Could isolationism be a drag on H&M’s fast fashion?
H&M delivers fast fashion to the shelves via an agile, global supply chain network. But could isolationist trade policies disrupt the JIT delivery model?
In their latest annual report, H&M asserted that for global companies like itself, trade intervention affects them to a lesser extent [1]. However, global trade growth has reached its lowest levels since 2009 [2] and isolationist movements are on the rise in the U.K. and U.S. – countries that contribute ~20% of H&M’s total sales (see Table A).
The fashion retailer has become a global tour de force by delivering ‘fast fashion’ to its customers, shortening the time it takes for new trends to hit the shelves. In order to deliver on this promise, H&M has built a Just-In-Time supply chain designed at minimizing lead times and inventory. Given the Swedish retailer currently operates in 64 markets, the effectiveness of their JIT model depends on the ease and cost at which goods flow across borders.
In a 177-page report on the impact of Brexit on trade, Sweden’s National Board of Trade asserts that there will be “increased administration, increased costs, and reduced stability in the flow of goods” [3].
Although future U.S. trade policy is unknown, an important concern for H&M’s management must be: How will isolationism and declining global trade impact H&M’s supply chain, which is critical to delivering fast fashion?
To date, H&M does not manufacture their own clothing designs. Instead, they contract with over 700 suppliers across Asia and Europe [4], with approximately two-thirds of their sourcing from Asia as of 2011 [5].
To address global trade decline and isolationism, H&M in the short term is actively monitoring purchasing and transportation costs, and developing strategies to respond to future changes in prices.
In the medium term, H&M is making technological investments to develop a faster, more agile supply chain to shorten lead times. As Karl-Johan Persson, CEO, remarked in a press release in September 2017, “Technology is also enabling improved purchasing methods that allow shorter lead times and greater precision when planning the product range” [6].
Lead time is primarily a factor of manufacturing process time and travel time. A JIT supply chain depends on how well the company optimizes both levers – operations and the network. By investing in technology, H&M is focused on pulling the operations lever to improve lead time, rather than the network lever.
Depending on the extent to which future trade deals adversely impact H&M, it may be not only prudent, but also advantageous for H&M to consider investments in optimizing their supply chain network in the medium term. If trade administration and costs do indeed increase as expected, lead times to deliver merchandise from distribution centers to stores (within the U.K., possibly the U.S. and other countries) will lengthen. While H&M is investing to improve lead times through operational efficiencies, these gains may be fully offset by increases in administrative burdens to move merchandise across borders.
H&M will then need to shorten lead times through network optimization by reducing distances merchandise must travel across the entire length of the supply chain. Given the majority of H&M’s sales are concentrated within continental Europe and the U.S., H&M could look to source their supply closer to Europe, thereby reducing the distance merchandise must travel at the front-end of the supply chain.
H&M could achieve this through two means: 1) Shift sourcing from Asian suppliers to European suppliers, or African suppliers near Europe 2) Vertically integrate and build manufacturing capabilities in Europe or Africa. The second option is much riskier and more capital intensive, but H&M’s primary competitor – Zara – operates in this manner today. In the future, H&M may have no choice but to vertically integrate in order to remain competitive.
We have explored the potential impact of isolationist movements on H&M’s supply chain, but have not explored how the decline in global trade may impact future transportation costs. Will the decline eventually lead carrier or air freight shipping costs to rise? If so, how should H&M mitigate this risk?
Table A
Source: Hennes & Mauritz, 2016 Annual Report, p. 79, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
Word Count: 798
Endnotes
1. Hennes & Mauritz, 2016 Annual Report, p. 74, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
2. International Monetary Fund, “World Economic Outlook, October 2017, Seeking Sustainable Growth: Short-Term Recovery, Long-Term Challenges” (PDF file), downloaded from IMF website, p. 37, https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/world-economic-outlook-october-2017, accessed November 8, 2017.
3. National Board of Trade Sweden, “Brexit, March 2017” (PDF file), quoted in Lee Roden, “Trade with UK will be more difficult and expensive post-Brexit, Swedish government warned,” The Local se, March 14, 2017, https://www.thelocal.se/20170314/trade-with-uk-will-more-difficult-and-expensive-post-brexit-swedish-government-warned, accessed November 2017.
4. Hennes & Mauritz, 2016 Annual Report, p. 72, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
5. Source: Bernstein Global Wealth Management, “Inditex and H&M: Very Different and Very Similar,”
February 2011, p. 98, Business Source Complete, EBSCO, November 2017.
6. “H&M Hennes & Mauritz AB Nine-month Report,” press release, September, 28, 2017, on H&M website, http://about.hm.com/en/media/news/financial-reports/2017/9/2682788, accessed November 2017.
Source: Barnes, L., & Lea-Greenwood, G., “Fast fashioning the supply chain: shaping the research
agenda.” Journal of Fashion Marketing and Management Vol. 10 No. 3 (2006): 259-271
The own versus outsource production decision poses a lot of tradeoff considerations. While I’ll agree that vertical integration would allow H&M more control over its production, I wonder if the inflexibility of moving production from country to country (gained from an outsourcing model) would offset the benefits vertical integration. Given the onset of isolationist movements, it may be hard for H&M to predict where to put capital investment in a factory. On the other hand, strong virtual integration with supply chain partners might allow H&M to maintain supply chain flexibility while remaining competitive in the fast fashion landscape. Maybe an interesting option would be for H&M to partner with a company (like Li & Fung) that specializes in coordination among supply chain partners and allows for disseminated production, bringing products closer to consumers.
I think it’s interesting how you keyed in on the fact that increased trade restrictions could slow down H&M’s delivery cycle. Is it possible, though, that there is an even bigger threat to H&M: that trade restrictions shut down their delivery across borders altogether?
One of H&M’s main value props is not only that they’re fast, but also that they’re very cheap. I worry that if the US or European countries were to levy duties on Asian imports, H&M would have to lower its margins or move away from its low-cost position. This past year in the US, for example, the U.S. Commerce Department increased antidumping actions against foreign importers 61% [1]. If this trend continues and spans to other Western countries, it could be much harder for H&M to cost-effectively import apparel into these countries.
That said, I think your idea to begin sourcing more products from Western countries becomes even more attractive. The question then becomes, though, can they do that cost-competitively?
[1] “U.S. Department of Commerce Issues Affirmative Preliminary Antidumping Duty Determination on Aluminum Foil from the People’s Republic of China,” press release, October 27, 2017, on US Commerce website, [https://www.commerce.gov/news/press-releases/2017/10/us-department-commerce-issues-affirmative-preliminary-antidumping-duty-3], accessed November 2017.
I agree with Tom Student 2017 on two points:
1. H&M’s key differentiator in the market, relative to Zara’s, is that they are cheap.
2. H&M’s largest concern in this space should be taxes or embargos levied on companies with foreign production.
President Donald Trump has publically promised a “major border tax” on companies that shift jobs outside the United States and the administration has considered an across-the-board tariff of 10 percent on all imports. President Trump has also discussed implementing a 35 percent tariff on Chinese imports. A recent Peterson Institute for International Economics study found that a tariff on imports of Chinese tires alone would cost U.S. consumers $1.1 billion while saving only 1,200 U.S. jobs. According to the study, “[t]he increased costs would likely be passed on to American consumers in the form of higher retail prices.”If any of these practices are adopted, H&M will likely suffer a decrease in sales due to price hikes, but perhaps, this method will still be more cost-effective than setting up a factory in the US.
Source:
1. http://thehill.com/blogs/pundits-blog/economy-budget/312900-trumps-import-taxes-could-devastate-us-economy
2. https://www.bizjournals.com/columbus/news/2017/04/14/how-trump-s-trade-policies-affect-u-s-retailers.html
The move to build factory and local sourcing is essential in the countries with more restrictions on trading. Also, the vertical integration is a long term investment that H&M needs to start from now. In the fast fashion industry, speed and cost are key successful factors. Thus, innovation on supply chain efficiency that reply to consumer’s changing needs is the thing the company need to concern about today.
while I agree that isolationism would affect H&M negatively especially with Brexit and potential import taxes within the European union. this gives the potential for startups in the fast-fashion to compete with major fast-fashion, it will allow small and medium enterprises to have a competitive advantage to produce in country rather than outsource.
I enjoyed your article, as it prompted me to think about H&M’s “true” competitive differentiation. While speed-to-market from a manufacturing perspective is obviously critical to their business, I would contend that what makes them truly “fast” is the culture of the organization and the process for using data to inform buying and merchandising allocation decisions. As we saw in the GAP case in Marketing, what hinders many organizations from being as nimble as fast fashion players is legacy organizational structures, and antiquated Merchandising / Creative Officer roles, which inhibit data-driven decision making. Isolationist policies are certainly a risk for H&M. However, I would argue that it will not disadvantage them in the context of the competitive landscape until other organizations catch up from a business model perspective — at which point, winning might truly mean a race to market from a production / transportation perspective.
Great write up. I do believe that H&M has to think about the increase in isolationist movement and decline in global trade, however, I believe that H&M has a few things going for it. First of which, is that clothing is such a staple good with a ton of production coming from Asia. For a country to put a tariff on clothing products, I believe, is less likely than for other products (i.e. automobiles). In addition, labor costs in Asia for clothes production are so much cheaper than in Western Europe and the United States that even with tariffs, I don’t believe that building facilities in the local market would be warranted. The real threat that I see is not from the cost side but an effect on H&M’s value proposition. If the company is unable to swap in fashion trends quickly, customers will be less inclined to shop there and this will open the market for competition.
When evaluating the tradeoffs in establishing new production facilities in Europe/North Africa to mitigate potential trade disruption risk, H&M and other companies should also consider the likelihood of the trade restrictions sustaining long term as well as the ease with which a company could pivot away from the new facilities if trade restrictions are once again relaxed. What was first launched as a defensive move to protect against global supply chain uncertainty could quickly become a significant liability that prevents H&M from continuing to offer a broad, rapidly evolving product portfolio at a tremendous value.