There is no question that the clothing retail market has become increasingly competitive, especially amongst fast fashion companies. Notwithstanding their price sensitivity, shoppers still desire fashion forward items, and there are no better companies to deliver on that promise than Sweden’s Hennes & Mauritz AB, Zara’s parent company Inditex and Dublin-based retailer Primark.
Despite posting a 21 percent rise in sales and an 11 percent boost in its second quarter profits, the Swedish retail giant finds itself not only staring at a gloomy financial outlook but also faces pressure from incumbent industry leader, Inditex, and rival, Primark.
Karl-Johan Persson, H&M chief executive, commented on the second quarter performance.
“Our sales performance was impressive given strong comparables from last year, unusually cold spring weather in many of our important European markets and negative calendar effects,” he said.
Earning nearly $800 million is seemingly not enough for H&M. What caught investors’ attention was the decline in profit margins. H&M relies on outsourcing its clothing production in cheaper labor areas such as Asia, but the strength of the US dollar is driving purchasing costs further up since that is the currency H&M uses to pay laborers. Moreover, the majority of the company’s sales has come from a weaker Euro. Therefore, the company is losing its cost advantage, which affects its year outlook. Assuming the fluctuation in currencies continues to be problematic, and fast fashion rivals embark on aggressive store roll-outs and discount prices, then H&M’s situation does not look too favorable.
Meanwhile, Inditex had an impressive showing. The company continues to push forward with its latest quarter profits showing a 28 percent increase. Amidst its campaign for global expansion, the world’s largest clothing retailer announced that its profits boost was the fastest increase in more than two years.
Primark is not making the competitive landscape any easier. The retailer is finally making its way into the western hemisphere. The first store will open in the US later this autumn. Primark is critically positioned to do well in the US, a market characterized by heavy consumption of clothing at inexpensive prices. According to the Euromonitor data, US consumers“spend less money on clothes than their European counterparts but buy nearly twice the number of items.”
In order to combat the mounting pressure from competitors, H&M continues to scale upward. Last quarter the company launched new stores in Lima and Macau, and they plan to open an additional 400 this fiscal year. To compliment their store growth, H&M will introduce two new brand concepts that will join already existing brands: COS, & Other Stories, Weekday, Monki and Cheap Monday.
Persson did not mention specifically which segment of the fashion industry the brands will compete in but they “will be completely different from H&M.”
The remainder of the financial year should be an interesting test for H&M moving forward. When asked if the company will revise its strategy, Persson said,
“Our model works for us, and other price levels work for other companies. There are successful and unsuccessful competitors in all price segments.”
Perhaps the company’s diversification and product offerings across all price points will help stifle their financial woes.
Photo Credit: Via Flickr/Mike Mozart
