H&M Finally Begins Online Sales in the U.S.

By Anna Ringstrom

STOCKHOLM -- Budget fashion retailer Hennes & Mauritz launched an e-commerce operation in the U.S. on Thursday, taking on rivals in the world's biggest online market.

The initiative is highly anticipated and follows successive delays. But retail experts say H&M may struggle to make the kind of profits from U.S. e-commerce enjoyed by pricier rivals.

H&M has prospered in the United States without a big online presence and is mindful of the likely impact on profit margins of the high shipping and return costs associated with such a vast country.

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However, with more and more shoppers buying clothes from home, the Swedish firm is speeding up its online roll-out to capture a slice of the growing market.

H&M has grown fast in recent years in the U.S., its second-biggest market, but has twice pulled back from announced dates for the online launch, blaming unexpected complexities in setting up an operation well-integrated with its stores.

Meanwhile, its main rival Inditex and others such as online e-store ASOS have expanded in the market, while Amazon (AMZN) is pushing further into apparel after eBay (EBAY) prospered with its fashion offering.

"You don't want to lose out on being the port of call for younger shoppers. So H&M should really get in there," Planet Retail consultant Isabel Cavill said.

Apparel has become one of the fastest-growing online retail segments. H&M has e-stores in eight European countries and says they are now as profitable as its bricks-and-mortar shops.

In North America, a quarter of clothing sales will take place on the Internet in 2030, up from 7 percent in 2011, Goldman Sachs (GS) predicts. Researcher Euromonitor International sees the U.S. online apparel market more than doubling in a decade to $41 billion in 2017.

"Generations of shoppers are growing up for whom the multi-channel is a basic expectation," said Kantar Retail consultant Bryan Roberts.

Mind the Returns

H&M has been struggling to work out a viable logistics model in the country, where many shoppers expect free deliveries.

"H&M is low-price, quite low-margin and makes it work by selling very high volumes. An issue with that is very high costs for shipping and, most significantly, returns. It's a particular problem in the U.S.," Conlumino consultant Neil Saunders said.

Up to half of fashion items sold online are returned. At H&M, a shopper may well buy up to three times as many items than at Zara or ASOS. Analysts place average prices at Zara at least 40 percent above H&M's, with ASOS in between.

H&M's U.S. online store offers free shipping but charges for returns. Items bought online cannot be returned in stores.

"I'm particularly surprised by the lack of multichannel. Customers perceive retailers to be one company and these days demand multichannel offers such as buy online, pick-up or return in stores," Societe Generale analyst Anne Critchlow said.

"This looks like a 'soft launch' with the company perhaps hoping to limit the volume of orders initially."

All items on offer in stores will be available on the website, said Nils Vinge, head of investor relations at H&M.

Pent-Up Demand

Consultants and analysts say one likely way for H&M to support margins is to focus the website on its pricier garments.

There is pent-up demand for H&M online and the launch will make a buzz after the brand became well-known. But for a latecomer to an already crowded market, it may be a challenge to lure enough shoppers already used to other sites.

"H&M will need significant volume. That's absolutely key, and that is going to take time to build. It may take years to get to a good level of profitability, also because of the cost for the infrastructure," Conlumino's Saunders said.

Inditex and ASOS ship all goods straight from home markets Spain and Britain. H&M's model is one with regional hubs, meaning bigger costs when entering some markets, but shorter shipping distances. In the U.S., it has built a hub for the online business, the running of which it has outsourced.

Vinge said much of the marketing of the site would take place in social media and would also include cooperation with U.S. bloggers and a pop-up shop in New York.

Bank of America Merrill Lynch estimates H&M's online sales make up about 6 percent of group turnover, which last year amounted to 121 billion Swedish crowns ($18.5 billion).

Some consultants said that, for an even wider exposure online, H&M should also sell its clothes through one of the big one-stop online shops, along the lines of a recent deal between British discount retailer Primark and ASOS.

Vinge said the chain was focusing on rolling out its own online stores, but didn't rule it out. "We are very, very pragmatic. We want to be where our customers are," he said.