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H&M's Now the Filling in the Classic Retailer Sandwich: Gadfly

H&M's Now the Filling in the Classic Retailer Sandwich: Gadfly

(Bloomberg Gadfly)—Hennes & Mauritz has joined the ranks of the squeezed middle.

Sales growth excluding currency movements slowed to just 1 percent in September, the lowest rate of expansion for more than a year, the company said Friday. The fast-fashion chain warned that it may need to continue cutting prices for the remainder of 2016, after a poor start to the crucial autumn season.

The malaise marks a change of fortune for the Swedish retailer, which once stood out by offering the latest styles at rock-bottom prices around the globe. Now, its cachet is starting to fade.

It's no longer the cheapest place to get fashionable threads -- that crown has been usurped by Primark. And it's no longer the coolest place to go shopping, that label goes to retailers like Inditex's Zara and British online seller Asos, which is expanding outside of its home market, including across the U.S.

Being caught in the middle rarely bodes well. Just look at the Gap, whose namesake retail chain has struggled to bring shoppers through its doors as it gets caught in a growing bifurcation across retail: Customers are increasingly turning to lower-priced goods from discounters and off-price retailers like Old Navy and T.J. Maxx for wardrobe staples like t-shirts and leggings, while heading to higher-end shops to splurge on fashion items.

H&M initially undercut Gap and other fashion chains which helped it win over teenagers who didn't want to shell out for similar items at traditional teen retailers like Abercrombie & Fitch and American Eagle. But as the rest of the industry, including those focusing on teens, have pushed prices down, H&M doesn't seem as cheap anymore by comparison.

Take Associated British Foods' Primark, whose products are around 60 percent cheaper than H&M on average like-for-like products, according to Bernstein analyst Jamie Merriman. Prices tend to range from 2 pounds ($2.60) to 20 pounds at Primark's U.K. outposts, compared to H&M's wider price range of 4 pounds to 50 pounds, according to Merriman.

H&M is trying to earn the right to charge higher prices and position itself as more upmarket by introducing new brands, such as Cos, and & Other Stories, which it has said are doing well. It says it will debut another one or two new brands in 2017, even as it slows its overall pace of investment. That is sensible. Diversifying away from the core H&M format will enable it to offer new and different products, with potentially higher price points.

And such action can't come soon enough. Primark, which opened its first store in the U.S. last year, is one of the few retailers expanding in America -- snapping up large spaces that failing department stores like Sears have exited. That threatens what has been one of H&M's most successful markets -- about 12 percent of its sales come from the U.S., compared to about 7 percent in the U.K.

H&M would be wise to start fighting back before Primark gains much more American ground. The new brands are a good start. Too many retailers focus on cutting costs, but that only goes so far. In the end, actually selling stuff -- and at a profit -- is what counts. That's not easy, given the pressures that H&M faces, not least from the strong dollar that ratchets up its sourcing costs, but it should be commended for at least trying to reinvigorate its business. And it badly needs to. Somewhere in the middle just won't cut it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story: Shelly Banjo in New York at [email protected] Andrea Felsted in London at [email protected] To contact the editor responsible for this story: Jennifer Ryan at [email protected]

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