H&M Sets Up Shop in China

By Kathleen Kingsbury / Hong Kong

Madonna has invaded Hong Kong. The pop megastar's likeness adorned most of the city's billboards this spring, her music was piped through its subway stations, and baseless rumors had crowds lining up for nearly a mile down Queen's Road to catch a glimpse of the Material Girl in person.

Madge was a no-show, but the long lines lasted for weeks. The draw was her line of trench coats, kimono dresses and catsuits for the Swedish retailer H&M, which debuted on March 10 at H&M's newest store in Hong Kong and in April at H&M in Shanghai. In these cities, shopping is as important as stargazing, and that's why the $2 billion firm made its first moves into Asia here: H&M wants a share of China's $60 billion apparel market. To do that it may have to redefine its trademark "cheap chic" aesthetic.

The potential of the Chinese market is so large that H&M's need to capture it is obvious. McKinsey estimates that by 2025 there will be 220 million upper-middle-class households in China's cities, defined as those making $5,000 to $12,500 a year, in contrast to 23 million households in 2005. Less clear for the company, says retail analyst Raphael Moreau of Euromonitor International, is "how much it will have to reinvent itself to make an impact."

In the U.S. and Europe, H&M has a formula that works. "We offer the best value for your money," says H&M chairman Stefan Persson. H&M is synonymous with the concept of "fast fashion"--trendy clothes at prices so low that the clothes are all but disposable. While the styles may be impulse buys, the company has maintained a disciplined, conservative approach to expansion that has turned H&M into Europe's second largest retailer in little more than a decade. Today H&M has 1,400 stores in 28 countries, including 114 in the U.S.; there it is still a small player, but its $687 million in sales last year has retailers such as Banana Republic, Wal-Mart and Abercrombie & Fitch all launching fast-fashion initiatives.

But China's free spenders may be looking for something else. China knows a thing or two about cheap clothing, and when its consumers buy foreign brands, they want what they can't find at home. "It's a fatal mistake to discount for the Chinese customer," says JPMorgan analyst Vineet Sharma. "Young people want clothes that aspire to luxury. H&M should concentrate on that mid-market, where there's still room to grow."

H&M's biggest opportunity is in its pioneering use of celebrity designers such as Karl Lagerfeld and Stella McCartney. For the "M" line from Madonna, the singer worked with H&M designer Margareta van den Bosch, but it's clear whose name Chinese shoppers are looking for. "I'd buy almost anything Madonna designed," said Anne Yeung, 22, an architect trainee, as she waited in line in Hong Kong last month, "and so will all my friends."

Marketing expert Tom Doctoroff, head of greater China for ad agency JWT, says brand names are particularly effective in China as its nouveau riche try to emulate the West's fashionistas. "The halo effect can be very powerful here," he says. "Most retailers are just now following H&M's lead in this area."

Going upscale has worked well in Asia for H&M's main rival, Inditex's Zara, which opened its first store in Hong Kong in 2004. It carefully selects store locations in luxurious shopping centers, marketing itself as a rival to designers like Armani. Inditex's regional sales for its 59 Asian stores last year amounted to $1.1 billion, or 9% of the company's revenue, up from 7.5% in 2005. The Spanish company is often credited with inventing fast fashion, a business model that moves garments from the design table to stores quickly. Zara's clothing designers work closely with factories on the back end and marketers on the front end to deliver new products, replenishing merchandise every two weeks. Inditex introduced more than 30,000 designs last year alone.

H&M has struggled to compete with Zara's short turnaround time, but that advantage largely disappears in Asia. H&M sources more than 60% of its products in the region, more than half of that from China, compared with Inditex's 34%. "H&M has been in Asia as a manufacturer for 30 years," says retail analyst Henrik Schultz of Danske Equities in Copenhagen. "It has a broader choice of suppliers, and strong relationships already in place. For perhaps the first time, it can set the timetable for trends."

Hong Kong and China are only H&M's first stops in Asia. Three more stores are planned for Hong Kong this year, and two in Shanghai. As a sign of how China has come to dominate the Asian retail market, Japan has taken a backseat. H&M will open its first store there by 2008. Other possibilities, like Singapore, are in the works. "We're taking things slow to start out, but we're clearly not going into Asia for 10 stores," Persson explains. "The potential for the market is just too huge."