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Rolf Eriksen, CEO of Swedish fashion retailer H&M, is on a mission to conquer the Far East. He talks to Sterling about how his plans are unfolding
After years of sourcing materials and labour in China, international clothes retailers have woken up to the fact that the world’s number one manufacturing powerhouse also provides a ready market for their products.
Chinese consumers have become known for their love of designer labels often placing emphasis on the name over the product. But now Swedish giant H&M is hoping its message – that stylish clothing doesn’t have to cost a fortune – will strike a chord with shoppers in the People’s Republic, like it does everywhere else the firm operates. As H&M CEO Rolf Eriksen explains: “We say that design is not a matter of price.” It’s an approach that helped the firm to worldwide profits of €1.45bn last year.
Over 12 months since H&M opened its first outlet in mainland China, the retailer is doing brisk business. The chain quickly followed up its flagship store on Huai Hai, Shanghai, with two further shops at the city’s Cloud Nine and Super Brand Mall. Hong Kong got its first H&M last March, and the firm plans to open it first two stores in Japan in the autumn.
With over 1,400 stores in 29 countries, H&M is hardly a stranger to foreign markets. However, until recently it had limited its business in China to sourcing. So what inspired Eriksen to make the move last year?
The fact that the Chinese market is worth in the region of €40bn may explain his interest. McKinsey estimates that by 2025 there will be 220 million upper-middle-class households in China’s cities, defined as those making €3,000 to €8,000 a year. This contrasts greatly with 23 million such households in 2005. What is less clear for the company is the extent to which it will have to reinvent itself to make an impact.
“We think it’s necessary to enter new markets,” says Eriksen. “We went for Hong Kong and Shanghai because we are familiar with the two cities, since we had our production offices based in those locations for 30 years and 25 years respectively.” He admits it was a big step for the company to enter the Far East: “The Asian market is undoubtedly huge and it could be one of the key markets for H&M in the future. However, we prefer to start slowly and plan carefully for further expansions.”
In line with the CEO’s own cool and analytical personal style, the company is striving to maintain the disciplined, conservative approach to expansion that built H&M into Europe’s second largest retailer in little more than a decade. But Eriksen admits that errors have been made when the firm opened stores in new territories in the past.
For example, it has had to learn lessons from its initial foray into the US market, where it launched its first emporium on Fifth Avenue in New York City eight years ago. The Manhattan store was such a hit that H&M fell into the trap of believing that this success could be replicated nationwide, and it proceeded to open much bigger stores in the US than in Europe.
“We did make some mistakes with the US market at the very beginning,” says Eriksen. “It turned out that the stores we opened at that time were too big, which created problems. So we altered our strategies and we also gradually learned how to operate long distance business from [our experiences with] the US market.”
It seems H&M’s development mode in China is to operate a few stores in order to collect and evaluate the necessary market information. The company will consider moving to other mainland cities after the market in Shanghai has been established. “We’re in no rush,” he stresses. “The most important thing is to make sure that Chinese customers appreciate H&M.
We believe that fashion behaviour is the same all over the world, be it Paris or New York, Hong Kong or Shanghai.”
Although Eriksen has adopted an understated, wait-and-see approach, his firm is not exactly shy of publicity – or spending cash on the important job of maintaining its image. For example, over the past four years, H&M has collaborated with a number of guest designers, including Karl Lagerfeld, Stella McCartney and Roberto Cavalli, as well as style icons like Madonna. The Huai Hai store’s launch party was a much more exclusive affair than one might expect from one of the world’s best known “fast clothes” outlets; tickets to the event were the must-have item of the day for every fashionista in town.
While Spanish rival Zara opted to celebrate its flagship store opening in a relatively low-key manner, H&M organised a huge, star-studded bash that made international headlines. Australian pop diva Kylie Minogue was invited along to make her Chinese mainland debut, promoting the “H&M loves Kylie” limited beachwear line.
According to Eriksen, H&M spends about three percent of its annual turnover on advertising in any market. Considering the amount of money the company lavished on the launch party – and what it spent on the gigantic billboards that plastered the city – its expectations for the Chinese market could not be clearer.
Along with the outlay on promotional activity, Eriksen is not afraid of shaking the business up when necessary; this applies to logistics as well as marketing. Before he assumed the CEO role, H&M’s management had allowed high fashion to spread through the entire range, with costs spiralling out of control. Eriksen’s response was to concentrate on cutting costs and buying during, rather than before, season. This policy allowed reordering of popular styles and reduced stocks of slower-moving items, helping to slash inventories.
Unlike many retailers, who work on a seasonal basis, H&M replaces stock every six to 12 weeks. This engages customers’ interest because each time they visit the store it has a different feel. Industry analysts believe this will help mid-level fashion retailers to find a lucrative market in China. “There are more people who can afford these clothes now, and they’re in jobs where they need to be smart,” says Jake Davids, a director at market research firm Pulstracker. “It’s related partly to the rise of the female executive. It was a trend first in Japan, then South Korea. China’s next.”
If the company’s Hong Kong store is any indication, H&M has a bright future in China. When it opened there was a long queue of eager customers and, for weeks afterwards, the bustle on the stretch of pavement outside was more reminiscent of a rock festival than a high street.
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