H&M Has Finally Moved Onto Tmall. What's Left for It to Win in Fast Fashion's E-Commerce War?

With its physical stores shrinking and its multi-brand strategy still able to do only so much, e-commerce has become the one remaining way to reach more shoppers.

A little over a year ago, asked about e-commerce, H&M's Greater China general manager Magnus Olsson still insisted that “building our own e-commerce operation is better for H&M.”

On the eve of the March 21 announcement, Olsson said H&M was finally “ready for the next step” — an official store on Tmall.

For the launch, H&M named Roy Wang its new brand ambassador in China. Appearing alongside him at the Tmall event were the model He Sui and the fashion bloggers Becky Li and Fil Xiaobai. It is the most popular way to sell things at the moment: a celebrity who brings traffic, plus internet influencers.

This Swedish fast-fashion company, more than 70 years old, is trying to find “new life” through e-commerce.

QDaily wrote about H&M's growth problem last year, in a year-end report on the fast-fashion industry. In the fourth quarter ending November 30, 2017, H&M Group's sales fell 4% — the first decline in more than 20 years. China was no better. Over the past two years, H&M's year-on-year sales growth in China has slid to 2-3%. Before 2016 it had always been in double digits, and at its post-financial-crisis peak it once hit 83%.

Olsson's argument for building an e-commerce operation in-house was not wrong in itself: it gives a brand more control over consumer data, logistics and delivery, advertising and marketing. Zara started out the same way, then opened a Tmall flagship store in 2014. H&M launched its own standalone e-commerce site only that same year, and although it has never disclosed the figures, the site very likely fell short of expectations.

That is no surprise. Shopping on Taobao or Tmall is already most Chinese consumers' first choice for buying clothes online, and Tmall now holds something close to a monopoly on the online apparel market. According to Analysys's China B2C Market Quarterly Monitoring Report, Q2 2017, Tmall took 80.7% of the 307.74-billion-yuan online apparel market, while second-place JD.com had 8.7%. Compared with a year earlier, Tmall's share had grown even more concentrated.

With this, all four of the big fast-fashion brands — Zara, H&M, Uniqlo and Gap — are on Tmall. And Tmall is still growing fast. According to data from Yunguan Consulting, sales of both men's and women's apparel on Tmall grew more than 40% in 2017, reaching 131.2 billion yuan and 78.8 billion yuan in transaction volume respectively.

Lü Jianmei, vice president of Tmall Apparel, told QDaily that Tmall's contact with H&M began at least five years ago. Two years ago H&M brought in Monki, the group's brand for younger women, first. “Monki's performance on Tmall gave us confidence,” Magnus Olsson said. “Given how successful Tmall really has been in recent years… this was a very natural step for us.”

Call it less a natural step than one forced on the company.

After 2013, H&M opened between 60 and 90 stores a year in China, but revenue per store kept falling (2015 aside). The result: in 2017 its store count grew 14% and sales grew 2%. The 2016 numbers were worse. Chinese demand for H&M, in other words, is not enough to support opening stores at that pace.

Most of the new stores went into lower-tier cities. About 37% of H&M's new stores in 2016 were in third- and fourth-tier cities. Of the 62 opened in 2017, 22 were the first H&M in their city — places like Bengbu, Langfang, Ordos, Yiwu, Xianyang and Zhangjiakou. In total, the H&M main brand has 96 stores in the four first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen, and more than 360 in second-, third- and fourth-tier cities.

These stores followed new shopping malls and commercial property developers such as Wanda and Intime into smaller cities. The developers offered H&M some attractive terms. “Low rent and low revenue-sharing rates, and in some cases even fit-out subsidies,” said one commercial property executive who has dealt with H&M's expansion department.

But by the results, H&M's attempt to keep growing by pushing into lower-tier markets does not appear to be working.

Zara was drawn in by the same idea — that third- and fourth-tier cities hold enormous growth potential — but it read the shifts and the complexity of the Chinese market earlier than H&M did.

In 2015 Zara changed its store-opening strategy in China, saying it would slow openings and add flagship stores in key cities instead. The whole group opened just 54 stores in 2016, and fewer in 2017: a net gain of 18. Most of that came from its more specialized sister brands, such as Pull&Bear and Massimo Dutti, while the number of Zara-branded stores actually fell by 10 from the year before.

With physical stores shrinking, e-commerce looks like the only way left to reach more shoppers.

Worldwide, too, H&M has paid for being late online. Karl-Johan Persson, the group's third-generation chief executive, has had to admit at an analyst meeting that “falling foot traffic in major markets like the U.S. and China” is connected, to some degree, to “rising traffic at Amazon and Alibaba.” In the U.S., H&M's second-largest market, it ranks behind Gap, Zara and Forever 21 in the online apparel market.

To show he was serious, Persson used H&M Group's investor day in February 2018 to disclose the company's e-commerce numbers for the first time. Online sales in 2017 came to SEK 29 billion, or 12.5% of total sales. The group's target is to grow online sales 20% a year and reach SEK 75 billion by 2022.

China, an important piece of that global map, is clearly part of the plan (H&M China declined to disclose how its e-commerce business there is doing). The whole fast-fashion industry has moved online far more slowly than it opened stores, but in China, H&M has been the most cautious of the lot.

Since Stradivarius arrived in May 2015, every brand owned by Zara's parent, Inditex — Massimo Dutti, Oysho, Bershka and the rest — has a flagship store on Tmall.

Gap is smaller and was the last of the four to enter China, but it launched its own e-commerce operation in its first year here and moved onto Tmall the next year, in 2011.

Uniqlo hardly needs introducing: it is the best-performing fast-fashion brand in e-commerce. It struck a deal with Alibaba back in 2009 and opened a flagship store on Taobao Mall, Tmall's predecessor. For the past four years it has been among the top five women's apparel brands by sales, and it was No. 1 in both 2015 and 2016. On Double 11 in 2017, Uniqlo's sales passed 100 million yuan within a minute. “Uniqlo's online store sold out” has become a recurring topic of conversation during Double 11 over the past two years.

Last year, e-commerce accounted for 10% of Uniqlo's sales in China, which puts its 2017 online revenue at 2.06 billion yuan — almost a quarter of everything H&M sold in China all year.

Pan Ning, chief executive of Uniqlo China, has said plainly in Fast Retailing's financial reports that “online business has expanded our fan base” and raised awareness, and that the stores have benefited as a result. Between 2013 and 2015, Uniqlo added roughly 100 stores a year in China and revenue per store still grew 25% and 17%. Fast Retailing China's overall sales growth has slowed since 2015. Even so, by last year's results, Uniqlo China's revenue per store, about 30.11 million yuan, is nearly double H&M China's, about 16.37 million yuan.

Fast-fashion brands with no stores in China at all — Topshop, Urban Outfitters, Free People — have also been quicker than H&M to notice, and act on, how much Chinese consumers like shopping online.

H&M's decision to move onto Tmall came far too late. There is almost no dividend left for it to collect.

It is now one of tens of thousands of apparel brands on the platform. The news of its arrival stayed on Tmall's home page above the fold for two days after March 21, then was washed away by Nike's Super Brand Day on the 24th. Tmall runs a Super Brand Day almost every day.

H&M did say its Tmall store drew more than 3 million visits in the first 24 hours and gained more than 1 million followers. What comes after that is harder to say. Zara, which arrived earlier, is a useful yardstick: it has almost never made Tmall's top 10 in women's apparel sales.

Counting on Tmall to reach more shoppers in third- and fourth-tier cities may also prove hard. “Those consumers in third- and fourth-tier cities — where the H&M brand may not be well known yet — might be able to find us on Tmall,” Olsson said.

But compared with first- and second-tier cities, the ecosystem in smaller cities may be harder for an international brand to adapt to. For shoppers who don't know H&M, buying on Taobao means browsing by category and searching by keyword, which makes it more likely the brand simply disappears into a long list of results. Another group of shoppers has yet to pick up the habit of buying clothes fast and discarding them fast, so their appetite for fast fashion is still weak. Meanwhile the first generation of fast-fashion shoppers has probably moved up in taste and spending power, and has far more to choose from.

Fast fashion has also been slow online because its margins are thin. Prices are low, and the logistics and supply-chain costs that come with e-commerce will eat into those margins unless they are optimized.

Inditex's 2017 report showed revenue up 9% year on year, to €25.3 billion. Online sales grew 41%, but gross margin slipped again, to 56.3%.

“We think value retailers — meaning retailers that make their money selling high volumes in large stores rather than by marking prices up — are the group most exposed to online disruption in apparel retail,” Anne Critchlow, an analyst at the French bank Société Générale, told BoF. “For retailers like this, trying to sell through online and offline channels at the same time seriously erodes profit.” Because H&M's prices are so low, she argues, the extra logistics costs of expanding online are what have held it back.

In an interview with QDaily, Olsson denied that growing e-commerce would push profits down. “From the figures we published last year, online is 12.5% of sales for the group and contributes 22% of profit. That's a pretty good result. Not many other retailers make much money from their online business.”

Still, growing online does affect low-priced fast-fashion brands to some degree. That is why Uniqlo has been pushing buy-online, pick-up-in-store lately — to save on last-mile delivery. Just as its rivals are refining the mix of their online revenue, H&M is arriving in an already crowded Tmall apparel market.

Its best-sellers alone say something about the brand and its product mix. Three of the five best-selling items in H&M's Tmall store (as of noon on March 25) were 39.9-yuan T-shirts. The most popular items in Uniqlo's and Zara's online stores include collaborations with KAWS and Inès de la Fressange, and fashionable sock boots priced above 300 yuan. What competitive edge, or brand positioning, the flagship H&M brand actually has — the brand the group leans on most — is worth thinking about.

H&M's strategy for a long time has been to expand by opening stores: build scale, push production costs down, drive revenue. A Euromonitor report calls it the most successful fast-fashion brand at claiming territory over the past five years. But it lags Zara in supply-chain optimization and in using retail data, and it is some distance behind Uniqlo in fabric development and brand positioning.

H&M is speeding up its multi-brand strategy, but for now those brands contribute little to growth. On top of COS, &Other Stories, Cheap Monday, Monki and Weekday, in 2017 H&M launched two more “lifestyle” brands, Arket and Nyden. The “new business” division that holds these seven is performing much better than the flagship brand, and at the investor day H&M was far happier to talk about them. It plans to grow the new brands 25% a year and reach SEK 50 billion in sales by 2022.

In mature markets, variety and individuality really are important trends in how people buy clothes, and the effect has begun to show in China's first-tier cities. But a multi-brand strategy is not enough to solve H&M's crisis in the short term: 93% of its sales still come from the main brand. And H&M has been more cautious than Inditex both about bringing sister brands into China and about opening stores for them. So far it has introduced only two, Monki and COS. Distant water cannot put out a nearby fire.

Falling sales, thinner margins, a battered share price: H&M, Zara and Gap all share these problems now, and all three are counting on e-commerce to turn things around.

More and more people buy their clothes online. Euromonitor puts online sales at 14% of the global apparel and footwear market in 2016, worth $231.7 billion. In the world's major economies the share is higher still: 15.5% in the U.S. in 2016, 18.7% in the U.K., 25.9% in China. Measured against that 14% global average, the only fast-fashion brand that has taken a real share of the online apparel market is Gap, with 20% of sales online; H&M, Zara and Uniqlo have not.

Inditex plans to slow the growth of its store floor space, and has sold stores outright, to build its online business. Fast Retailing says it wants to become a “digital consumer goods retail company”; in China, it plans to have online account for 30% of sales by 2021. And don't forget the brands born online — ASOS, Boohoo, and China's crop of Taobao-native and influencer labels such as Qian Furen Jia Xueli Dingzhi and Zhang Dayi's Wu Huanxi — which are the bigger beneficiaries of that 14% today, and are younger and quicker.

Fast fashion's competition online has sharpened. This is the start of a new round.

Graphics: Feng Xiuxia

Image sources: H&M, staff photography