H&M – Expansion Strategies

1.0 Introduction

According to H&M annual report 2012, H&M is one of the world’s largest fashion companies and an exciting place to pursue a career within the fashion industry. Their business concept is to offer their customers fashion and quality at the best price, and with more stores and new markets added every year the group is constantly growing. This means that they’re always looking for new talents to join the team. The H&M Group employs over 104,000 people and there are more than 2,800 stores spread over 48 markets in Europe, North America, Asia, North Africa and the Middle East.

Their design team, pattern makers and buyers work together to create a broad band varied range of inspiring fashion. Fashion collections for women, men, teenagers and children are complemented by shoes, accessories, cosmetics and even home textiles. The diversity of the collections means H&M has fashion for all. Efficient decision-making and flexible assortment planning ensure that the product range is always adapted to the latest trends.

Next, considerable resources are devoted to increasing sustainability. H&M does not own factories, but instead buys products from independent suppliers and works to bring about long-term improvements for people and the environment such as in the supply chain, the garment lifecycle and the communities in which H&M is active.

Moreover, with a strong offering that appeals to customers around the world, H&M is able to grow successfully in all its existing markets as well as in new ones, with growth among all its brands and through new concepts. H&M has selected wholly-owned subsidiary and franchising as their mode of entry in current expansion strategy is that H&M is financed entirely by H&M’s own resources. H&M using different current expansion strategy in different country such as in a politically stable country, H&M has gained competitive advantage of low risk and constant profit margin.

2.0 Current Expansion Strategy

H&M’s current expansion strategy involves opening 10-15% more stores per year. H&M’s current expansion is mainly increase the number of stores under its brand includes H&M as well as COS, Monki, Weekday, Cheap Monday, & Other Stories and H&M Home. The mode of entry of H&M is in form of wholly-owned subsidiary as well as licensing. The image below is current expansion of H&M in the world.

The world of H&M

Source: http://www.hm.com/cz/abouthm/theworldofhm__worldofhm.nhtml

2.1 Wholly-Owned Subsidiary

H&M has selected wholly-owned subsidiary as their mode of entry in current expansion strategy is that H&M is financed entirely by H&M’s own resources. In Singapore and Malaysia, H&M has entered in 2011 and 2012 respectively by establishing own stores. The main reason why H&M establishing Wholly-owned subsidiary in that particular countries is that they are politically stable. This is because in a politically stable country, H&M has gained competitive advantage of low risk and constant profit margin in the above countries. It is like a free market system to enter because in such country the relationship between benefit, cost and risk can be balanced well.

This is the same goes to United States and Canada. Another reason why H&M choose Wholly-owned subsidiary instead of franchising in country like Canada and United states is in order to have a tight control on every store. Its benefits for H&M is that such entry mode cannot help a firm reduce the risk of losing control over the competence, but also can make it have tight control over operations different countries that is necessary for engaging in global strategic coordination. On the other hand, the location can be realized, the curve economies can be experienced and the stock of the subsidiary can be shared 100 percent by the firm.

However, H&M bear the full costs and risks of setting up overseas operations especially such as United States, Canada, Malaysia and Singapore. H&M, in each market for example United States and Canada has to face kinds of competition from international and local retailers, individual stores and also department stores. Most importantly is wholly owned subsidiary has caused H&M to compete with other consumption such as travel, home electronic and so on. All these cost are the downside of wholly owned subsidiary of H&M. But, it is just a minor problem since H&M is financially strong firm. H&M has not used franchising in the country mentioned because franchising is suitable to use only when the country to be entered is politically unstable or higher barrier to entry. This will further discuss in the next part of current expansion.

2.2 Franchising

As mentioned above, H&M was mainly chooses the wholly subsidiary entry mode and franchising were only suitable to use when the country to be entered is politically unstable or facing barriers to entry. Even though there was some policies that make H&M unable to establish wholly owned subsidiaries in Middle East, H&M had decided to enter Middle East and partnership with franchisee Alshaya on year 2006. The reason of H&M chooses to enter partnership with franchisee Alshaya is because of Alshaya were the biggest retailers in the Middle East region. According to Hill (2007), franchising entry mode means that the franchiser (H&M) sells the intangible property like stock to the franchisee (Alshaya) and also has the right to control or run the business in the country.

According to Marknadsetablering (2008), the main reason for H&M to franchising in cooperation with Alshaya is because of the rules and regulation that set by the country. That is because of Middle East country had set a rules for the foreign companies that wish to invest in their country. The rules and regulation is the foreign companies cannot establish wholly subsidiary entry mode in the country and they need to franchisee with a local partner that owner at least 51% of shares in the business.

Another reasons for H&M chooses to corporate with Alshaya is because of they wish to make Middle East country like Dubai, Kuwait and Qatar be more high economic growth and great purchasing power. Other than that, the political situation is stable in Middle East country. In this situation, H&M were able to have 10 franchise stores in Qatar, Dubai, Kuwait and also able to expand into new Middle East countries like Saudi Arabia, Bahrain, Egypt and Oman.

Moreover, it is less risk when H&M choose to be franchisee with Alshaya. With franchisee with Alshaya, H&M can extend its business to the foreign country slowly by get the information from the franchisee. It is benefit to H&M because can be better understand about other countries’ rules and regulation before invest in the countries. That is because of different political and legal system that linked to Muslim values, different education system, business environment, industry structure and culture, and the marketing infrastructure for each countries are different. For the example, H&M have to provide different range of product to follow the clothing restrictions resulting from Muslim religion when they enter to Middle East markets.

3.0 Future Expansion Strategy

H&M future expansion strategy involves venturing into new market and focusing on expanding more stores throughout the world. There are many countries like the Eastern Africa and South America. The mode of entry of H&M is in form of wholly-owned subsidiary as well as joint venture.

3.1Wholly-Owned Subsidiary

H&M has selected wholly-owned subsidiary as the mode of entry in future expansion because of H&M own resources. In Asian countries H&M are concentrating on 80 percent of its manufactures, so H&M would like to expand its production with the suppliers to Ethiopia. One of the reasons why H&M is establishing wholly-owned subsidiary because of the strong development and there is good job opportunities. Establishing wholly-owned subsidiary will help to lower down the unemployment rate in the country. Furthermore, H&M has done an intensive risk analysis in Ethiopia regarding to the human rights and environmental issue.

Besides that, the reason why H&M wants to establish wholly-owned subsidiary in Ethiopia because the Sub-Saharan Africa’s has possible way to become low-end manufacturing place, especially with the increasing cost in China. Report shows that labor cost in Eastern Africa cheap compare to the labor cost in Asia countries. H&M has set 1 billion targets in textile export by 2016. This move will be beneficial to both H&M and the economic growth in Ethiopia.

Expanding the company is another reason why H&M wants to establish wholly-owned subsidiary in Ethiopia. As the numbers of stores worldwide is increasing, H&M decided to increase sources through all markets in order to compete with their competitors. H&M as growing company must have the ability to deliver to all their products to all their stalls in order to have a rapid pace in expansion. In the country capital of Ethiopia, H&M has established an office in 2012 which has been engaging test orders with the supplier. Many of the new factories there have started large scale of production. With constant economic growth, H&M is planning to spend one million clothing a month from Ethiopia despite the country remains one of the world poorest country.

3.2 Joint Venture

Besides using wholly-owned subsidiary, H&M is also using joint venture as the entry mode of strategy in their future expansion. A joint venture is a business in which new firms are formed to achieve some specific objectives of a partnership like an agreement between two or more firms for a finite time, a new entity and new assets by contributing equity. The Swedish retailer, H&M was touting its ongoing success to implement sustainable initiatives. Across the globe, H&M gave its sheer size – now at 2,853 stores and counting in 49 markets. H&M’s environmental footprint maybe decreasing but the fashion chain is getting ready to break into another market: India. H&M can also set up a joint venture with the company in Ethiopia in future expansion for the company as H&M are currently venturing into the country Ethiopia.

H&M, the world’s second-largest apparel retailer after Zara-owner Inditex, the parent company of Zara, has a foray into India with 3 Indian firms which is Textile major Arvind Ltd, Reliance Industries – owned Reliance Brands, and Delhi-based luxury fashion retailer, Genesis Colours. These few retailers actively continuing to push global expansion .H&M has been searching for potential retailers in Ethiopia to joint venture to manufacture and sell their clothing for future expansion of the company.

H&M is applying to open stores in India in order to join a rush of international retailers and looking to expand in Asia’s third-biggest economy on the back of government liberalization measures. The reason is because of in single brand retail, India allows 100 percent foreign direct investment (FDI), a route with H&M would take to enter this market just almost like its Swedish peer furniture retailer IKEA. India represents a significant opportunity for clothing chains and also makes sense for a global player like H&M to seek and expand business there. Moreover, there is no reason that the fast-fashion and value-oriented model shouldn’t work in India. For our chosen country, Ethiopia is a country with strong development. H&M believes that they can sustain their economic growth and also the job opportunities in Ethiopia.

Besides, H&M is also seen as a fast-fashion retailer with a very high ratio in collection changes and the prices are lower for trendy products as their competition. H&M’s collections are very adventurous and fashionable. For instance, as a joint venture of H&M in India, brand attributes are required. For example, constant arriving of new products, stores expanding, new campaign, making constant surprise for customers and so on. As for Ethiopia, H&M expand its business to Ethiopia by making Ethiopia one of its suppliers by building factories in the country. Ethiopia has rich and long history in textile and leather production. Therefore, for the future expansion of the H&M in Ethiopia, H&M can search for some retailers which is going internationally and globally so that they can have a joint venture in order to globalize the products of H&M.

3.3 Licensing

At the same time, H&M is also using licensing in her future international expansion in Ethiopia. A licensing agreement is an agreement where a licensor grants the right to intangible property to another party for a limited period and in return the licensor receives a royalty fee from the licensee. (Hill, 2007, p489). H&M can use licensing as one of the strategies to enter Ethiopia by building new factory for H&M supplies. In Ethiopia, H&M as a licensor to grant the right for its intangible property such as brand, production process to local factory for a specified time to supply its products. There are few evidences that support H&M using licensing to build its supplies in Ethiopia. One of them is the economy of Ethiopia has been growing since 2007 at times with double digit grow. The economy will experience annual growth of 7-8 % through 2016. As a result, H&M is no need to worry about employment rate of its factory since there is more and more labor supply for the factory. In addition, Ethiopia’s government is placing priority on the textile industry and by year 2016, the country aims to export more than a billion dollars of apparel. Thus, factories established by H&M are welcomed in Ethiopia. (Martin Koch, 2013)

Furthermore, another reason is cheaper labor cost. H&M is trigger to compete in a cost competitive apparel industry facing competitors such as Zara and Gap. But recent increase in social standard among H&M existing supplies bases especially China has increased H&M production cost, so H&M need to start considering its new option in Ethiopia where cheaper and lower than in China in term of labor cost. Besides, there is huge number of labor force with 80 million people living there. The Location is strategic in Ethiopia because it’s near the sea as well as quick to get to Europe via the Suez Canal. This would result in giving competitive advantage for H&M since it shorten delivery time compared to china and furthermore the climate in Ethiopia is suitable for cultivate cotton too. This will giving advantage for H&M in term of cost.

4.0 Conclusion

As a conclusion, H&M a based fashion company which is one of the largest fashion company in the world. We able to observe that H&M is keep on improving from time to time. There are two current expansion strategies that H&M used in order to make their business more efficient. One of the strategies is H&M implemented wholly-owned subsidiary which will help them gain competitive advantage of low risk and constant profit margin in the specify country. Besides, H&M also expand its business via using franchising when the country to be entered is politically unstable or facing barriers to entry. For example, H&M partnership with franchisee (Alshaya) is because of Alshaya were the biggest retailers in Middle East region.

In order to expand in the future, joint venture mode is the strategy that usually being used. It is normally used when they entered the international markets. Moreover, H&M should make changes from low to higher entry strategies during they make investment. Internalization of entry mode able to aware those from risk, commitment from those resources, evolve with the international knowledge accumulation on investment location.

Last but not least, image of a company is very important for every company. This is because it will affect their expansion in the future and communication within those brokers. Till now, H&M image is still in every people mind because it is quite strong enough. Everyone also think that H&M is a type of Fashion Company. So, a great image of a company will really will bring confident to those buyers.

1