H&M needs digital meatballs on the menu, but struggles with the recipe

Remember that enormous pile of unsold clothes that was giving retailer H&M a major problem a few months back? Well it’s still there and the clothes mountain is getting bigger and in the way of the firm’s omni-channel plans.

In an update to the situation, H&M had to report that it’s unsold inventory globally now has a price tag of 36 billion Swedish Kronor ($4 billion), up 13% year-on-year.

The problem is behind the scenes as the fashion retailer tries to get to grips with transitioning to a new logistics back-end while also pushing to accelerate its digital efforts, an area in which it failed to invest early enough and is now playing catch-up.

While online sales grew 17% year-on-year in the most recent quarter, that’s coming from a low base point. Overall sales have been badly hit by the inventory issues, as H&M chief executive Karl-Johan Persson explains:

As part of our transformation work we are transitioning our logistics systems to make our supply chain even faster, more flexible and more efficient. These transitions are complicated and result in temporary interruptions as unfortunately occurred during the second quarter in some of our major sales markets. This negatively impacted sales in the US, France, Italy and Belgium as well as online sales in the Nordic region.

Yet in a number of markets, sales developed positively; in Sweden, Norway, Denmark and Eastern Europe we grew considerably faster than the market. This shows we are on the right track and that our digital investments and improvement work are starting to have results. Overall, however, total sales for the quarter were not satisfactory, which meant that inventory levels were still too high at the end of the period.

Back end

So what’s the issue with the back end problems? Persson says it’s multi-faceted:

When it comes to the supply chain and IT and logistic transitions, there are several parts. One is the online transitions that we’re doing to the new platforms [across] eight countries. We have done the transition for seven years, so one country remains. Initially, we had some technical issues with the transitions, but those have been solved. The latest countries that we have done, we have done in a very good way without any disturbances.

What will happen now in the U.S. and some of the Southern European countries, [is they] are connecting to the warehouse management systems. There have been some technical issues connected to the integration between the warehouse management system and automation in the warehouses. These are things that we have solved, I mean, the clear majority of it...of course, we’re learning along the way as well when it comes to working with teams and so on.

Once this phase is complete, a period of stabilisation seems to be in order. Persson says:

During the autumn, we will not transition more countries. With the warehouse management systems, we will make sure that we stabilize what we have and that we’re prepared well for other countries that will follow during 2019. So, with us during the autumn making sure that all countries are well prepared, we feel confident that we can do the countries for 2019 with less or no disturbance.

It’s clearly all been a major pain point for the retailer, but a necessary one, insists Persson:

The automation of the warehouses and the whole logistic systems will make us faster. So, we will have quicker deliveries to customers online, we will have quicker throughput to the stores. It will increase transparency. It’s th efoundation and enabler for things like RFID. It will help us to be more flexible between tenants and between markets. And in this work, we’re also further segmenting our products close, so differentiating between super quick orders and replenishment orders, so helping in that sense as well. So,[there are] many improvements coming from the automation of the warehouses, warehouse management systems. Unfortunately, [it meant] disturbance now in the quarter but still something that is great for the company.

There are some ambitious elements involved in the warehousing strategy, he adds:

[What] we’re doing [is] mapping up the whole logistic network, the automation of the warehouses, the new warehouse management systems, the new product flows, the sourcing network and so on, and also the work we do connected to Artificial Intelligence and advanced analytics. When it comes to quantifying and allocation, all-in-all it will lead to a lot of good things for the customers.

It will lead to increased sales by allocating better, by forecasting trends better for example, by speed to market and so on...but obviously improved sales, improved profits, lower markdowns, less -- lower inventory levels in relation to sales. That’s what we’re aiming for...we are making a lot of investment in the logistics, in the whole supply chain, to become even faster, more flexible and efficient. That should help as well. And also, in the AI tools that we have invested in today, to be able to quantify better, to allocate the better, and also when it comes to price management, just to mention a few things.

Digital

Looking at the customer-facing front end, digital catch-up remains the order of the day. Persson outlines the priorities:

Looking at the online store. We are focusing mainly on enhancing the product presentation to make the experience [better] and also personalizing our apps and our sites. We are improving various functionalities, such as payment options and deliveries. When it comes to the integration of the physical and digital channels, this work includes improvements and rollout of features such as Click-and-Collect, online returns, in-store and online shopping in-store.

Click-and-Collect is a good case-in-point to demonstrate the laggardly approach H&M has taken to digital. It’s still regarded as an experiment and to date only available in the UK, a poor state of affairs when contemplating omni-channel retail in 2018. Persson is somewhat defensive here:

It’s just one of many important omni-initiatives. During the test phase and the rollout phase in the UK, it has been well-received, appreciated by customers and also good for H&M. So, therefore, it’s something that we are rolling out to many more markets during second half of 2018 and then global rollout during 2019. In addition to that, we’re obviously also improving the service, so that not we not only expand with it, but we also improve it.

He adds that there is also experimentation around AI and analytics underway:

We have good indications from a number of tests in this area within personalization, quantification and allocation, price management, and also trend detection. It is worth pointing out though that as these are still pilot projects, effects are yet too small to be seen in our overall performance. But, with these investments, we’re building something very valuable for the future. And therefore, as our test results are very promising, we will scale this up for more markets and more concepts.

The H&M Club loyalty scheme is now a year old. Again, it’s a case of late to market and a CEO who doesn’t seem that keen on opening the lid on this too far at present:

When it comes to the H&M Club, sorry...but we don’t want to go into the exact details on the financials or the different KPIs connected to that. But, it’s something that we have worked with in the number of markets for many years and built up a big group of loyal customers. We are improving the club and we’re rolling it out to new markets. We’re introducing free shipping and free returns, much appreciated by customers, something that we have tested before rolling it out.

The reason we’re rolling it out, of course, it’s the customers and again it’s something that is financially good for H&M. So, all-in-all, we’re happy with the club. More and more customers are joining the club, and it’s something that we see as a long-term important thing for our company.

My take

There’s an awful lot of ‘jam tomorrow’ going on here. What H&M needs is some Swedish meatballs to chew down on; what we’ve got is a lot of mince and a recipe for meatballs that’s taking too long to cook through. Still, if H&M is your thing when it comes to fashion, the inevitable ‘fire sale’ to clear that clothes mountain is going to be a lot of fun.