H&M Hennes & Mauritz Ab in Retailing

Hennes & Mauritz (H&M) AB in remove December 2009 scope of the Report sell Hennes & Mauritz Euromonitor supranational Scope This ball-shaped club profile c everywheres the fol petty(a)ing harvests focusing on the year 2009 Retailing US$10,430 billion Store-based Retailing US$9,829 billion Non-Store Retailing US$601 billion Clothing & footgear Specialist Retailers US$791 billion Homeshopping US$190 billion Internet Retailing US$243 billionDisclaimer Much of the information in this briefing is of a statistical nature and, enchantment every assay has been made to ensure accuracy and reliability, Euromonitor internationalistic cannot be held responsible for omissions or errors Figures in tables and analyses atomic number 18 calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies opinions, reader discretion is advised visit More To find out much about Euromonitor foreigns exonerate range of business ntelligen ce on industries, countries and consumers please visit www. euromonitor. com or contact your local Euromonitor International office London + 44 (0)20 7251 8024 Vilnius +370 5 243 1577 Chicago +1 312 922 1115 Dubai +971 4 609 1340 Singapore +65 6429 0590 Cape T avouch +27 21 552 0037 ingrain +86 21 63726288 Santiago +56 2 4332226 2 Retailing Hennes & Mauritz Euromonitor International strategical evaluation Competitive Positioning Geographic Opportunities class Opportunities home run and Operational Strategies Recommendations 3 Strategic EvaluationRetailing Hennes & Mauritz Euromonitor International Key Company Facts Hennes & Mauritz (H) AB Headquarters Regional Involvement Stockholm, Sweden Asia Pacific, vitamin Eern Europe, mating America, westerly Europe, Middle East and Africa Clothing and footgear specialist retailers, homeshopping, meshwork retailing H robust performance in battle with Inditex The realnesss second considerablest habiliments and footgear Sector Involvement World clothing and footgear 1. 7% (2009) specialist retailers partake 1. 5% (2008) Retail gross gross revenue determine ontogenesis (US$) -4. 1% (2009) 17. % (2008) specialist retailer in 2009, behind Inditex, and ahead of geological fault, H act to record hale gross revenue growth in 2008 and 2009. This was achieved partly thank to a hale performance in its largest foodstuff, Germany, with gross revenue in local gold terms up by double-digits. Inditexs and H battle for the worlds largest clothing and footwear retailer position is closely fought, while ranch, which was the worlds largest player in this channel until 2007, has been significantly left behind by the in the lead two. Hennes & Mauritz (H) AB gross revenue excl.VAT vs Profit After Tax 90,000 SEK million 80,000 70,000 60,000 50,000 40,000 30,000 2004 2005 2006 2007 2008 gross sales excl VAT Profit afterward tax 18,000 14,000 12,000 10,000 8,000 6,000 SEK million 16,000 H earnings abide health y H registered sales excluding VAT of SEK88. 5 billion (US$13. 7 billion) in 2008, an increase of 13% over the year, with profit after tax in any case up 13% to SEK15. 3 billion (US$2. 4 billion), which highlights the groups high margin. Its major rival, Inditex, recorded revenue of EUR10. 4 billion (US$14. 5 billion) in 2008, up 10% on the previous year, with net profit up 0. % to EUR1. 3 billion (US$1. 8 billion). tornado registered sales of US$14. 5 billion, shine 8% in the year, as it suffered from poor conditions in its subject matter US merchandise, though the companys net profit grew by 16% to US$967 million, helped by cost savings. 4 Strategic Evaluation Retailing Hennes & Mauritz Euromonitor International Q3 results Resilient Performance, Continued elaborateness Hennes & Mauritz (H) AB Q1 to Q3 sales excluding VAT (SEK billion) Profit after tax (SEK billion) Net margin (%) 73. 4 (2009) 62. 2 (2008) 10. 2 (2009) 10. 2 (2008) 13. 9 (2009) 16. (2008) Resilient pe rformance, with sales driven by terminus network running(a) out H sales excluding VAT grew by 13% to SEK23. 6 billion (US$3. 4 billion) in the third quarter ending August 2009. Group acquire after tax continued to rise, up by 4% to SEK3. 5 billion (US$506 million). However, same- instal sales declined slightly in local currency terms, with consumer sentiment rest subdued and hindering sales of non-grocery retailers, especially in the US, while the German trade was resilient and sound gains were made in Italy. For the nine months to August 2009, sales were up by 18% to SEK73. billion (US$10. 6 billion), with growth boosted by raw(a) store openings. Profits after tax were up by 0. 2% to SEK10. 2 billion (US$1. 5 billion). Low inventory levels were a major factor contributing to keep costs checkmate. Inditex records lower sales growth than H Inditex recorded revenues up by 7% to reach EUR4. 9 billion (US$7. 1 billion) in the six months to July 2009. Growth in Asias emergin g markets continued to boost revenues, especially in mainland china and Hong Kong, offsetting a negative scotchal environment in its Spanish house servant market where it saw a strong decline in like-for-like sales. Although impacted by the recession in Europe, Inditexs profits were resilient, helped by efficient cost controls. The group recorded net income down by only 8% on the previous year to EUR375 million (US$550 million), despite sustained investments in network expansion. 5 Hennes & Mauritz (H) AB Net Sales excl VAT vs Profit After Tax 75,000 72,500 70,000 SEK million 67,500 65,000 62,500 60,000 57,500 55,000 52,500 50,000 2008 Q1 to Q3 Net sales excl VAT 2009 Q1 to Q3 Profit after tax 12,000 11,500 SEK million 11,000 10,500 10,000 9,500 9,000 8,500 8,000Strategic Evaluation Retailing Hennes & Mauritz Euromonitor International SWOT Hennes & Mauritz (H) AB dishonor recognition low worth and style Combining style innovations and low expenditures be staple attributes of the H brand on which it has built strong consumer recognition. High profile advertising and collaboration with designers help fox stores shopping destinations and raise the pizzazz of its ranges. Operational efficiency A strong control of the whole logistics process helps H achieve low costs, while low inventory contributes to maintain margins.Reliance on outsourcing The reliance on crossingion outsourcing, foreign some separate rivals such as Inditex, puts H at great risks of damaging its reputation in terms of return quality and poor labour conditions in demonstrable countries. Modest front line in emerging markets Despite being a global player present in 33 markets, H has developed its nominal head in Europe and North America mostly, unlike Inditex operating in over 70 countries including many emerging markets. Strengths Weaknesses Opportunities ThreatsInternet retailing The rapid growth of clothing and footwear sales through network retailing is evaluate to cont inue and give H opportunities to reach a roomyr audience, especially in its core demographic target, teenagers and young adults, whose purchases are often influenced by the internet. Untapped potential in emerging markets Urbanisation, increased disposable incomes and ever- changing lifestyles making the population to a greater accomplishment aware of make trends give major growth opportunities in large emerging markets such as China and Russia. There is also potential in markets where H is absent such as Tur mainstay and Romania.Non-food expansion of grocery retailers Hypermarkets and mountain merchandisers including Carre quadruplet, Target, Tesco and Wal-Mart are set to continue developing their offer of non-food products and compete today against H in the place segment of clothing and footwear retailing. exuberant fashion proper more than combative H faces a development little terror from a number of direct competitors with increasingly global ambitions at the low-pr iced end of the market such as Associated British Foods with Primark, Fast Retailing with Uniqlo and tag & Spencer, alongside a resurgent Gap. 6 Strategic Evaluation Retailing Hennes & Mauritz Euromonitor International Key Strategic Objectives and Challenges Speed to market and price system Fast product turn near, flexibility and speed to market are major elements determining straighta flair fashion retailers operational efficiency. H record is strong comparable to Inditex in most aspects, although Inditex has an expediency regarding speed to market, as a result of its vertical integration business model. In the midst of the global economic crisis particularly affect clothing and footwear specialists, H chose to avoid heavy discounting in aver to maintain its margins and profits.However, more offensive price wars may force it to discount more and hit its margins. Ongoing international expansion with a focus on emerging markets H charge in emerging markets is less important t han Inditexs, which has a major store network in Latin America and more stores in the Middle East and Africa. Expanding in emerging markets remains a antecedence for H, although growth prospects remain strong in developed markets such as Canada and the US where it can enter numerous new cities, especially in southern States where it has a modest presence.H CEO KarlJohan Persson appointed in July 2009 restated the groups global expansion targets, although it appears to be slower than expected, with around 160 new stores probably to be opened out of 225 initially planned for 2009. Maintain brand image and increase desirability Collaborations with designers will need to be continued and reinvented to make products more desirable, make stores more popular shopping destinations and strengthen the emotional bond with consumers and H.Distinctive store layout has been used undefeatedly by Inditex with its Zara chain to convey the desirability of its clothes, and this is a strategy that H could also implement to make the store designs a more important aspect of its strategy. This could hold H to maintain an advantage over smaller rivals with increasing global ambitions for their brands such as Primark and Uniqlo. Late entry into internet retailing Although growth in internet retailing sales is particularly promising for clothing and footwear retailers, H has been a late entrant and will struggle to seize the opportunities offered by this channel.It has left numerous other retailers including pure play internet retailers such as Amazon and Asos and the homeshopping specialist Otto take a lead. Hence, it will be difficult for H to target these consumers and fall traffic to its websites, although it could rely on high-profile advertising and innovative sites to succeed. 7 Retailing Hennes & Mauritz Euromonitor International Strategic Evaluation Competitive Positioning Geographic Opportunities Category Opportunities Brand and Operational Strategies Recommendations 8 Competitive Positioning Retailing Hennes & Mauritz Euromonitor International H Performs Strongly but Growth is chalk uped by Inditex International expansion and cool product assortment led to strong growth for H and its main rival Inditex, despite a marked slowdown in 2009 due to the global economic crisis and the strength of the US dollar. Clothing & Footwear Specialist Retailers World Retail Value RSP excl Sales Tax US$ % Year-on-Year Growth 28 24 20 16 12 8 4 0 -4 -8 -12 2005 % y-o-y growth A C B 2006 World C Mode Brenninkmeijer & Co INDITEX Industria de Diseno Textil 2007 2008 Hennes & Mauritz (H) AB Gap Inc, The 2009A H sales record strong growth, on a par with C, thank to global store network expansion. However, Inditex outperforms H give convey to more aggressive network expansion not only in Western Europe, but also in emerging markets. B Gap under-performs its main rivals, hindered by a strong reliance on its low-growth domestic market and a less aggressive p rice strategy than H. Gaps image also suffers from a product assortment perceived as more staid than H and Inditexs. C The rise of the US dollar against other global currencies in 2009 is do a fall in value sales for all retailers.H low-priced positioning and its wide global presence helps the company remain resilient in a challenging environment for non-grocery retailers. 9 Competitive Positioning Retailing Hennes & Mauritz Euromonitor International Competitive Context Inditex and H on the Rise World shed light on 10 Clothing & Footwear Specialist Retailers 2005-2009 Company name INDITEX Industria de Diseno Textil Hennes & Mauritz (H) AB Gap Inc, The C Mode Brenninkmeijer & Co Ross Stores Inc Fast Retailing Co Ltd Shinamura Co Ltd Limited Brands Inc Benetton Group SpA Burlington Coat Factory Warehouse Corp 5-year 2009 % 2005 2006 2007 2008 2009 trend share ?Gap loses its crown Gap saw declining sales in 2007 3 3 2 1 1 1. 7 ? ? ? ? ? ? ? ? 2 1 4 6 8 12 5 11 2 1 4 6 8 14 5 12 3 1 4 5 8 11 7 10 2 3 4 5 6 11 7 8 2 3 4 5 6 7 8 9 1. 7 1. 5 1. 4 0. 8 0. 8 0. 5 0. 5 0. 5 and 2008, due to unfavourable economic conditions in its US domestic market, which accounted for 81% of its global sales through the clothing and footwear specialists channel. Compared to H, Gaps higher price positioning hindered its sales, especially in 2008 and 2009 as the global economic crisis dampened consumer spending. Fast Retailing and Shinamura rising Japan-based Fast Retailing posted a strong performance among the top ? 10 10 12 14 10 0. 4 10 global players, helped partly by the strengthening of the yen to the look 2009 provisional data US dollar. Competing with a similar price positioning to H, Fast Strong growth for H, overtakes Gap but is surpassed by Inditex Retailing spread out outside Japan, Strong sales growth for H over the 2005-2008 period enabled it to especially in China and South overtake key rival Gap. H business model based on low-priced fast Korea, and announced a t the end of fashion proved highly popular with consumers. 008 its intentions to open stores in However, Inditex recorded a stronger performance than H, thank to a European markets and in the US. more aggressive expansion strategy, especially in emerging markets. The latter was partly helped by a greater reliance on franchised outlets. Although As Japans second largest clothing and footwear retailer, Shinamuras H new store opening strategy was also ambitious, its presence in be was also boosted by emerging markets remained modest compared to Inditexs. avourable exchange rates, but also Inditex also benefited from a vertical integration business model enabling it to thanks to new store openings. renew collections more frequently than its main rivals, including H. 10 Competitive Positioning Retailing Hennes & Mauritz Euromonitor International H and Inditex Neck-and-Neck H and Inditex have both(prenominal) been highly winnerful in the clothing and footwear specialists channel o ver the 2004- 2009 period. Their positioning based on low-priced fast fashion enables them to appeal to a wide range of consumers, especially since 2008 and with the major world economies entering recession.Their fast fashion business model also gives the two players the flexibility to change collections rapidly to adapt to consumer tastes, although Inditex has the edge over H in this respect. International network expansion was also a major part in driving sales of both companies, although Inditex has a greater presence in emerging markets, especially thanks to a wide reach in Latin America. Thanks to its greater reliance on franchising, new market entry requires fewer resources and entails less risk for Inditex than for H, which is more biased towards company-owned outlets. Although both companies saw their World Retailing Sales 2004-2009 retail sales in US dollar terms hit by the fall in the value of the euro 15,000 against the US dollar, they retained their lead over Gap. The latters 12,500 strong dependence on the US market proved a disadvantage, as it suffered 10,000 disproportionately from the recession in its domestic market in 2008 and 7,500 2009, which it could not offset with expansion in emerging markets, where it remains absent. ,000 In addition, Gap adopted a less aggressive pricing strategy than its 2,500 peers, thus losing share rapidly to H and Inditex, but also to players 0 in other channels in the US such as 2004 2005 2006 2007 2008 2009 mass merchandisers Target and WalHennes & Mauritz (H) AB INDITEX Industria de Diseno Textil Mart. Retail value sales rsp excl tax (US$ mn) 11 Competitive Positioning Retailing Hennes & Mauritz Euromonitor International Overall Stagnation in Sales per OutletWorld Top 10 Clothing & Footwear Specialist Retailers Sales per Outlet 2004-2009 US$ Fixed Exchange Rates Company name INDITEX Industria de Diseno Textil Hennes & Mauritz (H) AB Gap Inc, The C Mode Brenninkmeijer & Co Ross Stores Inc Fast Retail ing Co Ltd Shinamura Co Ltd Limited Brands Inc Benetton Group SpA Burlington Coat Factory Warehouse Corp Note 2009 provisional data 2004 3,130,909 7,103,455 5,233,467 7,658,816 6,571,607 5,663,966 3,168,427 2,541,956 916,038 8,482,203 2005 3,222,196 7,072,943 4,976,290 7,435,090 6,719,945 4,185,028 3,129,442 2,686,424 911,815 9,062,259 2006 3,245,793 7,102,853 4,882,942 7,276,803 6,967,172 3,720,254 3,222,800 2,799,494 896,071 9,090,081 2007 3,374,326 7,194,397 4,648,360 7,195,536 7,136,890 3,884,908 3,196,295 2,778,019 913,342 9,032,800 2008 3,291,002 7,279,016 4,180,204 6,979,826 6,784,922 4,520,068 3,201,177 2,636,235 949,993 8,904,762 2009 3,267,473 7,303,864 3,753,935 6,843,244 7,238,611 5,203,178 3,163,917 2,543,005 960,191 8,068,446 % growth 2004/2009 4. 4 2. 8 -28. 3 -10. 6 10. 1 -8. 1 -0. 1 0. 0 4. 8 -4. 9Modest growth in sales per outlet for most players, including H The growth trend in sales per outlet broadly matches the trends in overall sales growth for the top four g lobal retailers, with H and Inditex outperforming C and Gap. Higher sales per outlet for H compared to Inditex largely reflects H larger average outlet size. Downward price public press and prevalent discounting in apparel retailing, accompanied by the growing reliance on production outsourcing to low labour cost countries in the clothing industry, contributed to the doldrums or slight decline in sales per outlet for most retailers, especially for C and Fast Retailing. Sharp contraction for Gap Gaps higher-priced positioning and its relative resistance to discounting led to a sharp drop in sales per outlet, as it pted to maintain its margins at the expense of overall sales growth. 12 Retailing Hennes & Mauritz Euromonitor International Strategic Evaluation Competitive Positioning Geographic Opportunities Category Opportunities Brand and Operational Strategies Recommendations 13 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International A Global Player Stil l Dependent on Western Europe Among H top 10 global markets in 2009, all of them were fixed in Western Europe apart from one, the US. This highlights the companys modest presence in emerging markets. Western Europe will account for 84% of the groups sales in 2009.This proportion exceeded 90% in 2005, which illustrates H relative success in expanding its presence globally in vagabond to offset the maturity and saturation in Western Europes clothing and footwear retailing. The companys largest market, Germany, will account for 26% of world sales in 2009. No other market had a share of global sales exceeding 10%, while the domestic market, Sweden, accounts for 5%, which shows that H is not overly dependent on the economy of a single market. In comparison to H, Inditex is more dependent on its domestic market, which will get 37% of its world sales in 2009. Both companies work throughk to extend their global reach, especially in emerging markets, although Inditex has a clear lead in this respect.Hence, H operates in 33 markets as of October 2009, compared to around 70 markets for Inditex. Hennes & Mauritz (H) AB Clothing & Footwear Specialist Retailers (Companys 10 Largest commercializes) 2. 0 1. 5 %CAGR 2009-2014 Netherlands Norway Spain 1. 0 Austria 0. 5 Sweden 0. 0 -0. 5 -1. 0 -1. 5 -2. 0 -2. 5 0 25,000 50,000 75,000 100,000 Market Size 2009 (US$ mn) 125,000 150,000 175,000 France Switzerland USA Opportunity Zone Germany coupled Kingdom burble size shows company sales in market, range displayed US$536 3,497 mn 14 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International Western Europe Ongoing Expansion for H&M and Inditex H&M has a wide presence covering most Western European markets, in which its two main competitors are Inditex and C&A. All three companies have seen their share increase over the 2004-2009 period at the expense of smaller players, especially those with a national presence only. The shares of H&M and Inditex were driven by aggressive continuous network expansion across most markets. H&M has seen major ongoing store network expansion in most major European markets in 2008 and 2009, especially in France, Germany, Italy, Spain and the UK. Its business model has proved to be relatively recession-proof, thanks to its low prices. C&A has been distanced by the two largest operators.Positioned as a value retailer targeted at families, C&A lost ground thanks to a less fashionable image and an inferior international presence. The company is absent from major European markets including Italy and the UK, and over 50% of its sales in Western Europe are derived from the German market. Clothing & Footwear Specialist Retailers Retail Value RSP excl Sales Tax Company Shares by GBO 4 % value share 3 2 1 0 2004 2005 2006 2007 2008 2009 14 12 % value share 10 Hennes & Mauritz (H&M) AB Company Shares Top 6 Markets Clothing & Footwear Specialist Retailers Retail Value RSP excl Sales Tax 8 6 4 2 0 2004 2005 2006 2007 2008 2009 C&A Mode Brenninkmeijer & Co Hennes & Mauritz (H&M) AB INDITEX Industria de Diseno Textil France Netherlands SwedenGermany Spain United Kingdom 15 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International Western Europe Primark Emerges as New Major Player Primark expends beyond the British Isles to bring out as a new European player Primark, owned by Associated British Foods, only recently expanding outside Ireland and the UK with its number one outlets in Spain in 2008 and Portugal and campaign stores in Germany and the Netherlands in 2009, has ambitions to develop a wide pan-European network. A new market entry is planned in Belgium in 2010. The success recorded by its first stores in Spain indicates that it could become a major Europe-wide player. With a strong brand image based on low prices and trendy collections following fashion trends closely, Primark targets teenagers and young adults, thus competing directly against H&M in ter ms of demographic and price positioning. Clothing & Footwear Specialist Retailers Western Europe and United KingdomRetail Value RSP excl Sales Tax Company Shares by GBO 6 5 % value share 4 3 2 1 0 WE Hennes & Mauritz (H&M) AB WE Associated British Foods Plc (ABF) 2005 2006 2007 UK Hennes & Mauritz (H&M) AB 2008 2009 UK Associated British Foods Plc (ABF) 16 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International Recent and Planned Market Entries Japan, South Korea Although geographic expansion has been a rudimentary feature of H&Ms strategy, it has focused until recently on Europe nd North America, in contrast to Inditex venturing in several markets in Latin America and Asia Pacific and C&As major presence in Brazil. Recent new market entries in Japan in September 2008 and the planned entry in South Korea in spring 2010 confirm H&Ms adoption of a strategy to be less dependent on Europe and North America. Successful new entry in Japan in 2008 With its first store in the upscale shopping district of Ginza in Tokyo, H&Ms market entry was successful. Initial reception was very favourable to the new chain, with around 50,000 shoppers tour the Ginza store over the first week of opening, and a second Tokyo store was opened in November 2008 in the trendy district of Harajuku. The Harajuku outlet was the first H&M worldwide to sell the fashion pitComme des Garcons, with a collection designed by the Japanese designer Rei Kawakubo. This strategy helped create arithmetic mean ahead of the new store opening among fashion-conscious consumers and gives H&M a more exclusive image in Japan than it has in other markets. two more outlets in Tokyo are planned by the end of 2009 and a fifth is due to open in 2010, in Osaka. In state to expand faster in the mature Japanese market and to match the scale of its larger rival Inditex, H&M is considering acquisitions to be a feasible expansion strategy. Intense price competition in Japan In a mar ket hit by severe recession in 2009, price competition for clothing and footwear items has intensified. This as highlighted by mass merchandiser chains Justo (Aeon), Ito-Yokado (Seven & I) and Seiyu (Wal-Mart) starting to offer jeans at around ? 1,000 in 2009. Among H&Ms most direct competitors in terms of price and image, the dynamic player Fast Retailing with the Uniqlo chain combining low price and fashionable ranges, followed a similar price move in 2009. However, regardless of price H&M has an advantage in terms of fast fashion in being able to source and offer new products and refresh its collection more frequently than Fast Retailing. South Korea following in the footsteps of Inditex Following its successful entry in Japan, H&M plans to open its first outlet in South Korea in abut 2010 at a flagship store in Seouls business district of Myungdong.In a market less saturated than Japans and with fewer major international clothing and footwear specialist chains, H&M is expecte d to be successful. However, similarly to Japan, H&M enters after Inditex has already established a footprint in 2007 and expanded rapidly since. 17 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International Further Growth in Large Emerging Markets China, Russia With little presence in emerging markets, H&M is attempting to catch up with rivals, especially by expanding in large emerging markets, especially in China and Russia. Ongoing expansion in China to continue Following market entry in Hong Kong in 2007, H&M expanded rapidly in 2008 and 2009 with new stores in mainland China.Sales in China accounted for almost 1% of global sales in 2009. The first outlet in Beijing was opened in April 2009 south of Tiananmen Square, with H&M becoming the first foreign retailer to be present in this newly renovated part of the city. In show to create more anticipation around the store opening among consumers, it coincided with the launch of a new collection in collaborati on with the designer Matthew Williamson. H&Ms presence in China is expected to continue expanding rapidly through new store openings, both in existing cities and by entering new cities where it can target the rapidly growing number of middle-class urban consumers. Among H&Ms global rivals, although Inditex expanded in China and Hong Kong earlier than H&M and has a stronger presence with more outlets, it has a less developed supplier network in Asia than H&M, and as a result it can struggle to offer competitive prices to compete against H&M and also against local players, which may lead to the adoption a more differentiated positioning than in other markets. With Gap planning to enter China in 2010, it is likely that a greater number of international clothing and footwear specialist retailers will enter the market. Competing in a similar price segment to H&M, Fast Retailing announced at the end of 2008 its long-term objective to have 100 Uniqlo outlets in China. Russia untimely ent ry but sound long-term prospects H&M opened its first store in Russia in Moscow in March 2009. However, suffering from a fall in gas and oil revenues, the countrys deep recession in 2009 is worse than previously anticipated and makes H&Ms market entry untimely.Rival Inditex has developed a major presence in Russia over several years, which has allowed the group to take advantage of the favorable economy until 2008 to expand and establish a wide customer base. Longer term, H&M is set to emerge from the recession relatively unscathed thanks to its low-priced positioning and to have major growth prospects. Key point With no presence in Latin America unlike C&A and Inditex, H&M could benefit from entering the large markets of Brazil and Mexico where its low prices should help build a major customer base. 18 Geographic Opportunities Retailing Hennes & Mauritz Euromonitor International Franchise Deals Give New Middle East Opportunities Middle East and Africa expansion set to gather pa ce H&Ms presence in the main Middle East market, the United Arab Emirates, continued to increase rapidly in 2009 hanks to the franchise agreement signed in 2006 with the Kuwait-based company MH Alshaya Group. Opting to expand through franchise stores and using a similar growth model as Inditex represents a major new development in H&Ms global expansion strategy in emerging markets, which is likely to help speed up its global expansion. Thanks to the partnership with Alshaya Group, H&M entered the markets of Bahrain and Oman in 2009, and also opened its first two stores in Egypt in the second half of the year. H&M is likely to enter other new markets in the Middle East and Africa by the end of 2009, or in 2010, including Lebanon. Under another franchise deal signed with the local company Match Retail, H&M plans to enter Israel in 2010.Dedicated store concept for Saudi-Arabian Arabia As store concept adaptation is an important ingredient in the success for foreign retailers oper ating in the Middle East and Africa, and require close attention, franchise partners are in a better position than H&M to implement new concepts. For illustration, in order to comply with local sharia law that forces shops to have segregated areas for men and for women, for its market entry in Saudi Arabia in autumn 2008, H&M opted to adapt its store concept to be only open to women and staffed by women. 19 Retailing Hennes & Mauritz Euromonitor International Strategic Evaluation Competitive Positioning Geographic OpportunitiesCategory Opportunities Brand and Operational Strategies Recommendations 20 Category Opportunities Retailing Hennes & Mauritz Euromonitor International Modest Growth Forecast for H&Ms Main Channel H&Ms sales through the clothing and footwear specialist retailers channel will account for around 97% of its sales in 2009. This channel is forecast to record modest growth over the 2009-2014 period. While channel sales were hindered by the global economic cris is in 2008 and 2009, they are likely to recover to some extent, although they will remain affected by low price pressures on clothing prevailing at bottom this statistical distribution channel as well as in other channels.H&M has stronger prospects than most other clothing and footwear specialist players thanks to its wide international presence and low-cost and flexible business model allowing the group to undercut most rivals while remaining at the forefront of fashion trends. The ending of H&Ms sales is accounted for almost equally by homeshopping and internet retailing, although the latter is increasingly supplanting the former, mirroring the wider industry trend. Expanding internet retailing presence will help offset the growing saturation of clothing and footwear retailing. Unlike Inditex, which is also present in the furniture and furnishings stores channel in a number of markets under the Zara Home brand, H&M does not operate other store-based formats. Hennes & Mauritz (H &M) AB Global Retailing Presence & Prospects by Channel 9 8 7 6 5 4 3 2 1 0 -1 0 100,000 Internet retailing % CAGR 2009-2014Clothing & footwear specialist retailers Homeshopping 200,000 300,000 400,000 500,000 600,000 Market Size 2009 (US$ million) 700,000 800,000 900,000 Bubble size shows company sales in this channel (2009). Range displayed US$169 13,118 million 21 Category Opportunities Retailing Hennes & Mauritz Euromonitor International Battling Against Hypermarkets and spate Merchandisers Grocery retailers and mass merchandisers increase price pressure on clothing and footwear specialists Clothing and footwear specialist retailers are increasingly seeing more intense competition from rivals operating mostly in other store-based channels, such as mass merchandisers and hypermarkets.As H&M is positioned in the low-priced segment in clothing and footwear retailing, it is vulnerable to the direct competition from these channels and needs to cultivate its clear competitiv e advantage in terms of fashion and desirability. An example of the intensifying competition affecting clothing and footwear retailers is the price war between Fast Retailing (Uniqlo) and mass merchandisers Aeon (Jusco) and Wal-Mart (Seiyu) in Japan to sell jeans at around ? 1,000 in 2009. In the US, Gaps sales have been eroded by the success of mass merchandiser Targets aggressively priced clothing ranges. In Western Europe, the expansion of major hypermarket operators including Auchan, Carrefour, Tesco and Wal-Mart into non-food products is set to continue as they seek to improve margins.Although this trend has slowed down to some extent in 2008 and 2009 due to the global economic crisis, with grocery retailers refocusing at least temporarily on more recession-proof food items, the longer-term trend is expected to see hypermarkets attempting to be more competitive in their offer of clothing and footwear, with more appealing ranges to compete more directly against specialist non-gr ocery retailers. In the UK, Wal-Marts Asda chain, thanks to the increased sales of its George apparel range in 2009, threatens to overtake Marks & Spencer and Associated British Foods Primark chain to become the countrys largest clothing retailer. Tesco saw clothing sales improve in the first half of 2009 alongside growth in non-food sales, up by 8%. Meanwhile, Sainsburys is planning to increase musculus quadriceps femoris allocated to non-food ranges in 2010 and 2011 and widen the reach of its successful TU range of clothes by offering it at more stores. 22 Category OpportunitiesRetailing Hennes & Mauritz Euromonitor International Internet Retailing H&Ms Late Entry H&M and Inditex both rise to the challenge and plan to develop internet retailing beyond store-based rivals, clothing and footwear specialist retailers are increasingly battling against internet retailers and most of them react by developing or expanding their own online retailing activity. With consumers familiarity with ordering online generally on the rise, coupled with efforts from internet retailers to make their websites more visually appealing and user-friendly, consumers confidence in ordering clothes via the internet has been strongly boosted. Major homeshopping retailers which are also leading players in clothing, for example, Otto, are increasingly moving online. Similarly, H&Ms homeshopping sales in Austria, Germany, Netherlands and the Nordic countries are gradually migrating to internet retailing. The companys significant experience in homeshopping in these markets prepares it well to tackle the logistics aspects to make internet retailing operations efficient across European markets. Both Inditex and H&M made announcements in 2009 indicating that they are gradually joining the fray and expanding online in most European markets. Inditex will start operations in major European markets by early 2010, while H&M will launch its website in autumn 2010 in the UK.Thanks to its wide pro duct assortment, the immense choice increases H&Ms chances of success in internet retailing although this requires the site to be designed in a way to be easy to navigate. However, H&M is a late entrant in the channel and appears to have made a protracted move, with a superfluity of major other operators including Amazon, Asos, the John Lewis Partnership, Marks & Spencer and Tesco having already obtained a strong foothold in UK online clothes retailing. Rival Gap also plans to launch its own website in the UK, following its earlier initiative in 2009 to sell its products on the Asos. com website. In the US, Gap has a multibrand website and offers combined delivery on cross-brand orders.Aggressive expansion from internet retailing specialists and grocery retailers Major grocery retailers have high ambitions for online clothes sales, as shown by Tescos relaunch of its UK clothing website in September 2009 offering one-on-one label and brands, and with Wal-Marts Asda offering the George label at Asda Direct since 2008. Websites of grocery retailers also often offer the added convenience of click-and-collect services. Among specialist internet retailers, Amazons acquisition of the US online clothes retailer Zappos for US$850 million in August 2009 signals its ambitions in apparel retailing, and its low prices and high number of visits from customers give it key competitive advantages.Key point With internet retailing making price comparisons between retailers easier, H&M should focus on advertising its low prices and promotions on its transactional website, while also emphasising the more fashionable design of its clothes in order to differentiate its website from Amazon and the grocery retailers. 23 Retailing Hennes & Mauritz Euromonitor International Strategic Evaluation Competitive Positioning Geographic Opportunities Category Opportunities Brand and Operational Strategies Recommendations 24 Brand and Operational Strategies Retailing Hennes & Mauritz E uromonitor International H&M A astray Recognised Global Brand Strong brand awareness and image H&Ms strong brand image is associated with value and posh collections, helped by the collaborations with famous designers. The latest example is the creation of the Jimmy Choo collection to be launched in November 2009.Such events create a great amount of publicity and media reporting to generate added footfall. In a similar way to Inditex, H&M relies on opening stores at a few flagship locations in major cities in order to build its brand image. Examples of such stores include the Harajuku store in Tokyo and the Champs Elysees store in Paris planned for 2010. Highlighting the H&M brands high level of awareness, it was ranked 21st among the top 100 most valuable global brands according to Interbrand in 2009, with a value exceeding US$15 billion. In comparison, Zara ranked only 50, while Gap came in at number 78. High-profile advertising with celebrities is widely used by H&M, unlike Inditex.H&M spends around 5% of its revenues on advertising. H&M Brand geographic Asia Pacific, Eastern involvement Europe, Middle East and Africa, North America, Western Europe Brand channels Clothing & footwear specialist retailers World ranking & share 1 and 1. 6% (2009) in clothing and footwear specialist retailers Multi-brand approach from Inditex In sharp contrast to H&Ms almost exclusive Brands other than H&M gain greater importance The more upmarket COS successfully launched in the UK in 2007 enabling the group to target wealthier customers and potentially increase its margins. It was subsequently extended to other markets Belgium, Denmark, Germany and the Netherlands. The Swedish chain Monki, acquired in 2008 and known for its sophisticated and colourful store designs, is not being rebranded and was expanded outside Sweden in 2009 with two stores in Denmark. This should allow H&M to diversify its customer base. reliance on its eponymous brand, Inditex has adopted a strate gy based on building a vast brand portfolio including Bershka, Massimo Dutti, Pull and Bear, Zara and Zara Home. The key competitive advantages resulting from this companys multi-brand strategy is its ability to target a wide range of consumer groups with brands and products tailored to various tastes in order to bring exclusivity and differentiation. The level of independence of the companys major brands is also an important aspect of Inditexs capacity to adapt quickly to changing market conditions. Group synergies are ensured thanks to the groups vertical integration, which also contrasts with H strategy of outsourcing. 25 Brand and Operational Strategies Retailing Hennes & Mauritz Euromonitor International Operations and snobbish Label Strategies Production outsourcing vs.. vertical integration H sources around 70% of its product assortment from Asia and over one third is purchased from China. It relies heavily on outsourcing production, with over 21 production offices world wide (10 in Europe, 10 in Asia and 1 in Africa) liaising with over 750 factories.In contrast, Inditex sources the majority of its products from Europe, and most of its production is made in-house in order to cut the time lag between product design and in-store availability. Although production in Asia helps H undercut Inditex on price, it also makes it more vulnerable to currency fluctuations, with the value of the US dollar strengthening in 2009 against European currencies and making imports from Asia more expensive in its main market, Europe. This reduced at least temporarily the scale of its competitive advantage over Inditex. Low inventory levels H operational efficiency is reflected in the level of inventory being usually low thanks to the frequent renewal of its collection.However, the focus on reducing inventory in order to protect margins has been detrimental to sales in some months in 2009, especially over the summer, when the company had relatively few items available fo r markdowns. Although H generally achieves low inventory costs, it is likely to be often surpassed by Inditex in this respect. As one of the pioneers of the fast fashion business model with new ranges being introduced every two weeks, Inditex is particularly efficient in incorporating feedback from stores daily into the development of new products, thanks to vertical integration and as such, H cannot replicate this model. Private label ranges under various names All of H product assortment consists exclusively of private label. Private label ranges have various names to arget different genders and customer types. For example, Hennes is targeted at 25-35 year-old women, L. O. G. G. is a casual sportswear label and MAMA is a maternity range. Key point As European consumers awareness of ethical issues increases, H is vulnerable to negative publicity surrounding working conditions at factories producing its clothes in Asia. Since it outsources a greater share of its products from Asia than Inditex and has less control over its supply chain, H auditing of factories must be strict and bluff to limit the chances of poor labour conditions being publicised and tarnishing its brand reputation. 26 Retailing Hennes & Mauritz Euromonitor International Strategic Evaluation Competitive Positioning Geographic Opportunities Category Opportunities Brand and Operational Strategies Recommendations 27 Recommendations Retailing Hennes & Mauritz Euromonitor International Key Recommendations Develop more premium chains alongside core low-priced offering H focus on affordability remains Internet retailing to be differentiated and wide-reaching As H is a late entrant in the New market entries and expansion in existing markets Entering into new emerging a core element of its success and contributed to make the retailer resilient in a recessionary economic environment. Although its low-priced and fashionable image with its eponymous brand H should not be jeopardised, in addition to cultivating it, the retailer should also attempt to widen its customer base and especially target wealthier consumers with its other banners such as COS and Monki stores offering edgy fashion. This could also help increase profits once the economy recovers and consumers become less cost-conscious. internet retailing arena in most European markets and arrives in a crowded and competitive market where Amazon and Otto have made inroads, it will need to offer innovative transactional websites that can convey effectively the textures, colours and finish of its clothes in order to differentiate its offer but still highlight the low prices. H presence in internet retailing could also be extended to markets where it does not seek to open physical stores, mirroring the example of Marks & Spencer delivering products to around 80 countries since autumn 2009. markets, especially in neighbouring markets to those where it operates, offers considerable growth opportunities for H. Romania and T urkey are large European markets where the store concept is likely to be popular and where rival Inditex has developed a major store network. In Latin America, Mexico offers opportunities in the value segment of clothing and footwear retailing. Although it is well covered by C and Wal-Mart, H can cater for more fashionconscious consumer groups. In Asia Pacific, H burgeoning presence could accelerate by expanding to new cities, especially in China and Japan. In the latter market, new store concepts and collections or new banners such as COS and Monki could be tested. 28 Retailing Hennes & Mauritz Euromonitor International Experience more This research from Euromonitor International is part of a global strategic intelligence system which offers a complete picture of the commercial environment . Also available from Euromonitor International Global Briefings The state of the market globally and regionally, emerging trends and pressing industry issues timely, relevant appreciation pub lished every month. Global Company ProfilesThe competitive positioning and strategic direction of the leading companies including uniquely sector-specific sales and share data. Country Market cleverness Reports The key drivers influencing the industry in each country comprehensive coverage of supply-side and demand trends and how they shape the future outlook. 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