H&M Situational Analysis

Posted: January 4th, 2023

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H&M Situational Analysis

Hennes & Mauritz AB (H&M Group or simply H&M) is a multinational clothing retailer based in Sweden that has contributed significantly to the proliferation of the fast-fashion industry. Since its founding in 1947 by Erling Persson, H&M has grown to become the second-largest garment retailer in the world, after Zara, operating over 5,000 stores in 74 and online stores in 51 countries respectively, and employing about 179,000 people (H&M Group 81). In 2019, H&M sold products worth $23 billion at a 7.5% profit margin, with the most sales being in the United States, Germany, United Kingdom, and China (H&M Group 19). Moreover, the company has 9 propriety brands that target different segments of the market, enabling H&M to target a wide selection of clients that are fashion-forward and like a bargain.

However, despite this stellar performance, H&M is operating in an industry that is at the maturity stage in its lifecycle, meaning that it is experiencing vicious competition along with thinning profit margins. In this respect, H&M Group needs to protect its market position by fending off competitors and maintaining profitability in an industry that is near saturation. For these reasons, a situation analysis is conducted to inform the strategic decisions that need to be made and the initiatives that need to be taken by H&M to maintain its competitive advantage and secure its position in the global fast-fashion marketplace. To this end, a SWOT analysis, customer analysis, and competitive analysis are conducted.  Thereafter, the trends in the fast-fashion industry are analyzed to reveal the threats that challenge the future of H&M. Finally, the competitive situation is analyzed to determine the threats posed by the major competitors of H&M and determine the winner in the next five years.     

1.0 Situational analysis of H&M

Several internal and external factors influence the performance and survivability of H&M in the contemporary business environment. While the company has enjoyed remarkable success in a highly competitive fast-fashion industry, its optimal performance may have been limited by its internal limitations. In this regard, a situational analysis that determines the various strengths and weaknesses that H&M possesses and the opportunities and threats that it encounters are critical in planning for improved performance. Moreover, an understanding of the targeted customers and the source of competitive advantage need to be precise to facilitate decision-making regarding business strategy going forward.

1.1 SWOT analysis

The SWOT analysis determines the internal and external factors that influence the current and future situations at H&M. The internal factors influencing the current situation include the strengths and weaknesses of the firm, while the opportunities and threats constitute the external factors that may influence the company’s future.

Table 1. SWOT analysis of H&M

	Beneficial	Detrimental
Internal factors	Strengths Fast-fashion business modelWide range of productsStrong presence in multiple markets and customer segmentsAffordabilityRobust social media presenceOnline retailingCelebrity endorsements	Weaknesses Lengthy supply chain with long production lead timesDoes not own factories thus relying heavily on third-party suppliersPoor customer retentionLow brand loyalty
External factors	Opportunities Market expansion through e-commerceImproving lifestyles from burgeoning middle-classReduction of environmental footprint to increase the license to operate	Threats Fierce competition by Gap, Uniqlo, and ZaraNegative brand image from perceptions of low-priced, low-quality productsEase of industry entry by new entrantsBuyers have strong bargaining power due to low switching costsRapid evolution of fashion trendsRising labor costs Foreign exchange fluctuations

1.2 Customer Analysis

H&M has segmented its market to better define its target customers along demographic and psychometric dimensions. The company’s slogan is “fashion and quality at the best price” which describes the cohort it targets in the marketplace (H&M Group 8). In this respect, H&M targets the middle and working classes in society. These are garment customers seeking high fashion apparel at affordable or low prices. Although H&M has focused on women mostly, it targets young adults aged between 15 and 30 years. These comprise Generation Y and Z individuals, otherwise collectively known as the millennials. This cohort is likely to be single or young couples without children that are either in college or starting their working careers. They are also likely to be found in urban areas and technologically aware. Psychometrically, the targeted audience is defined as conscious progressives because of their open-mindedness and intellectual capacity. These are individuals that seek excitement, adventure, and information while being pragmatic in their approach to life. In this respect, they have globalized worldviews and embrace foreign cultures along with seeking functionality and cost-effectiveness in the products they buy. However, while they endeavor to express their individuality and creativity in all they do, they yearn to belong and fit in by connecting with others using technology (Perch). Therefore, they follow popular fashion trends closely despite not affording the high prices.    

2.0 Environmental Situation (Analysis of trends)

H&M is operating in an environment that is influenced by political, economic, social, technological, legal, and environmental factors that either favor or hinder its operations. Firstly, H&M is exposed to the political instability in countries where it has outsourced its production. Although countries like Bangladesh and Cambodia have enjoyed relative political stability, the clamor for higher wages and better working conditions would threaten the supply of the firm. Secondly, major markets, like the United Kingdom and China are embroiled in Brexit and trade wars respectively, which may constrain H&M operations in those markets. Foreign exchange fluctuations remain the most significant economic hurdle impacting the operations of H&M, considering that it has operations across 74 countries. Despite this, the increasing taste of fashion in emerging economics with an enlarging middle class promises to present opportunities in market expansion. Africa, Asia and Latin America are lucrative expansion destinations as Europe and North American become saturated. Thirdly, rapidly-changing customer preferences are a significant social factor that is forcing the fast fashion industry to keep reinventing its business model. Currently, fashion-forward customers are forcing the industry to deliver high-fashion apparel at affordable prices while presenting sufficient variability to satisfy the numerous individual tastes. Overreliance on fashion trends presented in the global fashion week events may give way to more in-house designing to cater for the rising need for individuality among the millennials. This transformation will challenge the mass production approach in the fast-fashion industry (Mo 217). Fourthly, advancements in digital and mobile technologies, particularly artificial intelligence, machine learning, and robotics will increasingly enable fast-fashion companies to respond to the fast-changing and individualized fashion tastes of customers. So far, H&M is leveraging these technologies to enhance the shopping experiences of its customers at its physical and virtual stores. Legally, intellectual property rights are a significant concern to H&M and the fast-fashion industry as countries enhance their regulatory mechanisms. Lawsuits from fashion houses whose designs have been pirated threaten the financial and reputational health of fast-fashion firms. Lastly, the fast-fashion industry has a large carbon footprint because of its mass production and outsourcing models. The disposable clothing, consumerism, and materialism cultures that have driven the fast-fashion industry are now threatened by calls for environmentally-friendly value chain approaches. Fast-forward companies are being asked to adopt more environmentally-responsible production and distribution approaches to reduce waste and reduce environmental impact.     

2.1 H&M in the next 3~5 years

The future of H&M will be market by increased co-branding ventures with renowned designers and possible mergers and acquisition activities. This will help secure and expand the company’s market and brand while reducing the intellectual property rights concerns. Similarly, H&M is likely to expand its circular economy initiatives to reduce its environmental footprint and enhance its social license to operate. In this regard, H&M is likely to expand its resale of used clothing to extend their usability and reduce wastage, long with recycling of used materials. Likewise, may focus more on minimalism and pragmatism in its apparels to extent their lifecycle and reduce wastage further.

2.2 New Entrants into the Fast Fashion Industry

New entrants into the fast-fashion industry present a high threat because of the ease of entry presented by low capital investments. Established firms in the industry are threatened by small startups that enter into the market through online retailing platforms and outsourced third-party suppliers. Besides, new entrants can leverage the existing supply chains to support their logistical operations to deliver the products from the manufactures to the customers, considering that there are numerous apparel manufacturing contractors willing to take up such offers. However, this threat may be moderated by the challenges presented by established brands that enjoy awareness and equity in the market, which may challenge the entry and establishment of new brands. Moreover, new entrants may not own the supply chain infrastructure due to the high investments required is setting up warehouses, procuring inventory, and establishing distribution networks. In this regard, the erosion of profit margins by the lack of the cost advantage provided by economics of scale and proprietary supply chains may raise the barriers to entry.   

2.3 Influence of New Entrants on the Fast Fashion Industry

New entrants would force the existing players in the fast-fashion industry to upscale their marketing strategies and improve their operational efficiencies. For instance, new entrants that are skillful in utilizing digital marketing approaches would persuade existing fast-fashion companies to enhance their digital marketing, by increasing their social media presence and coming up with creative marketing strategies that capture the interest and call the purchasing action of customers. In the same vein, new entrants that are more responsive to customer demands would encourage existing retailers to adopt more customer-centric approaches. In turn, the fast-fashion industry would benefit more customers than is the case currently.   

3.0 Competitive Situation

1.3 Competitive Advantage

The competitive advantage of H&M lies in its business model. H&M provides its fashion-conscious clientele with high-fashion clothing at a fraction of the price charged by the fashion design houses. Therefore, the company can sell huge volumes of apparel for a short period by saturating its cities of location with multiple stores to increase product availability and scheduling its releases with major fashion week events. To achieve the low-pricing strategy, H&M contracts low-cost mass producers of apparel in Asia, specifically Bangladesh and Cambodia, for its large volumes. In addition, the firm does not spend much money and time on designing because it replicates the attires that are popular from the seasonal fashion runways that are held in major high-fashion cities such as London, Paris, Milan, and New York. Although the firm sends its representatives to these fashion events, that cost is offset by the low production and the nonexistent designing expenditures. Also, the company collaborates with renowned designers to deliver fashionable products, which improve its brand image and helps it target more affluent clientele. In this regard, the firm has nine other brands, namely H&M HOME, COS, Weekday, Monki, & Other Stories, ARKET, Afound, and Sellpy, through which it targets different segments of the market (H&M Group 12). This enables the firm to expand its market reach and diversify its offerings.

In the same vein, H&M has developed a hybrid model that combines its brick-and-mortar stores with its online retail platform. Moreover, it employs digital and mobile technologies to make the shopping experience across both retail channels seamless. For instance, shoppers can view the items in a physical store on their mobile devices using the in-store mode of the mobile application, scan the QR code of a physical item in a store to access more options online through the scan & buy function in the app, recommend apparel sizes from the client’s previous buying history to improve size matching, and pick up purchases made online using the click & collect mode (H&M Group 6). Besides, orders made online are delivered the next day in 14 locations across the world. This is facilitated by the absence of distribution chain intermediaries because H&M delivers apparel differently from manufacturers to the customers, thus shortening delivery times and reducing delivery costs. In this respect, the H&M leverages its well-established brand and large size of H&M to capitalize on economics of scale, thus keeping its operational costs low. H&M is present in 74 locations with over 5,000 stores. Therefore, it can consolidate and streamline its warehousing and distribution activities in countries where it has several shops.

Additionally, H&M has embraced the circular economy by providing a complete loop for its apparels to minimize was and environmental footprint. In this respect, the firm collects used clothes for reusing and recycling alongside using biodegradable and recyclable materials, such as cotton, for its apparels and rewarding customers with a 15%-discount on future purchases for returning used clothes (H&M Group 5). The reuse and recycle service is extended to all clothing brands and not just the ones sold by the company. In this respect, the firm collected over 29,000 tonnes of clothes in 2019 (H&M Group 6). 

3.2 Competitor Comparison

The fast-fashion industry is highly competitive globally. Fast-fashion companies not only have brick-and-mortar stores strewn across the globe but also have online platforms that can be accesses across national borders of the home countries. In this regard, fast-fashion firms experience fierce competition in their domestic and global marketplaces. The five major players in the fast-fashion industry other than H&M are Zara, Gap, Uniqlo, Asos, and Macys.

Zara and Uniqlo are the two most direct competitors of H&M. Zara is owned by Inditex, which is a large garment manufacturer based in Spain (Caro and Martínez-de-Albéniz238). The company has grown tremendously since it was founded in 1975 to become the largest apparel retailer in the world today earning 19.56 million dollars in 2018. In the same vein, Uniqlo is based in Japan and was established in 1949, two years after H&M. Despite being acquired by Fast Retailing in 2005, it has grown to become the third largest clothing retailer in the world. Therefore, H&M, Zara, and Uniqlo are ranked 1^st, 2^nd, and 3^rd in the fast-fashion industry globally. However, H&M is the oldest while Zara is the youngest of the three firms.  

 The three firms have well-established presence in their home countries, although they also have international operations as well. In this regard, they each have over 2000 stores globally and operate an e-commerce retailing outlet as well. Although they target similar markets, they use dissimilar strategies in their business models to produce and distribute their apparels, and position their businesses differently in the marketplace.

3.2.1 Ownership and source of manufacturing

All companies are owned by holding firms and therefore are subsidiaries of much larger firms. For instance, H&M is owned by the H&M Group that comprises of 9 other brands, while Zara is owned by Inditex and Uniqlo by Fast Retailing. However, while H&M outsources its production processes to low-cost third-party contractors mainly in Cambodia, Vietnam and Bangladesh, Zara and Uniqulo produce their apparel in-house (Mo 223). In this regard, Zara and Uniqulo can produce garments within weeks of its appearance in the fashion runways while H&M takes months. This is because Sara and Uniqulo are able to design and produce the apparel within Spain and Japan respectively, thus enjoying short lead-times of up to two weeks. In contrast, although H&M also designs its fashion-inspired apparel, it sends out the designs to its more than 900 suppliers spread across the world, which incurs extended lead-times because the finished goods have to be moved by train and ship across vast distances.   

3.2.2 Targeted audience

From the product perspective, the apparels availed by H&M and Zara are inspired by high fashion from established fashion houses around the world, such as Versace, Prada, and Gucci among many others, while Uniqlo uses the minimalistic approach in its simple designs and a proprietary label. Therefore, H&M and Zara appeal to an international market that is attracted to the high fashion presented in runways, while Uniqlo focuses on the Japanese clothing culture and market. However, the three companies focus on their home markets along with their global one as well. For instance, H&M is well-established in Sweden, while Zara is big in Spain and Uniqlo in Japan. However, all firms have a presence in Europe and the United States, and are increasing their visibility in emerging markets in Asia, Latin America, and Africa. Specifically, H&M operates in 74 countries while Zara and Uniqlo have presence in 96 and 19 countries, respectively. In addition, while the three firms position themselves in the marketplace as low-priced clothing retailers in the fast-fashion industry globally, H&M targets the middle-class while Zara positions its stores in high-traffic locations in major cities to access the high-end shoppers in the industry.  

3.2.3 Logistics

Although none of the companies have their own logistical infrastructure and therefore rely on third-party contractors for their distribution and delivery services, Zara and Uniqlo have production units in their home countries unlike H&M, which saves then transportation costs and reduces their logistical expenditure.

3.3 Differentiation of H&M

H&M differentiates itself from its competitors in several ways, which if sustained, is likely to help H&M displace Zara from the helm of the fast fashion industry within the next five years.  Firstly, H&M presents the most recent fashion apparel to the market, by co-branding with renowned fashion designers and anticipating fashion trends (Shen, Choi, and Chow 174). This enables the company to make and introduce apparel along with important seasons in the high fashion industry, thus attracting huge volumes of purchases. This is already being extended by creating internal proprietary labels with the stable of designers. H&M also saturates the high-fashion streets of major cities with retail outlets accompanied by aggressive social media promotion campaigns that keep the brand in peoples’ faces and minds, perpetually. This enables the company to increase its visibility and develop a robust brand presence in the market. 

Moreover, it uses environmentally-friendly clothing materials along with having a reuse and recycle program, which not only appeal to the environmentally-conscious clientele but also are unique initiatives in the fast fashion industry. With increasing accumulation and disposal of used clothes that are still in good condition, the company has initiative an innovative resell and reuse program in which the apparel find new owners, extending their lifecycle. These distinguishing characteristics are likely to see H&M remain on top of Uniqlo and even surpass Zara as its main competitors.

Conclusion

H&M’s operations as a fast-fashion clothing retailer have delivered unprecedented success to the company, projecting it to the top of the fast-fashion industry. Despite strong competition, H&M has leveraged its expansive global presence, financial strength, and collaboration with fashion designers to dominate the fast-fashion market. However, the unsustainability of the disposable clothing culture, the fast-changing customer tastes, and environmental concerns threaten the future of the company in its existing business model. However, H&M’s reuse and recycle program, along with continued collaboration with famed fashion designers and diversified product offering help the company outcompete Zara and Uniqlo to remain the pinnacle of the fast-fashion industry in the next five years.   

Works Cited

Caro, Felipe, and Victor Martínez-de-Albéniz. “Fast fashion: Business model overview and research opportunities.” Retail supply chain management. Springer, Boston, MA, 2015, pp. 237-264.

H&M Group. Annual report 2019. https://hmgroup.com/content/dam/hmgroup/groupsite/documents/masterlanguage/Annual%20Report/HM_Annual%20Report%202019.pdf. Accessed 22 April 2020

Mo, Ziying. “Internationalization process of fast fashion retailers: evidence of H&M and Zara.” International Journal of Business and Management vol. 10, no. 3, 2015, pp. 217-236.

Perch, Darbinyan. “Target market of Zara, H&M and Burberry.” The social grabber, April 21, 2020,

https://thesocialgrabber.com/target-markets-of-zara-hm-and-burberry/. Accessed 22 April 2020

Shen, Bin, Tsan-Ming Choi, and Pui-Sze Chow. “Brand loyalties in designer luxury and fast fashion co-branding alliances.” Journal of Business Research, vol. 81, 2017, pp. 173-180.