H&M, the Swedish fashion group with over $17B in annual sales, has an approach that is a hybrid of the two. H&M is the second largest apparel retailer in the world, just behind Inditex SA. With 2,600 stores in 43 countries, H&M was a pioneer in pursuing a strategy of vertical integration with its own distribution network.
What are the keys to its success?
The company’s clothing collections are created in Sweden by 150 designers and 100 buyers. H&M’sproduction function is outsourced to a network of 800 suppliers; 60% of the production takes place in Asia and the remainder in Europe.
H&M offers two main collections each year, one in spring and one in fall. Within each season, there are several sub-collections so there are always new products in the stores. The main collections are the traditional long-lead items, and the sub-collections are the trendier items with short lead times.
The key to H&M’s ability to react quickly is its network of 20-30 production offices which are placed close to the suppliers. These offices mediate between the buyers in Sweden and the production facilities, reviewing samples, checking quality, and deciding which supplier gets each order. Generally, the items with very short lead times are manufactured in Europe, while the longer lead items are manufactured in Asia.
Also critical to H&M’s strategy is its IT infrastructure. Each store is connected with the logistics and procurement systems and the central warehouse. The design and product development functions are also IT-enabled, so central managers have visibility into the entire process from product design to sales transaction.
Uniqlo, Zara, and H&M.
Three very different models which are proving to be successful for 21st century retail. What do these companies have in common?
All three companies understand that you can’t win in apparel retailing simply by guessing on the next hot style. You also can’t win by distributing your guesses across a large number of styles, putting them in stores, and hoping that most of them are winners. Clearance racks are full of items like these. In fact, across the industry, 30-40% of seasonal volume is sold at markdown prices, as compared to only 15-20% for Zara.
All three companies rely on understanding what their customers want and have built systems for identifying consumer preferences, along with supply chains for delivering on them. In Uniqlo’s case, getting customer preferences right is extremely important because of their long development cycles and long-term commitments to materials and products. For Zara, reacting quickly to consumer preferences is a core component of their competitive advantage. H&M is well-known for its focus on researching and predicting emerging trends. In fact, the company staffs this function both in Sweden and in national offices throughout the world.
In today’s retail environment, regardless of approach, it’s critical to know how consumers will react to your products well before you launch them.
