‘Fashion and quality at the best price’ is the motto on which H&M bases its business concept. H&M had humble beginnings over sixty years ago in Vasteras, Sweden. It is now a highly successful, contemporary fashion group with a global reach. H&M’s Annual Report for FY 2013 reported 3,132 department stores worldwide; H&M department stores are now in 53 countries.
Outward processing trade (OPT) agreements work well for many segments of the textile production and marketing sectors. OPT is better than free trade regulations for H&M when using production facilities in countries in closer proximity to the consumer market. For example, OPT agreements make the method of temporary exports and re-imports for garment production works well with Central Eastern European (CEE) countries like Romania. CEE countries are in close proximity to European H&M department stores so transportation costs are less than the costs for transporting finished garments from China or India. The strategy works well for both H&M and Romania. H&M already uses the uses the strategy of segmenting production processes at different locations; the H&M supply chain is organized around the strategy of temporary exports and re-imports that characterize OPT.
Fragmentation is a feature of H&M’s business globalization because their products are assembled in various factories mainly in China and other locations in Asia. Fragmentation can also be to the company’s advantage by using production capacities in Romania and other CEE countries. CEE counties need jobs and have workers to fill the jobs. Romania is also the site of H&M department stores which have proved to be very successful with profits growing quickly in the past fiscal year. The cycle of jobs and purchasing power is good for Romania and H&M can take advantage of the popularity of their products by building more stores there as the market demands.
H&M’s future looks good because of the new directions the company is taking. A mobile marketing campaign was started in 2011 and an online catalogue is available for online shopping. M&M should continue its move to sustainable practices and maintain the quality of their products, while at the same time moving into new markets, especially into Africa. H&M should continue to grow and at this time their future survival and success seem assured.
Hennes & Mauritz is generally known as H&M, a highly successful fashion group with department stores in 53 countries (H&M Full, 2014, p. 10), although it had a modest start in 1947 in Vasteras, Sweden. Their business concept is based on their motto ‘Fashion and quality at the best price.’ The stores offer clothing and accessories for children, teenagers, women and men. H&M lists the strategies that allow them to offer lower prices include not using any middlemen, purchasing large volumes of apparel at one time to distribute to companies throughout the world and “efficient logistics” (H&M Business Concepts). Approximately one hundred clothing designers, fifty pattern designers and one hundred buyers work in-house which the company maintains with the purpose to save money. An interesting organizational process H&M uses has been to develop mediators to work internally with the buying department and externally with suppliers. The task of the mediators is to place the right buyers’ orders with the supplier best able to fill the orders and make sure the products fit with the H&M price range with high quality. It is also the mediators’ responsibility to ensure that suppliers have working conditions that comply with H&M’s code of conduct. (e-Business, p. 2)
H&M’s 2013 Annual Financial Report stated the H&M Group’s profit increased from last year by SEK 17,152 million. (H&M Annual, 2014, p. 1) The fourth quarter showed a 13 percent rise in sales since the third quarter when converted into local currencies (H&M Full, 2014, p. 3)
New employees were hired to fill more than 120,000 new jobs during FY 2013. (H&M Annual, 2014, p. 1) The total of employees on December 30, 2013 amounted to 116,000. H&M worked hard to expand in 2013 and grew by 356 new stores. China and the United States (U.S.) added the most new stores. China had 205 total stores and the U.S. had 305 total stores by the end of 2013. (See table 1) The only country with more stores than the U.S. by the end of Fiscal
Comparative advantage occurs when a company can sell goods at prices below the prices of competitors; this helps a company gain more sales because customers are drawn in by the lower prices. H&M has a comparative advantage because their garments are mainly produced in China and Asia. The strategy of producing clothes as inexpensively as possible to sell in department stores around the world fits with the free trade theory. Fragmentation is a feature of H&M’s business globalization because their products are assembled in various factories mainly in China and Asia.
Research on the apparel and textile trade has shown that trade between Central Europe and the European Union demonstrates that fragmentation creates a different kind of comparative advantage in Romania. Baldone, Sdogati, and Tajoli (2001, p. 104) explained that “Analysis suggests that fragmentation is activated by labour differentials as well as by reasons of geographic and cultural proximity.” Therefore, although regional integration has some negative influences, Romania is part of Europe and has a European, ameliorating some of the disadvantages. Also, the success of the new H&M department stores in Romania suggests that a partnership between H&M and Romania is good for both parties.
Outward processing trade (OPT) agreements cover situations when textiles are temporarily exported to Eastern European to be processed and then re-imported into the European Union. Outward processing trade (OPT) agreements can have benefits that are not available with free trade (using only the existing regulations related to trade). Although products from Asia can be purchased cheaply, transportation costs are high and vary with the price of oil. Production within Romania, for example, has offers savings for transportation costs compared to China or India. The principal entities generate a variety of structures for OPT flows. Romania has been able to enter into the H&M supply chain because of OPT agreements. The result has been good for Romania in terms of trade and in terms of job creation for Romanians. OPT works well for H&M and Romania because the company uses the strategy of segmenting production processes at different locations; the H&M structure works well with the strategy of temporary exports and re-imports that characterizes OPT (Baldone et al., 2001, p. 14).
Romania has not been an open economy for long enough to compete well with historically open economies in terms of skilled workers and assure growth potential. Highly regulated, closed economies do not attract Foreign Direct Investments (FDI). FDI are when one company invests in a company located in a different country. FDI would be a great asset for Romania and Romanian workers. The Romania government could help remedy the situation by opening up the economy and by offering small textile companies grants or loans with low interest rates. H&M has a great deal of influence and control over the new stores H&M stores in Romania. The success of H&M in Romania is an encouraging example of FDI. H&M’s annual report for FY 2013 reported sales of SEK 893 million in 2013 compared to sales of SEK 43 million in 2012. The increase represents a 41 recent difference from 2012 to 2013. That is a large increase for only one year. As of November 30, 2013 Romania has 28 H&M department stores; nine new stores started business in 2013 (H&M Annual, 2014, p. 15). The fourth quarter (September 1, 2013 to November 30, 2013) alone sales in Romania equalled SEK 273 million (H&M Annual, 2014, p. 16).
Although H&M is smaller than Spanish rival ZARA the differences in the business concepts between the two allow H&M to attract a different and larger segment of the clothes buying population. ZARA’s in-house designers are constantly producing new trendy designs, whereas H&M offer trendy and classic styles. ZARA’s strategic plan calls for a constant flow of new clothing into the stores, fast fashion, rather than following the traditional fashion seasons. This does not always allow for the quality that H&M insists upon for its products. H&M has made a commitment to sustainable practices which include good worker conditions, whereas ZARA has used sweatshop labour to produce some of their clothing (Burgen & Phillips, 2011). Good strategies H&M have been initiating are mobile marketing and online shopping (Burgen, 2011).
In conclusion, can stay competitive by taking advantage of OPT agreements to bring production closer to its European markets. Romania and other Central Eastern European markets offer opportunities because labour costs are less than in other parts of Europe and transportation costs will be less than shipping to China and to other parts of Asia. This is a strategy that could be the basis for competing with the low-cost apparel available globally that has been made in China. H&M also has the advantage of customer loyalty strategies which will be enhanced with their mobile marketing campaign and with a well designed online catalogue. Consumers, especially young clothing buyers are comfortable with online ordering. Ordering online is easy and the catalogue is attractive. Transportation costs for the consumer are decreased when ordering online. H&M should continue its move to sustainable practices and maintain the quality of their products all the while moving into new markets, especially into Africa. These strategies will help to ensure the future survival and success of H&M.
References
Baldone, S., Sdogati, F. & Tajoli, L. (2001). Patterns and determinants of international fragmentation of production: Evidence from outward processing trade between the EU and Central Eastern European Countires. Weltwirtschaftliches Archiv, 137(1), 80-104.
Benton, P. & Manchin, M. (2002). Making EU Trade Agreements Work: The Role of Rules of Origin. Centre for European Policy Studies (CEPS), CEPS Working Document No. 183, Brussels, http://www.ceps.be
Burgen, S. and Phillips, T. (2011). Zara accused in Brazil sweatshop inquiry. The Guardian, guardian.co.uk/world/2011/aug/18/zara-brazil-sweatshop-accusation
Butcher, Dan. (2009). Retail giant H&M runs multifaceted mobile marketing campaign. Mobile Marketer, http://www.mobilemarketer.com/cms/news/advertising/2506.html
e-business watch. (n.d.). Case Study: Hennes & Mauritz. e-business watch, www.ebusiness-watch.org
“Foreign Direct Investment (FDI).” (2014). Investopedia, http://www.investopedia.com/terms/f/fdi.asp
H&M Annual Financial Report 2013, http://about.hm.com/en/About/facts-about-hm/about-hm/expansion-strategy.html
H&M Business Concept, http://about.hm.com/en/About/facts-about-hm/about-hm/business-concept.html
H&M Global Strategy/Expansion Strategy, http://about.hm.com/en/About/facts-about-hm/about-hm/expansion-strategy.html
H&M Full Year Report Press Conference Presentation Q4, http://about.hm.com/end
“Outward Processing Trade.” (2012). Encyclo Online Encyclopedia, http://www.encyclo.co.uk/local/20546
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