H&M KEEPS IT HUMMING

Byline: Anne D’Innocenzio / Thomas J. Ryan

NEW YORK — Can Swedish retailer Hennes & Mauritz keep the crowds coming?
Since making its debut in the U.S. on March 31 with a 40,000-square-foot flagship at 640 Fifth Avenue, the traffic in the store hasn’t subsided. On the weekends and most lunch hours during the week there are still lines of shoppers — ranging from Gen Y’ers to baby boomers — that wrap around the outside. And inside, the store is jammed with customers jostling for the latest bargain, from $19 pink bikinis to $25 black crochet dresses. There’s still a 15-minute wait for a dressing room and a 10-minute wait to check out.
“I am surprised, but apparently the shoppers like what they see,” said Richard B. Hodos, president of HGCD Retail Services LLC, a real estate concern. “I am amazed at the frenzy. In some respects, I don’t understand it. But H&M has a wide variety of items to choose from, though we are not talking about investment clothing. These are things you can wear once or twice.”
Maybe so, but H&M’s disposable chic formula is playing right into the heart of the U.S. consumer, who is already bombarded by The Gap, Old Navy, and Ann Taylor Loft as well as thrift shops.
“I still can’t believe it,” said Par Darj, president of U.S. operations for H&M, noting that H&M’s opening in the U.S. has been the most successful of all of its new launches. “We were concerned about all the competition, and how we could get through the media landscape here.”
The retailer, which sells women’s and men’s clothing, large sizes, accessories and cosmetics under 20 different labels, spent $22 million to open the Fifth Avenue flagship and has spent an undisclosed amount in consumer advertising. This spring Chloe Sevigny is plastered in its ads. For summer the new face will be Giselle.
While the Fifth Avenue flagship has done “extraordinarily,” the other two U.S. stores — a 35,000-square-foot store at Palisades Mall in West Nyack, N.Y, and a 14,000-square-foot store in Garden State Plaza in Paramus, N.J. — have also performed “above expectations,” according to Darj.
H&M has already run out of some items, like the $95 leather red leather pants and the $169 leather trench coats. And the fast-fashion women’s line called Clothes has been the biggest hit with consumers, Darj said.
The three new locations are only the start of the big blitz for the $3.9 billion retailer, which operates 700 stores in 12 other countries. In October, H&M plans to open a 40,000-square-foot store on 34th Street between Fifth and Sixth Avenue. Within two years, H&M plans to open a 35,000-square-foot store in the former Alexander’s site on Lexington Avenue and 58th Street. And they’re scouting for a location in SoHo.
As for those long waits in the dressing rooms, the company now has limited the number of garments to 10; previously there was no limit. Darj also pointed out that there are plans to add more cash registers to reduce the lines.
Despite all the frenzy, H&M faces several challenges as it attacks the U.S. market, including proving it can build repeat customers once the buzz dies down and it loses its “new kid on the block” advantage. Keeping those registers clacking is key to H&M’s low-cost/high-turnover strategy.
Analysts also said H&M would be breaking the mold to become the first European apparel retailer to find true success on U.S. soil. Only the Gap is said to have found success as an international specialty apparel chain. Finally, while H&M has clearly been a hit in the metropolitan New York area, some wonder whether H&M’s fashion concepts would work as well in the malls of Middle America, where trendy fashion might be less appealing. “They can keep it going in major urban markets. Their opportunities lie in Brooklyn and Miami because of their diverse urban populations,” said HGCD’s Hodos. “But it remains to be seen how it will fare in Pittsburgh and St. Louis.”
Todd Slater of Lazard Freres noted in a recent report: “While the H&M model appears to be successful within the pan-European framework, and the Gap, which represents more ubiquitous fashion, is working in Europe and Asia, it is unclear if this trendy, Scandinavian import can be successful in the U.S., a country with much more competition and vastly divergent tastes than Europe. Crossing the global fashion divide has proven treacherous for most players.”
On the other hand, the potential impact of H&M’s expansion on U.S. retailers remains blurry, because H&M has not spelled out how aggressive they plan to be in opening stores here. Although most European analysts have the chain opening about five U.S. stores per year, others said H&M may ramp up 50 to 100 a year.
Darj said that the company also plans to target cities on the East Coast over the next two years. He declined to offer a specific number.
“If they only have 50 stores in five years, it’s going to be very different than if they have 300 doors,” said Dana Eisman Cohen, at Donaldson Lufkin & Jenrette.
But Wall Street so far has nothing but praise for H&M’s initial entry into the U.S.
“The buzz is amazing,” said Faye Landes at Thomas Weisel Partners. “The store location at Fifth Avenue is wonderful. It’s definitely on everyone’s list. It was serendipitous that they came right when all these different colors are in fashion.”
She added, “People know at these prices you are not going to get incredible quality. So I’m actually quite bullish, particularly in terms of how the concept has captured the consumer’s imagination.”
“They really know how to romance the product,” said Leslie McCall, an apparel analyst at Brown Bros. Harriman, who was particularly impressed at the dichotomy between the prices and luxury looks of high ceilings, glass and lilies. “The whole architecture is sending a message of luxury and beauty, and then you look at the price points and there’s almost a disconnect, so it makes it all very compelling.”
Analysts said H&M has clearly filled a void in the market for fashion at cheaper prices.
“You’re getting fairly leading-edge fashion at an opening price point so as you look about the landscape of American retailing, there aren’t a lot of apparel concepts that are doing that,” said Richard Baum, at CS First Boston.
Analysts are still wondering exactly who H&M’s competition is. Many believe that those most vulnerable to the H&M juggernaut are trendy fashion retailers focusing on the younger crowd such as Bebe, Deb Shops and Urban Outfitters.
Old Navy, which analysts said most closely resembles H&M’s low-price, high-volume format, would also be a competitor, although Old Navy carries a much heavier basics mix. Finally, many mass chains that sell at opening price points — including Target, Kohl’s, J.C. Penney and Sears — would likely feel pressure from a fashion-forward competitor in a more customer-friendly specialty store format, particularly with its prices.
Department stores are also expected to be vulnerable.
Even analysts, who spend their days poring over business models, were curious how H&M could make money given its low prices. While the lines out the door won’t be necessary, analysts said H&M’s low-price, high-turnover format will continue to need to develop a loyal following to keep volume churning.
“You’ve got to do a lot of volume at that price point,” said First Boston’s Baum. He noted that stores like Old Navy and Children’s Place show that a profitable, low-price specialty store model is feasible, but he said it’s not easy.
“You really need to make at least $300 per square foot to be profitable in a mall, and these guys are selling their product at about half the prices of the Gap. So they need to do twice the volume as the regular mall-based store.”
Clearly, H&M’s prices are the big differentiator from its competitors.
A report by Salomon Smith Barney found that H&M is decimating the U.S. competition on price. The study, based on a visit to stores on April 24, found that a sampling of six similar items was 13.2 percent more expensive at Old Navy than at H&M; 38.5 percent more at Lerner NY; 77.7 percent more at Express; 80.9 percent more at the Gap chain; and 99.5 percent more expensive at Ann Taylor Loft (see chart).
Maura Hunter Byrne, Salomon’s specialty store analyst, concluded that H&M is “uniquely positioned, offering almost entirely high-fashion garments with a minimal basic assortment, cheap prices, albeit lower quality garments than American counterparts.”
A hot fashion cycle featuring a variety of styles, colors and fabrics is clearly providing a significant boost to H&M’s launch, and analysts said a big test is how H&M will fare once the cycle inevitably shifts back to basic, conservative looks. Compared with such chains as Old Navy and The Gap, H&M has a trendier fashion content.
Landes of Weisel noted that some fashion cycles “can go on for a while,” but she noted that a pullback on demand for fashion could hurt the “economics” of H&M’s concept since it relies so heavily on volume, particularly to pay its heavy rents.
But Darj remains optimistic that H&M will remain viable, even if the fashion cycle turns to basics.
“We are very close to the market,” he said. “We listen to trends. Whichever trends are moving, we will move along.”