H&M adapting to the digitalization of retail
How the global retailer H&M is changing its supply chain in order to adapt to rapidly changing customer preferences due to digitalization
Retail is an industry that has been heavily impacted from growing digitalization. The development of digital technology has led customer preferences and behavior to change rapidly, and this has direct implications on how retailers need to manage their supply chains to stay competitive.
H&M, a global retailer headquartered in Sweden, is a company currently grappling with the complexities of changing their supply chains due to digitalization. Its CEO Karl-Johan Persson conceded in 2017 that the company has not changed its supply chain despite the evolving digital landscape, and hence was not able to respond as rapidly as the change in customer preferences. This has resulted in high inventory and huge markdowns to clear inventory. In the past 3 years, inventories have doubled and days in inventory have increased from 100 to 130. [1] H&M’s supply chain lead times, measured by time taken for apparel from design to being available to purchase in store or online, are currently double those of Zara’s, one of its “fast-fashion” competitors. [2] These have negative implications on both top-line (slow adaptation of customer tastes which results in lower revenue) as well as bottom-line (higher inventory cost and mark-downs leading to lower gross margins). As a result, H&M shares have lost a third of their value since two years ago.
To improve its lead times and decrease inventory to be able to respond more rapidly to customers’ evolving preferences, H&M has begun taking actions across the entire supply chain in both its internally made apparel as well as third-party supplied apparel, from product development, procurement, production and distribution. There is no single action that will dramatically improve the supply chain; H&M will have to invest in a host of initiatives to achieve its goals. [3]
Short-term actions (effects seen in next 2 years):
- Greater flexibility with suppliers: H&M is working closely with its suppliers and evaluating its internal buying processes to allow for just-in-time purchasing and leaner inventory levels. [4]
- Move procurement / production closer to end-markets: While this will decrease lead time, moving procurement or production from Asia to Europe will result in higher cost (wages, etc.). Given H&M is primarily a discount chain competing on price, it will need to balance profitability when executing this strategy. [5]
Medium-term actions (effects seen in 3-10 years):
- Build digital infrastructure: H&M has begun investing heavily in infrastructure in the past few years, a costly but necessary effort to build the foundations of a flexible and scalable supply chain. This will lead to more efficient sourcing, allocation and distribution and an overall increased speed of the supply chain. Key components include automatization of warehouses and logistics hubs, RFID tagging, delivery solutions, and advanced analytics. [6]
- Omni-channel strategy: In established markets, H&M’s online sales already account for 25-30% of sales, and are projected to grow by 25% a year in the near future. As such, H&M has a clear omni-channel strategy to integrate the digital and physical worlds to offer customers a more seamless shopping experience, including click and collect, scan and buy, online returns in stores. [7]
In addition to the above, I believe management should also focus on the following:
- Data analytics: H&M has stressed that they are incorporating algorithms into supply chain operations, but they should also take advantage of the wealth of internal and external data sources to inform various business decisions. Internal data is helpful for improving the algorithms to optimize supply chain, and external data is helpful in demand forecasting (being able to see consumer trends industry-wide) as well as in markets where H&M has just entered and is still a small player with limited data.
- Organizational culture: Management has repeatedly mentioned that adapting to digitalization is a huge transformation for the company. They stress change in processes and investment in technologies, but a key aspect of change is also the ‘softer’ aspect i.e., culture. With ‘speed’ as the new motto, communicating the vision, transforming the culture and mindset of employees, and attracting and retaining the right people are also essential to success.
As digitalization increases and advanced analytics play an increasingly larger role in product development, I wonder how much of a role ‘creatives’ will play in the future, particularly in a fast-fashion company like H&M. Can we sum up an apparel development process in an algorithm? Also, with the increasing transparency of supply and demand in the network and the move towards automation and just-in-time inventory, would it be possible for H&M to ultimately customize apparel to the specifications of each customer?
Citations:
[1] H&M 1H 2017 Earnings Call Transcript, CapitalIQ, June 29, 2017.
[2] Anna Ringstrom, “H&M invests in supply chain as fashion rivalry intensifies”, Reuters, March 30, 2017, https://www.reuters.com/article/us-h-m-results/hm-invests-in-supply-chain-as-fashion-rivalry-intensifies-idUSKBN1710PM.
[3] H&M 1H 2017 Earnings Call Transcript, CapitalIQ, June 29, 2017.
[4] H&M 9M 2017 Earnings Call Transcript, CapitalIQ, September 28, 2017.
[5] H&M 1H 2017 Earnings Call Transcript, CapitalIQ, June 29, 2017.
[6] H&M Year End 2016 Earnings Call Transcript, CapitalIQ, January 31, 2017.
[7] Ibid.
For me, your article draws an interesting parallel to one of our marketing classes this semester, where we discussed how Gap is using big data to predict consumer tastes. [1] In that case, GAP CEO Art Peck “invested heavily in digital capabilities to address consumers’ shift to omni-channel shopping, focusing on dissolving the wall between the physical and digital channels.” As your article discusses, H&M is similarly focused on building its digital infrastructure and omni-channel strategy.
I think you raise a very interesting question about how much of a role “creatives” will play in the future of fashion in an industry where the supply chain is becoming increasingly digital. I think data analytics play an important role in uncovering past trends and behaviors. However, for a fast-fashion company like H&M, I don’t think the role of a creative director could ever entirely be replaced by predictive analytics. Consumers often do not know what appeals to them until they see it in a store – thus how can you predict what their preferences will be? The role of creative directors is to tell them what is “in style” for the current season, therefore generating demand for that particular style. I think H&M should continue to rely on creative directors to select its fast-fashion products, but can supplement the “gut-driven” decisions of the creative directors with historical purchasing data and other analytics.
[1] Israeli, Ayelet, and Jill Avery. “Predicting Consumer Tastes with Big Data at Gap.” Harvard Business School Case 517-115, May 2017. (Revised July 2017.)
Great article (and great company)! I think predictive analytics will and should play an increasingly significant role for H&M’s product development going forward. Conversely, ‘creatives’ will play a smaller role. H&M competes in a very different market than high-end fashion houses such as Prada, Burberry etc. As a fast-fashion company focused on affordability, H&M’s key success factor is, in my view, the ability to very rapidly deliver products to market at low cost – it doesn’t have to be a fashion-setter (relying on ‘creatives’) to be successful, only a quick (and cheap) follower.
Also, in addition to the actions that you raise above, H&M and its owner (Persson family) have over recent years also been very aggressive in investing in retail and supply chain tech start-ups, e.g. Budbee (https://digital.di.se/artikel/hms-vd-backar-budtjansten-budbee) and Pinmeto (https://www.nyteknik.se/digitalisering/h-m-investerar-i-svenska-pinmeto-6866388). To me, this effectively addresses two points that you bring up above. First, as H&M has been too slow in adapting to the evolving digital landscape, acquiring companies is arguably the quickest way to ‘catch-up’ (compared to e.g. developing technologies in-house). Second, acquiring tech start-ups is also an effective way to gain access to ‘the right people [with digital expertise] essential to success’. H&M is catching up!
Hardly a problem unique to H&M, the entire retail industry is suffering as a result of the rapid rise of e-commerce and the decline in appeal of in store shopping. Bonobos, for example, is a brick and mortar clothing retailer who has adjusted its business model to deal with the issue of the digitalization in retail. Bonobos holds zero inventory at its stores, located only in major metropolis cities, and instead has focused on enhancing the customer shopping experience while taking on none of the inventory write down risk that has plagued traditional retailers in the past. A customer walks into a Bonobos store, music is blaring, a friendly customer sales rep greets you and offers you a drink, you try on various clothes that are on display, place an order on an in-store iPad, and your order is on your doorstep the next day.
Retailers are going to have to adopt some form of this model going forward – bring back the appeal of in store shopping while still utilizing e-commerce as its form of distribution, thus not having to worry about selling through store specific inventory. Companies no longer have the luxury of forecasting demand and what Bonobos has captured so brilliantly is their ability to mitigate that concern by having strategically placed warehouses around the country that can ship to customers the next day after purchasing online. They also have incentivized repeat customer purchases through their digital platform with personalized accounts containing your preferred size, previous orders, and recommendations. It doesn’t seem like brick and mortar is completely going away, and it will be interesting to see the measures traditional retailers like H&M undertake going forward.
Very interesting problem facing H&M and other retailers. I think you make great points about improving data analytics as well as the ways in which ‘going digital’ can impact the culture of a company. In terms of a fashion retailer moving more digital, one thing that may be particular to H&M (and similarly stores like Forever 21, etc), is that they tend to be fast followers in terms of fashion – they are really a tool to disseminate more ‘high fashion’ trends to the masses – so in my opinion, data analytics and speed to market is in fact significantly more important to their model than creative design. One other thing I wonder is how the upgrades to the supply chain you mentioned tie into their online sales strategy – I’m curious how inventory levels might change or be optimized as they can move to holding inventory in more central locations rather than distributing among stores.