The last year has proved a brutal Darwinian shakeout in the world of fashion retail, accelerating the demise of once dominant players like Arcadia and threatening the primacy of Zara-owner Inditex and H&M Group.
Over the pandemic, the high street landscape has polarised: newer, digital retailers like Asos and Boohoo soared, while many legacy brick-and-mortar retailers suffered. In a sign of the changing power dynamic, these online players have capitalised on decline of already distressed brands like Topshop, Warehouse and Oasis, snapping them up out of administration at favourable prices.
The fast fashion giants that have dominated the market for the last two decades have not emerged unscathed. Though H&M Group and Inditex had the size and balance sheet to withstand a year of turbulence, lockdowns shaved roughly 20 percent off both companies’ revenue in 2020. They also continue to face challenges, with key markets in Europe still emerging from the pandemic. Net sales at H&M Group fell 21 percent year-on-year for the quarter ending February 28, as around 1,300 of the group’s stores remain closed. Meanwhile, about 15 percent of Inditex’s near 7,000-strong store network remains closed.
Of course, H&M Group and Inditex remain two of the biggest fashion companies in the world and, despite falling sales, have held onto their global market share as the broader apparel industry contracted, according to data from Euromonitor (in 2020, Inditex was the third-largest apparel and footwear retailer behind Nike and Adidas, with a global marketshare of 1.6 percent, according to the research firm. H&M Group had a 1.2 percent share). Asos and Boohoo remain small in comparison, with a much less global footprint. Nevertheless, both H&M Group and Inditex will need to continue to adapt to a fast-changing fashion landscape to maintain their stronghold on the market.
“It’ll be about being able to compete with the likes of Asos and Boohoo in terms of [services like] delivery speed,” said GlobalData retail analyst Emily Salter. “Asos definitely is an important competitor for both H&M and Inditex, especially now it has Topshop.”
Going into the pandemic, the retail landscape was already in flux. Ultra-fast fashion players were shaking up the sector, by delivering trendier styles at a faster pace and for lower prices compared with what many brick-and-mortar legacy players were offering.
H&M Group and Inditex were already scrambling to adjust, pouring substantial investment into digital upgrades over the past decade. But going into the crisis, online only made up 14 percent of sales at Inditex and 16 percent at H&M Group. Both remain heavily dependent on large store networks, which left them vulnerable when lockdowns first hit.
Meanwhile, fast-growing digital rivals Asos and Boohoo Group gained fresh momentum over the past year. Lockdowns were a boon to sales and customer acquisition, while even shorter lead times allowed them to react more quickly to pandemic-driven trends, like last summer’s surge in demand for tie-dye sweatsuits and fashion masks.
To be sure, a return to normal trading will significantly lift the prospects at traditional brick-and-mortar players. Analysts expect that once lockdown restrictions begin to ease, H&M Group and Inditex will benefit from increased demand both in-store and online, as shoppers, eager to return to pre-pandemic lifestyles spend on new wardrobes for parties, holidays and even returning to the office. Both companies expect that the vast majority of their store networks will be able to reopen by mid-April.
“Once we start seeing stores reopen there’ll be two kinds of boosts: one will be pent up demand back to stores, but also I think there’ll be a bit of pent up demand online because people will just have more reasons to buy fashion,” said Bernstein analyst Aneesha Sherman.
Over the pandemic, the high street landscape has polarised.
But how and when this will happen is hard to predict. European countries like Italy and Germany are battling a fresh rise in Covid-19 cases. Even in countries where restrictions are beginning to ease, it’s hard to predict how fast a return to stores will take hold. Digital will continue to be hugely important — especially when it comes to enhancing the in-store experience to make shopping easier.
“People are still not going to be hugely comfortable about going to shops, and depending on whether we’ll be able to try on clothes as well when stores are open will massively affect the [consumer] shift back to stores,” said Salter.
To keep a hold of their dominant market positioning longer term, Inditex and H&M Group will need to leverage stores to support online offers, said Richard Chamberlain, managing director of general retail at RBC Capital Markets. This means doubling down on ship-from-store capabilities to steal share away from weaker specialist retailers, independent retailers and department stores, he said.
Inditex has made good progress on this front over the last few months. In June, the retailer committed to invest €1 billion ($1.2 billion) in digital by 2022, and by the end of 2020 completed a project to integrate its stock to allow in-store inventory to be used to fulfil online orders.
Next up for transformation is the store experience itself, which will be digitised through the brand app via easier product discovery, fitting room reservations, in-store mobile payment and other customer services.
“The goal ultimately [is] the rollout of the store in your pocket,” CEO Carlos Crespo said on an earnings call last week.
H&M Group said it is also continuing to invest in digital capabilities to integrate its online and in-store businesses. In 2020, the group ramped up its roll out of click and collect services and in-store returns for online purchases, the latter of which will continue to introduce into more markets this year. It’s also planning to shrink its store footprint this year by 250 stores.
“We will have different formats when it comes to stores, depending on whether it’s a big city or a small city, and [we] will have to look at what kind of role a particular store contributes,” chief executive Helena Helmersson told BoF last year. “It’s about looking at the customers and their needs, like how should we work with local relevance, for example.”
Analysts and investors are betting both Inditex and H&M Group will enjoy a healthy sales rebound as the world emerges from the pandemic. Shares in the two companies have risen 9 percent and 26 percent respectively since the start of the year, but both giants will also need to continue to innovate and adapt to market changes at pace going forward.
“Being agile to changing situations, in terms of what consumers will want, is really important,” said Salter.
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