H&M is revamping its strategy to cater to more affluent shoppers as it faces stiff competition from online retailer Shein. The fashion retailer recently held a star-studded event during Paris Fashion Week, showcasing its latest collaboration with the brand of late fashion designer Paco Rabanne. The event featured iconic pop star Cher, Swedish singer Robyn, and South Korean DJ Peggy Gou, all wearing shimmering outfits from the H&M-Paco Rabanne collection. This move demonstrates H&M's attempt to appeal to aspirational customers and differentiate itself from the low-cost focus of fast-fashion giant Shein.
The rise of Shein, known for selling incredibly low-priced items like $8 dresses and $5 t-shirts, has been disrupting the fashion industry. Coresight Research states that Shein now holds the title of the world's largest fast-fashion retailer, commanding an estimated 18% market share. In comparison, Zara owner Inditex holds 17% while H&M holds only 5%. Furthermore, Shein's app has a larger user base in Europe than in the US, indicating its growing threat to established players in their core region.
While H&M experienced a 4% decline in sales during the fourth quarter, Zara's parent company, Inditex, saw a 7% growth in its most recent quarter. H&M was slower to raise prices last year when faced with inflation, as its customer base is generally more price-sensitive. However, this year H&M raised prices and reduced discounting, resulting in an increased operating margin of 5.9% for the first nine months of the financial year. This demonstrates H&M's efforts to regain ground and compete with Zara's success.
Alistair Wittet, a portfolio manager at Comgest, believes that H&M, along with other traditional high-street brands, is losing market share to Shein. However, Wittet does not think Zara is as directly threatened due to its predominantly white-collar customer base. He predicts that Zara will continue to outperform the broader apparel industry, while Shein may grow faster. H&M is now attempting to attract more aspirational shoppers by enhancing its brand image through store upgrades and marketing, similar to Zara's successful approach.
Investors remain optimistic about H&M's ability to achieve a 10% operating margin by 2024, with the company's shares rising nearly 60% this year, surpassing Inditex's performance. H&M is also striving to improve its competitiveness by bringing new collections to the market more swiftly. The collaboration with Paco Rabanne showcases H&M's efforts to differentiate itself and enhance the fashion component of its assortment. However, the higher price points of the designer collection may impact H&M's competitiveness, according to analysts at RBC. Nonetheless, H&M's premium brand Cos has demonstrated demand for higher-priced products, indicating a potential market for elevated offerings.
Overall, H&M is adjusting its strategy to target more upscale shoppers and combat the increasing threat of Shein. By collaborating with renowned designers and elevating its brand image, H&M aims to attract aspirational customers and compete with the likes of Zara. The fashion retailer's journey to regain market share and improve profitability will be closely watched by investors and industry observers alike.