H & M : Can it Adapt to America's Landscape? - Hennes and Mauritz AB - Statistical Data Included

DSN Retailing Today, Sept 17, 2001 by Emily Scardino

Brief infatuations with exciting visitors from abroad are easy to understand, but there are no guarantees that they'll evolve into lifetime relationships.

A year and a half after it set stakes down on American shores, are customers still smitten with Swedish apparel retailer H&M?

There is affirming evidence: Shoppers still wait intently for the glass doors of its original Fifth Avenue location, which opened March 31, 2000, to unlock each morning. Lunch hours and weekends are still so packed that the relatively airy store layout can be virtually impossible to navigate. However, there are also signals that this lovefest is becoming less heated.

H&M (Hennes & Mauritz AB) generated sales of roughly $170 million since it opened domestically. The 10 U.S. stores that rolled out last year from March through November brought in about $78 million at current conversion rates. From December 2000 to May 2001, the first half of H&M's fiscal year, 11 more stores opened, bringing total units in the United States to 21. Another unit opened in Boston earlier this month.

"Sales for the first six months of the fiscal year [2001] in the United States were about 930 million kronors," says Leif Persson, chief financial officer for H&M. This translates to approximately $90.6 million American dollars. The slower-than-anticipated year-to-date growth has so far resulted in H&M coming in below its profit plan.

H&M certainly isn't the only retailer having to retrench in the backsliding economy. The financials, however, may reflect deeper issues relating to the assimilation of this newcomer into a supersaturated market. This crucial issue may determine H&M's expansion and ultimate success.

A total of 28 stores will be open by year's end between Buffalo, N.Y., Boston and Washington, D.C. If all goes as planned, concentric expansion will continue for the next few years, possibly into Canada. A similar strategy may be implemented on the West Coast, says Christian Bagnoud, marketing director.

U.S. expansion is projected at 85 stores by the end of 2003; this would make America H&M's second largest market after Germany.

Retailers know the American frontier can be a harsh one, and H&M is grappling with a number of challenges. The company's second quarter gross margin was adversely affected--about 0.5 percent--by the increasing relative value of the U.S. dollar. In addition, H&M is competing on price with mass merchants, especially similarly high-style, low-cost Old Navy and Target. H&M's range of designs also puts it up against mid-tier and specialty stores from Abercrombie & Fitch to Zara.

"I think this brand is very well positioned, and H&M is informed for expansion on the national market. But it will be interesting to see how H&M translates out into regional markets and see if this high-fashion European company has the everyman appeal to compete in smaller, out of state malls," says Jeff Klinefelter, senior analyst for U.S. Bankcorp Piper Jaffray, adding, "It may be a challenge."

As might be expected, H&M executives say they are up to the task. In fact, they intentionally position themselves neck-and-neck with rivals to promote value comparisons in top shopping locales.

"What's keeping H&M popular is that the merchandise backs the promise of the brand. We're constantly giving a good deal and finding ways to improve what we offer--for example, sizes that are neglected," says Par Darj, the U.S. country manager who will end his tour of duty here at the end of this month and return to H&M's home base in Stockholm, Sweden.

Beyond its foundation of value merchandise, location is also top of mind in H&M's U.S. growth plans. "When we open stores, we make sure it's in the best location in each city or region," says Darj, who is "very happy with sales in the Manhattan stores"--the ones open longest. H&M is so far satisfied with performance in suburban locations, but realizes adjustments will be necessary.

"We're looking at the experience we've had trying different things with our formats as we move into each area with slightly different versions, seeing where certain in-house brand concepts are doing well and not so well."

Apparently H&M still has to work the kinks out of this strategy. The company took an "extraordinary" $4.9 million in markdowns from last December to May 2001, far more than it had planned.

H&M attributes these price cuts to a disproportionate focus on high-fashion brights rather than neutral fashion basics. The company has also geared merchandise too young. As of 2001, the assortment is officially aimed at fashion-focused 18- to 45-year-olds--a broader range of consumers than the original 18 to thirtysomething target group, an adjustment based on sales performance.

H&M's history is one of adaptability. Chameleon-like flexibility has helped H&M establish relationships in every port, with 730 stores in 14 countries and 50 more opening by year's end.

Yet, America is not as homogenous as many of the smaller countries in which H&M has settled. Customers in New York City and central Pennsylvania are quite diverse. Is the H&M concept of European style at low prices too cosmopolitan for less-urbane Americans?