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H&M's sales collapse in March is indicative of a wider trend - Coronavirus isn't going to drive up online sales in every retail sector

Stuart Lauchlan Profile picture for user slauchlan April 6, 2020
Summary:
Online grocery sales may be booming in the Coronavirus crisis, but other sectors, such as fashion, aren't likely to enjoy the same uptick, as H&M is proving.

H&M store

Amid the talk of the Coronavirus crisis fuelling a potential boom in digital retail, it’s already clear that not all retail sectors are going to be equal. While online food shopping has seen a huge uptick in demand, to the extent that the supply chain has buckled under the unprecedented pressure, other non-essential areas are less likely to enjoy the same.

I'm still drawn to a recent comment made by Simon Wolfson, CEO of mid-range fashion retailer NEXT, who commented:

People do not buy a new outfit to stay at home.

I speculated that with offline non-essential stores closed that there might be some glimmer of hope for the likes of NEXT:

Possibly, although ‘lockdown buying’ could become the new ‘drunk buying’ depending on how quickly boredom thresholds are passed during the current crisis.

But that’s looking to be an overly optimistic view at this particular point in the current public health emergency. For its part, NEXT is among a growing number of retailers to shutter its online as well as offline outlets - and it’s not going to be the last.

According to stats for March from AI commerce platform provider Nosto, research across  271 companies in the US, UK, Germany, France and Sweden indicates a 30% drop across the month in online sales across fashion, apparel and accessories retailers.

In fact, all e-commerce KPIs were down year-on-year, visits, orders, average order value and conversion rate. The scale of the decline varies from country to country. For example, the US has seen the largest drop in order value (8%) whereas the UK has only recorded a 2% decline. Equally conversion rates in Sweden may only be down 4%, but in Germany the comparable number is a hefty 28%.

H&M

The conversion rate in Sweden might provide some crumb of comfort to that country’s flagship fashion icon and world’s second largest clothing retailer, H&M, which has just reported a 46% plummet in sales for March. In common with the overwhelming retail majority, H&M has shuttered most of its store, some 3778 out of a global tally of 5065, including in its bigger markets, the UK, US and Germany.  On the other hand, the company has kept 47 of its 51 online stores open which for March resulted in digital sales growing 17% year-on-year. That’s not a strong enough counterweight to the loss of offline business to prevent the next few months being hugely rocky for a firm that’s enjoyed more than its fair share of omni-channel transformation troubles in recent years.

Nor is it enough to confirm a sustainable ‘trend’ that might carry the retailer through the current crisis, although CEO  Helena Helmersson spins the highly optimistic vision that is an inevitable part of the job description for a new Chief Executive:

We believe that, the big change in consumer behavior that we are seeing now will further speed up the rapid digitalization of our industry….we do believe that the digital shift then will probably happen a bit quicker than before because of that, because of some customers that have not been shopping online before are starting to do that now.

Hmmm, maybe yes, maybe no. But the harsh reality is that while that 17% March growth rate is a positive that can be pointed to when there aren’t that many other options to choose from, it has to be placed against the online revenue growth figure of 48% year-on-year that was announced as part of the last full quarter’s numbers.

There’s also the unanswerable question at this point of how long it will remain sustainable to keep the online operation at its current capacity. Other retailers have found themselves shuttering their online arms through lack of business, lack of supply chain agility or concerns about the public health issues surrounding the back end warehouses and fulfilment centers without which no e-commerce business can function.

Sweden has notably taken a different tack to handling the Coronavirus crisis, not - to date - pursuing the societal lockdown that has become the norm elsewhere. Again, how long that is sustainable remains to be seen, but Helmersson insists that H&M is adhering to regulatory and policy advice around the globe:

When it comes to digital operations, of course, first of all, we follow the recommendations from the authorities in each market to understand and to keep on having the safety for our staff as the first priority. In those countries, 47 out of 51, where we can, we do see that we drive successfully some activities when it comes to increased flexibilities to be able to give the service and the products to the online customers going forward. We also, of course, revisit to optimize the commercial activities in our digital channels to meet the customers where they are and keep on delivering the best customer offer to them.

As to whether she’s seen any pressure from social media or trades unions to shutter the back end warehouses, she fails to provide a direct answer:

I would say that following the authorities, of course, they are the ones that have the best overview and can give the best recommendations. So I think, to a great extent, that's what many stakeholders do and have a good dialogue with them in how to deal with the situation. So I would say our first priority when it comes to where we stay open and where we have fantastic colleagues who still kind of go to work, and that is really to make sure that they feel protective and that we take the right measures in that, but it seems like many stakeholders also have that kind of trust and listen to authorities' recommendations.

Read that as you will. But the CEO is more blunt when it comes to assessing the current situation and suggesting what actions need to be taken:

With each day that we must keep stores closed, the situation is getting tougher. To lessen the negative impact, we are taking a range of forceful measures in areas such as purchasing, investments, rents, and staffing.

These aren’t long term changes in direction, she emphasizes:

Being in a crisis, we have to shift focus so that we are decisive and take the right short-term measures to adjust to the situation. That does not mean that we put all the strategic areas or we decide not to do them. It's just about the pace, meaning that some of the strategic areas and the priorities will simply have to shift and some initiatives will have to be postponed.

However, I would say that this crisis highlights the need of really ongoing focused work, sometimes even accelerated work in some strategic areas. For example, when we now see the digital shift and many customers who have been shopping in physical stores now going to online and the need for the omni experience, I would highlight. And of course also strategies going forward when it comes to making sure, we're a sustainable business with different revenue streams, which is another part that is important for us, where we still keep on working, but again, it's about the pace.

One challenge that H&M will want to avoid is coming out of the crisis with a lot of unwanted inventory. It’s been down that route before when it found itself with €3.2 billion of unsold stock. As a ‘fast fashion’ firm, it needs to have stock on its shelves and online that rotates quickly. To that end, while it has stated that will still accept and pay for existing contracts with suppliers, new orders have been put on hold for now. Helmersson says:

When it comes to the supply chain flexibility, again, the most important thing for us has been to act fast and to adjust our purchasing according to the decreased demand.

There’s one other bright spot in H&M’s current situation and that’s, ironically enough, China where most of the group’s stores have now re-opened and sales have started to rise. This may provide a playbook elsewhere, suggests Helmersson:

When it comes to learnings from China, yes, definitely that is spread to other markets in different ways. I would mention it's more our approach when it comes to our amazing colleagues and the people in how to do that in the right way, when having more closed stores. But of course also we can learn from them, reopening and what kind of actions to take when welcoming all the customers back again in the different channels.

My take

Much as I’d like to buy into Helmersson’s belief that out of this current nightmare will come a faster move towards digital retail across the board, sadly I find it about as credible as the Swedish lack of a lockdown. Having made sound digital transformation investments in the past may provide some short term ballast to counter overall decline and certainly those who haven’t spent wisely there will be at a disadvantage.

This week is likely to see UK retailer Debenhams - a veteran of digital ‘dad dancing’ as we’ve put it in the past - head into administration.  Meanwhile UK fashion retailer Arcadia Group, which owns brands including TopMan, TopShop and Burtons, has cut back its online operating capacity. In the US, Macy’s has just furloughed 130,000 of its offline workforce, while promising fewer cuts in its digital arm, for now.

Meanwhile others are rolling out emergency measures, such as Kohl’s which has introduced a Drive Up + Pop Your Trunk Pickup service which involves limited contact between employees and customers as the name suggests. That’s a good attempt at mitigating the damage wreaked by the Coronavirus, but overall the picture for the omni-channel fashion retail sector looks pretty grim.

One positive on which to end - H&M has temporarily switched parts of its supplier production to making personal protective equipment for hospital staff. For that at least, the firm should be applauded and its actions remembered when the current crisis is over.

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