After years of hectic expansion across the world, Swedish fast fashion giant H&M's profitability has faltered as Inditex (parent to Zara), Fast Retailing's Uniqlo and online specialists, such as ASOS, have gained an edge in "fast fashion.” By turning over more new styles each year and having production closer to customers, they can quickly boost supplies of best-selling items.
H&M's supply chain lead times are around double those of Inditex, according to a report this month by Goldman Sachs, which recommended that investors "sell" H&M shares. The company’s Chief Executive Karl-Johan Persson conceded that its supply chain practices had remained the same while the world had changed. H&M would "definitely" move some production closer to end-markets while keeping an eye on profitability.
"Some is about moving to Europe as well, it could be Turkey or other countries in Europe, in order to get faster deliveries to Europe," he said. The company would also seek more flexibility with suppliers so it needs lower inventories and boost spending to make the supply chain more flexible.
H&M has seen competition and price pressure in its budget ranges increase from rivals such as Britain's Primark, which recently entered H&M's biggest market Germany. H&M is also branching out to reach a broader customer base and cut exposure to the budget segment. On Thursday it announced a new chain of stores, ARKET, with a slightly higher price range than its core budget H&M brand. The new chain would also sell brands made by third parties.
But H&M has a dilemma – the need to compete on price means four fifths of its production is in Asia, far more than Inditex which sources around half its products from countries close to its main markets, allowing it to react faster to sales trends. More of Inditex's clothes are ordered, produced and delivered in-season, on demand, from nearby factories within weeks so it can capitalize on the constantly shifting preferences of young, fashion-conscious shoppers.
H&M's further-flung supply base could also leave it more exposed to trade disruption from protectionist moves such as Britain's decision to leave the European Union and the election of U.S. President Donald Trump. "While we don’t know if imports or exports will change for either, or other, countries at this point, if they do create significant impacts, that could change the dynamics of production for many retailers in the long term," said Kantar Retail consultant Tiffany Hogan.