H&M
H&M is suffering huge losses this quarter, and already projecting big losses for the following quarter as well. Even though online sales are up by over 20%, the company faced a decrease in profits by 61%. This comes as a direct result of an unexpected 7% increase in inventories that led the fashion giant to have to cut prices as a means of relieving this excess stock. The CEO believes that this issue will resolve itself as we move into the later half of the year, but many analysts are skeptical as H&M still plans on hitting its goals of this year. H&M believes that the markdowns that disrupted its sales so heavily will not continue into the later quarters, and that this issue is solely a result of it being a “transitional year” where they more heavily focus on online sales therefore causing brick and mortar stores to bear the brunt of this issue.
This increase in inventory/decrease in sales interestingly comes after the Swedish company had faced a large scandal surrounding a racially inappropriate advertisement.Albeit they realized their mistake and hired a new company “diversity leader” in order to try to combat such a scandal in the future, many of their consumers felt like the company did not do enough to try to fix what they had done. In countries, like South Africa, there were even mass protests at stores around the country. H&M has not commented whether or not the backlash of this ad has affected sales, but with how dramatically their sales dropped, it begs the question.
I will be curious to see the effect this has on their companies financial status in future periods. As we saw in the example in class we did on Tuesday, a one period change in inventory can have a drastic impact on their inventory position for years to come. This surplus of inventory lead to a large loss on the income statement. The company may not have enough money to operate all of their facilities and may need to shut down certain facilities. An example such as this shows how important inventory management can be and all of the repercussions that come with bad inventory management.
I agree, I think this event will have significant effects on periods going forward. Certainly, my personal sphere and connections do not support this brand anymore. I am hoping that this will bring light to social issues of ignorance in addition to financial aspects. I know that H&M runs mostly on producing a certain amount of inventory for a season and sells it until it runs out. However, with the drastically decreased amount of sales, I am wondering how manufacturing would compensate for this. I anticipate that there could be much unsold inventory that might have to be resold for a further amount of time. The company should be more focused on marketing and restructuring their brand image. However, because of the vast variety, trendy styles, and affordable price points, I don’t see H&M failing in the long term.
I think H&M’s struggles transitioning into the online arena are somewhat excusable. Although they definitely could have performed better, as many other retailers have shown, remodeling a business plan on the fly is not an easy thing to do while remaining profitable. There are many steps along the way that could go wrong, and I am not that surprised that their sales and operations planning missed the mark. On your note on the effect of their advertisement on sales, I am actually curious as to why they didn’t see a bigger dip. Online sales increasing by 20% is a very significant improvement, especially in the face of a controversy that generated a lot of social media buzz, and an apology that many did not seem thrilled with (https://www.washingtonpost.com/news/business/wp/2018/01/08/hm-apologizes-for-showing-black-child-wearing-a-monkey-in-the-jungle-sweatshirt/?utm_term=.2337fc84e944). They may have actually taken advantage of how fast the media cycle operates, as even though I remember seeing this controversy when it occurred, I did not remember it had been H&M at fault.
This is a really interesting issue that I didn’t know about until now. I have shopped at H&M both in America and in Europe but I can’t ever imagine myself shopping online there. Since stores like H&M and Forever 21 are so inexpensive, it’s risky to shop online as you don’t know what the quality of the product you will receive will be. On top of that, since their merchandise is already pretty cheaply priced, I’d imagine having to issue markdowns would hurt their profits. I am surprised that their sales took such a hit as I feel that customers would take advantage of the decreased prices. This Washington Post article: https://www.washingtonpost.com/news/business/wp/2018/03/27/despite-deep-discounts-hm-cant-get-people-to-buy-its-clothes/?utm_term=.6ce019139bb3 mentions that millennials are focusing more on quality items and less about quantity, which doesn’t bode well for H&M. Seeing as they are holding on to Halloween costumes and Christmas sweaters, I’d imagine their holding costs are rising exponentially. This is a perfect example of the opportunity costs and consequences that result in holding on to too much inventory.
I agree with Laura’s point, H&M’s business model is not meant for online shopping. Their lower-quality items make it hard for consumers to buy without seeing/feeling/trying on whatever item he or she is considering purchasing. That being said, I think with the current environment of low tolerance for anything against diversity or inclusivity, still seeing a 20% increase in online sales is significant. Nonetheless, it will be interesting to see if they can keep these numbers up, as they may have to deal with a high volume of returns or reorders through online shopping due to the quality of clothing they offer. Ensuring their handling of these goes smoothly and efficiently, I believe, will be a good indicator of how H&M will perform in the future.
In terms of being user friendly, I don’t think H&M’s online shopping experience caters to users. Clothes are often not displayed on models, making it difficult to see how the garment would fit. When visiting the store in person, from my own experience there always seems to be an excess of inventory. There are so many pieces of one garment made that the store feels overcrowded, and I don’t feel any urgency to purchase an item because it will most likely still be around in a few weeks. In terms of OM, this shows a slow inventory turnover rate. H&M tries to appeal to customers as a cheap way to access high fashion, yet their slow turnover leads them to lack that essential factor of exclusivity. I wonder if they would benefit more from Zara’s business model – selling high fashion at a mid to high range price, and having very quick inventory turnover to add that exclusivity factor back.
I agree with Liza that shopping at H&M feels overwhelming. I think in the past, the variety of options H&M offers was the main people shopped there-driving to a store is a hassle, so it feels safer to go to a store with a lot of options because there is a higher chance of finding something. Ecommerce is stealing this market away from H&M. Shopping online offers the same amount of variety, but way more convenience because you don’t even need to leave your house and you can take more time to sift through all the options. As the Toys “R” Us blog mentioned, as the popularity of brick and mortar stores declines, it is more important than ever to offer the consumer an experience that draws them to the store. H&M has not been able to compete in this arena. At the H&M near my house, there are clothes literally everywhere, seemingly with no kind of organization. If you are looking for some specific item of clothes, you have to search the entire store for it, and even then, you might not find it. Leaving the store, consumers feel frustrated and like they wasted their time. As Sarah mentioned, H&M is having a hard time selling its inventory. I found this article (https://www.nytimes.com/2018/03/27/business/hm-clothes-stock-sales.html) that proves just how dire the situation has gotten. The article describes how a power plant in the town where H&M was founded it burning extra inventory/defective products that H&M can’t sell to create energy. Burning clothing doesn’t seem like a great idea since it releases a lot of pollutants into the air (and H&M claims to promote sustainability). I think companies struggle with S&OP sometimes because it’s impossible to be perfect all the time, but H&M has clearly reached a new low. Their inventory size is way too big, and maybe they should implement a lean system like the ones we’ve talked about in class.
One of the purposes of sales and operations planning is to optimize trade-offs between customer service, supply availability, profitability, and more. Reading both the article and the comments above, it is clear that the purpose of the S&OP of H&M needs some work. Step 2, specifically, of the S&OP process which covers demand planning using statistical forecasts that we learned to calculate in chapter 15. I wonder what type of inventory planning system H&M uses that would lead to such an excess in inventory without it being noticed beforehand. I would like to agree that H&M has to reassess their inventory management.
H&M was once my favorite clothing store. I loved the wide range of clothing it provides at a low cost, and it is not overwhelming like Forever21 can be. I could get a basic outfit fit for casual occasions, but I could also grab a business shirt or a cute blazer for more sophisticated events. I have numerous purchases from the company, but I have decided to take a step back and shop less in response to the racial incident that arose this past winter. As Jordan mentioned, I definitely think that the millennials desire towards higher quality clothing has made a large impact. With the emergence of fashion gurus on social media, and their 24/7 coverage, fashion has become a huge focus for many. People want to be seen in clothing that not only looks good but feels good and is worth their buck. H&M just has not measured up, and they that providing further discounts and reductions would solve the problem. Maybe instead of dropping prices, H&M should have reached out to its customers at a more personal level to truly see what they want from the clothing retailer.
https://www.washingtonpost.com/news/business/wp/2018/03/27/despite-deep-discounts-hm-cant-get-people-to-buy-its-clothes/?utm_term=.78e56207cf98
When analyzing a company, it is also interesting to read what analysis on wall street think about the companies value. With regards the H&M, their stock price has fallen from $237.20 to $122.34 in the past year with a $47 decrease in the past 3 months. A big problem when it comes to H&M is their in-store sales as they do not have a large online presence, and historically the majority of their sales have come from Malls and walk in stores. H&M has projected that their same-store sales which are the tracked sales on one particular store vs itself over a period of time, will not grow until 2019. This does not meant that their stores are losing money, but it does mean that consumers are spending less money at their stores. Like Sarah said many of these problems are coming from high levels of inventory and sub-par styles of clothing that no longer have a huge global demand. Many street analysis projects that the promise by the management team to return same-store growth will not be met. The only way that H&M can start seeing profits by 2019 is if they put more resources into a digital initiative. My mother for example hasn’t shopped at a store in years because she says there is no reason to go to a store and find out they may or may not have something she wants, when she can pick out the exact thing she wants online in her house. H&M expects that online sales will grow 25% in 2018, and a steady 20% growth a year through 2022, which is a high projection. Many Analysis believe that due to the demand of online purchasing, H&M could see around a 10%-15% growth over this time, but the lack of demand for the companies products will limit the growth of H&M’s online business.
I apologize, these are the sources I used.
https://www.thestreet.com/story/14491321/1/hennes-and-mauritz-is-struggling-mightily-and-it-may-continue.html
https://www.google.com/searchei=o1u8WpNCx_XOAu7BkMgI&q=H%26M+stock+price&oq=H%26M+stock+price&gs_l=psyab.3..0i131k1j0l9.10460.11589.0.11680.6.6.0.0.0.0.184.478.5j1.6.0….0…1.1.64.psy-ab..0.6.478….0.cT2xvn84Eq4