Sustainability has been a hot topic for H&M over the last 12 months

Sustainability has been a hot topic for H&M over the last 12 months

Swedish fashion retailer Hennes & Mauritz (H&M) has had a busy 12 months, including a ramp-up of its sustainability efforts, a 'living wage' project, and a focus on expanding its global presence. While its latest fourth-quarter earnings disappointed the market, the company appears forthright in its ambitions to make 2014 an equally, if not more successful, year for the group.

Sustainability has been a particularly hot topic for H&M over the last 12 months as it made a marked effort to repackage itself into a more sustainable, quality-focused enterprise, suggesting a conscious move away from its ‘disposable fast fashion' image.

Already the world's largest user of organic cotton, H&M pledged to increase its use of the organic raw material and only use cotton from sustainable sources by 2020. It is also looking to phase out toxic chemicals from its supply chain.

Innovations have also gained a new edge. The company is working to close the loop in its clothing supply chain by launching a denim collection made from 20% recycled cotton, and the first products made from recycled textile fibres from its Garment Collecting Initiative are due in stores at the end of this month.

Sustainable agenda
Conlumino analyst Anusha Couttigane believes ethical sourcing has become a pertinent issue, not just in the media, but also in the mindset of the consumer.

"In the early days of the ethical movement in fashion, consumers expected to pay more for products which supported these causes. However, more and more retailers have moved their ‘ethical' products into the mainstream offer, which makes it a lot easier for consumers to shop ethically," she tells just-style.

More controversially, however, it is H&M's efforts to pay a fair living wage to some 850,000 workers in its clothing supply chain by 2018 that has raised the most eyebrows and may afford it a well-deserved pat on the back if achieved.

As a first step, the group's goal is that its strategic suppliers should have pay structures in place to pay a fair living wage covering workers' basic needs by 2018. The retailer is hoping its efforts will encourage the whole industry to follow suit.

If successful in its efforts, H&M would be the first fashion retailer to achieve such a move. As a starting point, it has teamed up with three of its best suppliers in Bangladesh and Cambodia to create model factories where it can test new ideas and standards before rolling them out to its wider supply chain.

The retailer is also focusing on several other areas including its own purchasing practices, supplier practices, workers' rights and government responsibility.

Euromonitor apparel research analyst Ashma Kunde believes H&M's commitment to sustainability will continue to be a core aspect of its strategy in 2014, both in terms of supply chain and branding.

She adds: "We expect price increases are on the cards; both on account of ongoing commitments on the sustainability front, and the desire to extract sales from higher price tiers as competition at the economy end of the market intensifies."

Verdict Research analyst Jessica Fioriti, however, offers a different view. She believes price hikes are unlikely given the majority of H&M's competitors, such as the online pureplays, are trying to undercut its prices.

"H&M is having to shift its commercial position away from price-driven competition and we believe this is one of the main drivers behind its launch of new labels like COS and & Other Stories as it tries to shift further up the quality spectrum than the positioning of its H&M brand allows."

International ambitions
In order to keep up with competition for its core H&M brand, the retailer has been looking to expand its sourcing footprint and last year turned its focus on Ethiopia as a new low-cost country in which to produce clothing.

At the present time, most of H&M's garments are sourced from factories in Asia, particularly Bangladesh. A move to Africa would expand its sourcing footprint but not replace its commitment to production in Asia.

On its fourth-quarter earnings call last week, CEO Karl-Johan Persson told analysts that any such decision would be about expanding capacity rather than moving it.

"We need to always look at capacity and growth since we have very ambitious plans for many years to come. So it's not about moving capacity from Asia to Africa, it's more about building even more capacity."

Africa has become a region on the radar of many apparel companies as an alternative to areas such as southern China, where costs are rising.

On the retail front, however, H&M is a little late to the party in terms of spotting the potential of the South African market. The company plans to open a flagship store in Johannesburg in 2015, but rivals Topshop, Zara and Mango already operate in the country.

Nonetheless, Fioriti believes the move into South Africa makes sense for H&M given it is the most developed country in the region, with a relatively stable economy.

"There is significant expansion opportunity in South Africa and the African continent as a whole, with H&M already operating stores in Egypt and Morocco; however, securing prime sites will be a key factor in how quickly H&M can expand," she says.

Africa isn't the only region H&M has plans for. Another country in which its rivals are already present is Australia, where the retailer intends to open a store this year. Persson told analysts the company is also eyeing markets such as Russia, Germany, Italy and Poland.

Fioriti says H&M's strategy to reduce its dependence on Europe is "sensible" given the prolonged recovery and stronger growth opportunities elsewhere.

"With like-for-like sales flat on the year, the retailer needs to look at renovating existing stores to drive additional sales."

Indeed, while H&M's overall offer still resonates well with consumers, the difficult trading environment has clearly impacted its performance, particularly in the UK where sales were up just 3% in the fourth quarter.

Group earnings missed analyst expectations and the retailer also revealed "disappointing" margins.

Persson remains confident in H&M's offering and that it can strengthen its market position further during the year.

Bernstein analysts believe the lower gross margins are due to increased investment by H&M, notably in online shopping, IT, and its new brand '& Other Stories'.

E-commerce investment
It is this investment in online that oculd be an essential piece of the puzzle for H&M in 2014. According to Kunde, the firm's online presence remains underdeveloped compared to key rivals, operating in only nine European markets and the US.

With online sales soaring in both mature and developing markets - especially Asia - developing e-commerce alongside its rapid store expansion would be an optimal strategy for H&M, she says.

"H&M needs to strengthen its online presence to capitalise on the growing presence of the omni-channel customer who uses a combination of online, in-store, and mobile devices to make purchases.

"These discerning consumers will expect to find a consistent brand message, pricing and product offering across all platforms, and failing to deliver could see H&M lose share to more agile rivals."

Indeed, competitors such as Topshop, River Island and Asos have more mature online offerings and will remain a threat to H&M if it doesn't improve its e-commerce platform.

Fioriti believes that while H&M's online presence has improved considerably over the past few years, its UK transactional website needs more investment and development if it is to be on par with its contemporaries.

"For features supplied by many of its rivals, H&M is trailing far behind and losing out on sales and market share growth. With online pureplay Asos launching its own value range, Style Steal, and new pureplays such as AX Paris and Miss Guided entering the online market, rivalry is set to intensify further for H&M.

"It is paramount that H&M addresses issues with its online business in order to keep up with consumers' shift to the online channel and young customers' growing use of smartphones and other mobile devices."

As the Swedish retail group continues to evolve into a more sustainable, quality-focused enterprise, its customers will continue to become more discerning, expecting a consistent brand message, pricing and product offering across all platforms.

H&M will therefore need to ensure it delivers, as failure to do so will see the group lose out to its more nimble rivals.

Euromonitor apparel research analyst Ashma Kunde outlines her top predictions for H&M's progression in 2014 here