It’s a shockingly large number of course and more than enough to spook investors, who drove the H&M stock price down to a 13 year low on the revelation.
It is, as CEO Karl-Johan Persson puts it, with commendable Scandic understatement, a "tough start" to the year. But, he argues, that’s true of the wider fashion market as a whole:
The fashion retail market is in rapid change. At the core of this change [is] digitalization, which is changing customer behaviors and driving customer expectations constantly higher. This development is bringing both opportunities and challenges.
He promises that for H&M 2018 will be “a year of transformation” with some significant tech and digital investment. Despite that mountain of unsold clothes, there is a lot going for H&M, he argues:
Today we have eight strong brands. And just like H&M, our New Business portfolio is profitable, offline as well as online. The New Business portfolio today includes seven brands, all with their own unique identity. In addition to this, we have great strength in all our shared group assets, such as our supply chain, all the data we have in the group, our tech foundation, our sourcing capabilities and all the scales and support from the multi-brand functions and country organizations, just to name a few.
There is work to be done on the physical H&M stores, admits Persson, in order to offer “a more inspiring and convenient customer experience for the local customer”. This work is underway, albeit at a tentative pace:
We are in the process of testing new store concepts that [are] only in test for pilot phase and they are small-scale, but they are showing really positive results, both in terms of customer feedbacks and sales. So we will do more tests during the year and then the plan is to start scaling this up during the latter part of 2019…we see that customers appreciate new digital features that we are adding such as image recognition and also personalized product feeds, just to mention a few things.
As for online sales, Persson says that H&M has beefed up its game to improve the consumer experience:
This includes everything from higher speed to improved navigation and extended payment options. We're also speeding up deliveries for online purchases. We also want to create a frictionless shopping experience by integrating the channels. This will enable convenient and more flexible services such as Click & Collect, Scan & Buy and online return in stores. Looking ahead, our omni-channel strategy will make our entire assortment even more accessible, which will benefit customers regardless of where, when and how they choose to shop.
He adds that online expansion is also on the corporate agenda:
We are broadening our online assortments. We’re rolling out our online stores to more markets as well as linking to new platforms. In March, both H&M and H&M Home launched successfully on Tmall in Mainland China. We had high expectations, but we exceeded the high expectations. It was a fantastic launch. Also in March, H&M opened online in India where customer reception has been very good. This means that H&M now has e-commerce in 45 markets, a number that will grow further this year and beyond.
All of this, offline and online, is going to mean more investment in tech. Persson contends that much has already been achieved on this front:
One key enabler also for future growth is our whole tech foundation. We have invested heavily in our backbone for a number of years, so now we have a robust and scalable foundation that will benefit the group for many years to come. This will also enable faster development of consumer-facing apps and digital experiences.
The strategy for this is to use technical structures such as cloud, APIs and micro-services. We're also expanding our use of technical solutions, such as RFID and 3D. In 2018 and over the next few years, we will be rolling out RFID on a large scale.
There are a number of tech priorities on Persson’s ‘to do’ list, not least improving supply chain management:
We have, together with internal and external experts, maxed-up to optimize our sourcing [and] the logistics network to ensure even more speed, flexibility and efficiency. In addition to this, we are also investing a lot in automated warehouses. For this, we have done for our warehouse in Netherlands, Sweden and Poland.
By these initiatives, some already up and running, we're increasing capacity and efficiency and most importantly, we shortened the time from order placements to delivery to customer. By optimizing our logistics network, we will also be able to increase product availability and further ahead reduce stock levels in relation to sales.
Analytics and - inevitably - Artificial Intelligence are also areas of interest, adds Persson:
We see a very big potential here across-the-board from assortment planning to supply chain and sales. The areas we are investing in are trend detection, quantification and allocation, price management and personalization. Our ongoing projects in this field already show very good results and sales uplifts.
Now if only he could shift that pile of unsold clothing…
Every time I’ve been into an H&M store it looks like a jumble sale gone wrong, with clothes scattered everywhere. It’s one of the reasons I find the brand rather daunting and not a welcoming customer experience. So anything that can be done to improve the in-store layout and look-and-feel is to be welcomed. The tech investment is also clearly a worthwhile push. But for the short term, that €3.2 billion worth of unwanted inventory needs to be shifted. The problem is, once you start slashing prices, it’s a slippery slope…