Before Europe sank into its current economic funk, the Continent had developed a taste for the ‘cheap-but-chic’ designs offered by the likes of H&M and Zara, a trend that saw their shops opening on almost every High Street across the region.
The ongoing crisis may have hit other retailers in Europe, but fashionistas are continuing to snap up David Beckham boxer shorts and stretch-leather trousers from those same bargain clothiers, meaning the pre-crisis boom hasn’t ended for them.
Those looking for investment returns to go with their inexpensive dress may want to hunt in the same place. Throughout the global economic malaise, Sweden’s Hennes & Mauritz (H&M) and Spain’s Inditex, which owns Zara, have weathered the storm, growing their presence online; offering new clothes and accessories every few weeks; and expanding in faster-growing emerging markets such as China.
Such shrewd steps have kept sales up at these global retailers, even as the economies of Europe and the US took a turn for the worse. As a result, the stock prices of both companies have soared. But with europe dipping back into recession, can the party go on? Analysts think so, given the budding exposure to high-growth Asia.
“Both Zara and H&M have long-term legs,” says Rahul Sharma, retail analyst at London retail consultancy Neev Capital. “What makes H&M unique, alongside Zara, is geography: it’s rare to have a spread from Europe to America to Asia.”
Key to Asia
Experts see Asia as a key market because its burgeoning middle class has just started to get a taste for fashion. According to the Boston Consulting Group, sales of fashion items in China will more than triple in the coming years – to €164 billion in 2020, from €50 billion in 2010.
Inditex is doing everything it can to cash in. Going forward, the company expects to open 400 to 500 stores a year, with a focus on China and Eastern Europe. It now gets 18 percent of its sales from Asia, up from 9 per cent five years ago. The Asian drive is also goosing profits: the retailer has taken advantage of its European brand cachet by charging higher prices in the region than it does in its home market.
Inditex, with €13.8 billion in 2011 sales, keeps its costs down by centralizing its distribution in its home country, and by maintaining suppliers in Spain, Portugal and Morocco. That makes it more nimble than its competitors, who work with third-party suppliers in Asia, since its design-to-store shelf time is shorter. If an item doesn’t sell well at Zara, the company can stop its production – fast.
Inditex also benefits from a wide brand portfolio – including Zara Home and Bershka – which enables it to target different consumers, spread its risk and keep profitability up. Net profit at the company rose 12 percent in 2011.
H&M, which tends to cut prices more than Inditex does, has seen its sales rise but has had a harder time maintaining its profits. Still, analysts are bullish, given its expansion plans in China and Latin America and the buzz-worthy ranges it creates with well-known designers.
In November 2011, it rolled out Versace for H&M. The clothes and accessories in bold prints and colors proved so popular, Donatella Versace designed a similar one for the following spring.
The retailer aims to increase its number of stores worldwide by 10 to 15 percent a year. In particular, as Chief Executive Karl-Johan Persson recently told investors, there’s a “great potential” for H&M to expand in Asia.
Last year, the €13 billion retailer had a presence in 43 countries, and opened 266 new stores – 16 more than it initially expected – with China and the US among the biggest expansion sites. This year, it hopes to open 275 new ones, and launch H&M Shop online in the US, the world’s biggest retail market.
If investors want a purer play on the Asia boom, a smaller rival to consider is Japan’s Fast Retailing, which operates the brand Uniqlo and the popular work-wear Theory line. The €8.3 billion company differentiates itself by insisting it has higher-quality fabrics.
Uniqlo – with most of it stores in Japan and Asia, along with others in the US and Europe – has seen its sales jump for eight years running, and has maintained double-digit profit margins. In Asia, by the end of 2012, it plans to open 100 stores, double the number the previous year. With 70 percent of its sales revenues coming from Asia, the retailer is set to take advantage of the boom. And, given its expansion plans, “Uniqlo will do well,” says Magdalena Kondej, global head of apparel research at Euromonitor International in London. Cheap may still be chic. But it also may be prudent for the portfolio.