H&M's US president reveals the retailer's plan for the future - and it includes a lot less discounting
- H&M has struggled in recent years as more nimble online stores take market share.
- Business Insider recently spoke to Martino Pessina, the newly appointed president of H&M's US operations, about the store's plan for the future in a new era of retail.
- Pessina said H&M is looking to invest in artificial intelligence to stay ahead of trends and create a more personalized customer experience in stores.
In the early to mid-2000s, H&M was a global leader in fast-fashion retail, churning out cheap and fashionable clothing to a willing audience.
But more recently, it has come under pressure as new stores have popped up online and replicated its model with speedier supply-chain times that enabled them to roll out trendy items more quickly.
These pressures began to show up in the company's financials in 2016, when sales growth started to falter. It culminated in H&M's biggest sales slump on record in the last quarter of 2017, at which point its share price slumped and key investors began selling off stock. As customers shopped elsewhere, inventory began to pile up, and clearance racks became a mainstay at H&M's stores.
Toward the end of 2018, the retailer's fortunes seemed to be turning around - sales grew, and its stock price soared at the beginning of the fall. But investor confidence was short-lived, and analysts began to speculate that the rapid sales growth was likely down to heavy discounting as H&M pushed to clear leftover stock. As a result, the stock price fell once more at the end of 2018.
Earlier this month, Business Insider spoke with the newly appointed president of H&M's US operations, Martino Pessina, who was previously its head of global sales. In our conversation, Pessina emphasized that H&M is well on its way to recovering after a tumultuous year and has a plan to get ahead in a new era of retail.
"We are in a much better place," he said, comparing H&M's inventory position today versus 2017 and 2018. He said that 90% of the clearance racks in stores today are reductions from its most recent fall collection.
"The really old stock? That's gone," he said.
Fewer discount racks and a more personalized shopping experience
Pessina likened discounts to a sugar addiction and said it's very hard to wean customers off of them. Despite this, he was adamant that discounting is not what the H&M brand is about.
"It is not in line with our business idea," he said. "Deals kill creativity. It's a shortcut you do and it's great, and next year you have to do it even bigger, and then all of a sudden, all you do is deal planning."
H&M is not alone here. Heavy discounting has been the flavor of the past decade among many retailers.
"It's almost like a drug," Tiffany Hogan, a retail analyst for Kantar Retail, told Business of Fashion in 2016, when discounting was prevalent. "We're on this 40% off drug that we pulse every weekend or even more frequently. What happens when you take away your promotions? Your shopper just kind of melts away because you know that you've trained them to come back on that 40% off day."
In order to curb the discounts, H&M needs to not only create products that are relevant and fashionable, but also make them in the correct quantities.
When it comes to creating fashionable items, there are two factors at play: it needs to have a better grasp of what the customer wants and set the trend, and it needs to have an efficient supply chain to ensure that there are no delays in getting these new styles to the customer, ideally ahead of its competitors.
In the first instance, the company is looking at how to use artificial intelligence to predict fashion trends and tailor the assortment in each store to create a more personalized experience.
"It becomes a pull system as compared to a push system," he said, adding that in the not-too-distant future, what you see in one New York store might differ from what you see in another nearby.
By creating a more personalized shopping experience, H&M could also trim down on the number of items it offers in the store.
"If you are able to be more accurate, then you are able to skip all those products that the customer doesn't want," he said.
But all of this is redundant if the brand doesn't have a speedy supply chain to support it.
"Sometimes you see things, but if you're slow at bringing them to the stores, it doesn't matter. It is more often a question of speed rather than the wrong idea," Pessina said.
And in a world where some stores can bring new items from design to sale in just over a week, H&M's once speedy six-month turnaround doesn't quite cut the mustard.
To tackle this, H&M is not only focusing on making its supply chain faster - some items can come from design to store in as little as five weeks - but also investing in making it more flexible. This means being able to be fast when needed and slow what it's not needed, Pessina explained.
Read more: The biggest difference between Zara and H&M explains why one is thriving while the other is flailing
Dealing with inventory
When a company the size of H&M makes fashion mistakes or overproduces, it's not something that can be easily swept under the rug.
Its only real option is to bring these items to its full-price stores or sell them through its outlet centers
(In the past, it has also been accused of burning excess inventory in a plant in Sweden. H&M strongly emphasized that this did not include usable clothing - only clothing that was unsafe for consumers.)
But excess clothing takes up valuable store space, puts pressure on margins, and creates a less appealing shopping experience for customers. Plus, it's an unwanted distraction for the brand.
"When you have too many garments you focus on getting rid of garments, rather than into promoting new garments," Pessina said.
To handle this, the company is looking to invest in radio-frequency identification (RFID) technology to manage inventory levels. This technology would enable H&M to track in real-time exactly what stock each store has, which means it can guarantee size availability without having an overwhelming amount of garments.
Pessina said that this is currently being tested in six countries. But it's already behind the likes of Zara, which has rolled out RFID globally.