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FRUGAL FASHION

Overcoming initial stumbles, H&M continues U.S. expansion

BY ED MCKINLEY

Three years after a splashy American launch in New York City, Sweden’s “cheap chic” apparel retailer H&M is nearing profitability on its U.S. operations as it branches out across the country.

Furthermore, its bold invasion of a market notoriously forbidding to foreign retailers is inspiring other European merchants selling high fashion at low prices.

H&M, a 56-year-old chain that operates 893 stores in 17 countries, has opened 56 units in the United States and plans to add at least 10 here this fall and more next year. Having established stores in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania and the Washington, D.C., area, H&M moved into Richmond, Va., and Chicago last month. Toronto units are in the works for early next year.

Despite the expansion and a few setbacks in the suburbs and some smaller markets, the chain is reportedly nearing profitability in its U.S. operations, while earning the loyalty of a fashion-minded but thrifty legion of Yank shoppers and alerting other value-oriented European apparel merchants to the charms of doing business here.

H&M isn’t the first international chain in recent years to bring the newest styles to the New World at reasonable prices. That distinction belongs to Zara International, the Spanish retailer that arrived here in 1987 and now has 10 stores in this country, including five in New York City, says Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide, a Manhattan brokerage that handles retail real estate nationwide.

“Zara really brought cheap chic to America, because they knocked off all the designers, but H&M branded it,” Consolo said. “Zara grew quietly, but [H&M] made a big splash in a huge store in a highly visible location on [Manhattan’s] Fifth Avenue, and they’ve expanded aggressively. They weren’t the first ones to do it, but they made it famous.”

Famous enough — with the help of ad campaigns packed with hip actors and celebrity models — to help attract other European purveyors of bargain-priced fashion to the American market. Netherlands-based Mexx, which Liz Claiborne Inc. bought two years ago, was poised to open its first U.S. stores last month in New York City. Mexx expects to open even more units.

Meanwhile, three more European chains with a similar approach to retailing are negotiating for space in the United States, Consolo says. She declined to name the chains, but said they are based in France, Sweden and the United Kingdom.

The proliferation of players doesn’t necessarily indicate an impending shakeout. “The market’s not flooded yet,” said Consolo. “It’s the right time for this kind of fashion. Why? Because they’re priced right. Today the American consumer is very much a cost shopper. These stores aren’t deep-discount. It’s just well-priced merchandise, and it moves quickly.”

The three already here offer attire for women, men, teens and children, but not for every group at every store. H&M has the lowest prices, with an average tag of $18, while Zara tends to charge between $60 and $100, and Mexx falls in the middle, Consolo says.

H&M doesn’t manufacture garments, but it employs 95 designers, as well as sourcing about half its merchandise in Europe and half in Asia. The chain (which takes its name from hennes, the Swedish word for “hers,” and Mauritz, the name of an outdoor retailer it purchased) uses daily deliveries to keep the stores fresh and give shoppers a reason to return often.

As one customer put it on a Web site devoted to shoppers’ reviews of H&M: “The store has enough of a range to allow freedom of fashion expression without having the painful side effect of too many zeros before the decimal point.”

Walter Loeb, a New York City-based consultant and the president of Loeb Associates, calls H&M’s offerings “disposable fashion.” Customers, he said, “can buy it on Friday for an event on Saturday and get rid of it on Monday if they want to.”

One snag: Americans don’t always fit into clothes that are cut for European bodies.

Despite all the talk of fashion, basics constitute an important part of the H&M mix, says Karen Belva, director of marketing at H&M’s New York City office. “There’s a misconception that the store is just for really fashion-forward young people,” said Belva. “Walk into an H&M store and take a look at the collections and you can find anything from your basic white button-down and basic T-shirts, jeans and a pair of khakis to younger, hipper, more fashion-forward garments. You find something for everyone from newborns to adults.”

Exactly which parts of that all-encompassing inventory shoppers will find in a particular store depends upon the square footage and the location, Belva says. H&M emphasizes fashion in the 10 to 12 freestanding stores in city centers and in some of the suburban mall stores, while in the more conservative suburbs and in smaller markets, basics prevail.

With mall stores ranging from 7,000 to 25,000 square feet or more and freestanding city stores reaching upwards of 40,000 square feet, H&M has to pick the consumer groups it will serve in each store, because all of the collections won’t fit into the smaller ones. That’s why some stores cater to women and children, for example, while others are targeted to teens, Belva says.

Women’s departments tend to take the most space because of the need for maternity clothes, plus sizes, leisure wear, classic basics, fashion, intimate apparel, cosmetics, accessories and the “young collections” for shoppers 16 to 30, Belva says.

According to some critics, a few early iterations of the U.S. stores had configurations that confounded shoppers. Customers might see trendy men’s clothes on the first floor of a store, for example, and not realize that H&M stocked basic jeans and T-shirts one level up.

Determining the merchandise assortment for each market takes time, and H&M apparently has yet to address the daunting task of getting the sizing right for Americans, who tend to need larger clothes than Europeans, says Lois Huff, who oversees softgoods tracking at Columbus, Ohio-based consumer retail research firm Retail Forward. So far, H&M doesn’t have enough stores in the United States to warrant sizing that’s specific to this country, she notes.

An even bigger challenge occupying the thoughts of H&M executives, however, is the necessity of figuring out the American real estate market, Huff says. In Europe, she notes, location isn’t so puzzling. Retailers merely set up shop on High Street there and devote their attention to merchandise and marketing. To succeed in the United States, store executives have to ponder the desires of local clientele and study the nuances of downtown locations and suburban shopping centers.

H&M has had to cut back on the size of some units while watching more closely what it spends on rent.

H&M came to America with a desire to learn the subtleties of real estate before undertaking a huge expansion, says Huff, but some miscues have occurred just the same. The chain hasn’t closed any American stores, but it has cut back the size of some. H&M is learning to avoid high rents and make better decisions, she says.

Speaking at a conference in New York City this year, Steven Roth, chairman and CEO of Vornado Realty Trust, H&M’s Manhattan flagship landlord, said the store does $40 million a year in sales, and pulled in $65 million in its first year.

Some of the lessons haven’t come easily, however. The press has seized, for example, upon H&M’s space problems at Carousel Center, a mall operated in Syracuse, N.Y., by The Pyramid Cos. The two-level H&M store there, big enough to qualify as one of the mall’s anchors, proved to be too large, according to some accounts. H&M says part of the upper level is now used for storage. The store has been reduced from 44,000 square feet to 31,356 square feet.

Livingston (N.J.) Mall, a Simon Property Group project, also netted H&M some bad publicity when critics decried the tenant mix as too downscale for H&M.

False starts aside, H&M, which posted worldwide sales of $6.6 billion in the fiscal year ended in November, reportedly will begin breaking even on American operations later this year. U.S. sales rose 23 percent last year to $242 million, up from $197 million in the previous fiscal year.

H&M can expect to fare well wherever fashion reigns, says Garrick-Aug Worldwide’s Consolo, and that consideration seems paramount in the chain’s immediate plans for expansion into two of America’s premier shopping destinations in Chicago.

H&M opened a store last month in the 43,000-square-foot space on Chicago’s North Michigan Avenue formerly occupied by FAO Schwarz and Express for Men. The store will put H&M in the company of a flock of retailing powerhouses, observers say.

A 27,320-square-foot, two-level store was slated to open about the same time in Taubman Centers’ Woodfield Mall, in the Chicago suburb of Schaumburg. The 2.27 million-square-foot mall, the area’s largest, bills itself as the state’s No. 1 tourist attraction, with 300 stores.

“H&M is a destination store that will draw traffic to the mall, and Woodfield is a destination center that will draw traffic to H&M,” said Marc Strich, Woodfield’s general manager.

The retailer is looking for more sites in the Chicago area, says H&M’s Belva, while it expands southward from Washington, D.C., into Richmond, Va., with a store in the open-air Short Pump Town Center, opened last month by Forest City Enterprises and locally based MJGT Associates.

Forest City says the 1.2 million-square-foot mall, which lists Dillard’s, Hecht’s, Lord & Taylor and Nordstrom as anchors, “will define style in the Richmond area.”

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