The crisis of H&M

H&M is in a crisis that is causing the lowest profits for 16 years. It is above all the strategic mistakes that are causing the company problems.

Weak start into 2018

The Swedish fashion company H&M made a weak start this year. Based on the figures published on Tuesday, the company's turnover declined only slightly to 23 billion Swedish kroner, or 2.3 billion euros. On the other hand, pre-tax profit fell by 60 percent, so that it was still at 1.2 billion kroner. The consensus of the analysts provided for a profit of 1.4 billion dollars. The Swedish fashion group has not had to report a lower profit for 16 years now.

According to Karl-Johan Persson, CEO of H&M, the start to the year was particularly difficult. Commenting on the quarterly figures, he noted that 2018 was only a transitional year for H&M. The strong growth of online fashion retailing in particular is causing margins to fall. It is therefore not surprising that the company is pushing ahead with digitization, so that growth of 25 percent can be achieved in this area. For the year as a whole, however, Persson expects an increase in profits compared to the previous year. In addition, the long and cold winter ensured that the current spring collection, which was already in the stores, was not well received by customers. For this reason, the company had to grant high discounts and accept lower margins.

Concession to the wrong strategy

At the Investors' Day in February, Persson admitted that many things are not going well at the moment. The Swedish company overslept the online business in particular, so that many customers have migrated to Zalando and Amazon. In addition, more and more young customers are moving to fashion discounters like Primark. The increasing distribution of outlets and market approval of discount chains such as TKMaxx are leading to increasing competition from above.

The interplay of these challenges is probably also the reason why the Swedish fashion manufacturer's share already lost a third of its market value last year. Whereas at the beginning of 2017 the H&M share was still traded at CZK 255.10, it is now quoted at CZK 124.60. Furthermore, only two out of 32 analysts surveyed see further price potential at H&M. The mismanagement of recent years in particular has repeatedly caused negative headlines. The latest example: accusations of racism due to the "Coolest monkey in the jungle" campaign. Global outrage caused negative headlines and a declining brand image. In addition, H&M used to pursue a clear low-price policy. Meanwhile, the company is neither particularly inexpensive nor particularly clever in marketing.

New sales strategy to stimulate business

However, the most important reason for the weakening business can be identified as the changed purchasing behaviour of young customers. Many young buyers prefer online trading and buy from companies such as Zalando, Amazon or ASOS. According to analysts, this deficit in online trading is currently the company's biggest weakness.

In order to overcome the current phase of weakness, Persson wants to fundamentally change the company's strategy. New sales channels such as online shops or new formats such as Afound are expected to turn the corner. In addition, the company will in future rely on a modern shop concept. So far, these statements have not been sufficient for the shareholders, so that the company management has had to face fierce criticism.