Online shopping is where profits are found
The Short Version
Forbes magazine is reporting that fast-fashion retailer H&M is going to start closing under-performing stores and is abandoning its goal of opening 10-15% new stores each year. The chain is moving to put more emphasis on online shopping as it continues to chase a younger demographic that doesn’t shop in stores.
A Bit More Detail
No, your favorite H&M store isn’t going to close tomorrow. Probably. Maybe. Unless it’s one that has been defined as “under-performing.” For now, those are the only stores on the chopping block. The majority of stores in the US and Europe will keep right on putting out the fashion as fast as those factories in Bangladesh and Turkey can churn them out.
However, H&M’s CEO Karl-Johan Persson has changed his mind about the company’s growth strategy, away from physical stores in Europe and the US and more toward online sales. The reasons are numerous. In posting a six percent increase in sales last year, net income actually dropped almost eleven percent, largely because of increased markdowns necessary to stay competitive. Persson also said that events such as terror attacks and Brexit are creating problems in certain areas of the world.
The move toward a more online strategy isn’t universal, however. Persson says that emerging markets such as India, Mexico, South Africa, and Turkey are growing and will see more stores open. In fact, 430 stores will open this year, including new entry into Kazakhstan, Colombia, The Republic of Georgia, and Taiwan.
As H&M grows its online presence, it looks directly at competing with Amazon, Zalandro, and Alibaba, hoping to capitalize off its online/brick-and-mortar combination. The company still expects a 10-15% annual sales increase despite the shift in focus. They are also expanding their online presence, adding Malaysia, Mexico, Hong Kong, Singapore, Taiwan, and Turkey to the list of cyber markets.
The move by H&M is important in light of the continued struggles that have plagued mall-based retailers over the past several years. Rumors that Hudson’s Bay, who already owns Saks, is making a takeover move on troubled department store Macy’s was greeted with considerable optimism. Traditional fashion retailers are struggling and brick-and-mortar stores are a large cost factor that yields little, if any, profit.
Fast-fashion retailers, such as H&M and Forever21, have been seen as the exception to the decline of retail fashion stores. Where others have failed, fast-fashion outlets have been booming, for the most part. H&M’s change in strategy seems to signal the popping of that bubble.
Again, H&M emphasizes that only under-performing stores are going to close. However, there was no detail defining “under-performing” and whether that might expand should on-line sales beat sales goals. We only know that once a store is targeted for closure, that the door-shuttering will happen quickly. Don’t expect a lot of huge clearance sales.
We also don’t know how this might effect H&M’s partnerships with fashion brands such as Kenzo and its relationships with designers, things that have made the store popular in the past.
What we do know is that this could be a serious blow to real estate and mall developers in the long-term. Any hope for a resurgence based on fast-fashion growth would appear to be crushed. As Amazon and other companies look at faster and cheaper delivery methods, the days of physical in-store shopping look to be shorter than previously anticipated.
At the same time, this move makes the opportunities for smaller boutiques that much stronger. Located in more urban areas in places where storefront rents are not quite so expensive, boutiques counter the online trend with a more intimate shopping experience. As bigger brands drop physical stores to move online, boutique owners are likely to see an increase in traffic, especially from shoppers over 40 who still like to touch and try on clothes before buying.
Either way one looks at the situation, however, the consumer almost certainly comes out the winner.