Fashion retailer H&M has said it will invest heavily in its supply chain and launch a new brand after a drop in profit caused it to stumble behind rival Zara.
The Swedish company reported a 3% fall in first-quarter net profit from a year earlier. Its main rival Zara, meanwhile, reported a 14% rise in net profit for the fourth quarter of last year, as well as record annual sales.
In its report, the world’s second-biggest fashion retailer said conditions had remained very tough in key European markets and in the US, with shopping behaviour and expectations changing rapidly.
A Goldman Sachs report revealed H&M’s supply chain lead time was twice as long as that of Zara-owner Inditex. Inditex has enjoyed double-digit sales growth due to a logistics and business model that allows the retailer to get designs into stores faster.
Most of H&M’s production is in Asia. Inditex, however, has production in countries closer to its largest markets. This gives it the flexibility to respond to sales trends, according to Market Watch.
H&M chief executive Karl-Johan Persson told Reuters his company’s supply chain practice had become stagnant and it needed to move production closer to end-markets.
“To meet the rapid change in fashion retail, we need to be even faster and more flexible in our work processes, for example as regards to buying and allocation of our assortment,” he said.
“We are therefore investing significantly in our supply chain, such as in new logistics solutions with greater levels of automation, but also in optimising our lead times. [It] is about moving to Europe as well ... to get faster deliveries to Europe.”
On top of the supply chain investment, the company will spend more on integrating stores with online sales. Persson said the company’s investments were in line with the changing behaviour of customers.
The retailer also said it would launch a new brand called ARKET, which will include cafes and a small assortment of home products in a higher price segment than its core range.
Anne Critchlow, an analyst at Société Générale, told the BBC that ARKET was “an attempt to get away from value fashion and into the lifestyle segment, which is more differentiated”.
However, Tiffany Hogan, senior analyst at Kantar Retail, said the Swedish retailer would have to look further forward to take over its rivals.
“I think it’s more important that H&M keep tabs on their shopper and be able to deliver strong assortments via shopper data and analysis,” she said.
H&M’s first ARKET store is due to open in London in autumn 2017, followed by outlets in Brussels, Copenhagen and Munich and online offerings in 18 European countries.
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