tarnishing its brand reputation.




27







Recommendations




28


• H&M’s focus on affordability remains

a core element of its success and

contributed to make the retailer

resilient in a recessionary economic

environment.

• Although its low-priced and

fashionable image with its

eponymous brand H&M should not

be jeopardised, in addition to

cultivating it, the retailer should also

attempt to widen its customer base

and especially target wealthier

consumers with its other banners

such as COS and Monki stores

offering edgy fashion. This could

also help increase profits once the

economy recovers and consumers

become less cost-conscious.

Develop more premium chains

alongside core low-priced

offering

• Entering into new emerging

markets, especially in neighbouring

markets to those where it operates,

offers considerable growth

opportunities for H&M.

• Romania and Turkey are large

European markets where the store

concept is likely to be popular and

where rival Inditex has developed a

major store network. In Latin

America, Mexico offers opportunities

in the value segment of clothing and

footwear retailing. Although it is well

covered by C&A and Wal-Mart, H&M

can cater for more fashion-

conscious consumer groups.

• In Asia Pacific, H&M’s burgeoning

presence could accelerate by

expanding to new cities, especially

in China and Japan. In the latter

market, new store concepts and

collections or new banners such as

COS and Monki could be tested.

New market entries and

expansion in existing markets

• As H&M is a late entrant in the

internet retailing arena in most

European markets and arrives in a

crowded and competitive market

where Amazon and Otto have made

inroads, it will need to offer

innovative transactional websites

that can convey effectively the

textures, colours and finish of its

clothes in order to differentiate its

offer but still highlight the low prices.

• H&M’s presence in internet retailing

could also be extended to markets

where it does not seek to open

physical stores, mirroring the

example of Marks & Spencer

delivering products to around 80

countries since autumn 2009.

Internet retailing to be

differentiated and wide-reaching

Key Recommendations

Recommendations




29


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