Fast Fashion Disruption With Shein and H&M

0:17Hello and welcome to The Debrief from The Business of Fashion, where each week we dive into our most popular BOF professional stories with the correspondents who created them. I'm executive editor Brian Baskin. Shein has shaken up the fashion industry like few brands before it. Known for its ultra-fast production, ultra-slow shipping times, and shockingly low prices, Shein has torn up the playbook for how a fashion company is supposed to operate and left established players scrambling to adapt. Today, we're exploring two facets of this disruption. First, we'll look at how H &M, which not so long ago was in Sheehan's role as the industry's resident disruptor, is trying to reposition itself in a market that's been irrevocably changed.

0:58Then, we'll look at another milestone in Sheehan's rapid rise. The company overtook Inditex, the owner of Zara, as fashion's biggest emitter of greenhouse gases, with more carbon dioxide emitted in 2023 than H &M and LVMH combined. I'm joined today by two of our correspondents who have been closely following these stories. Kat Chen, who recently spoke with H &M's new CEO, and Sarah Kent, who has been reporting on Shein's environmental footprint. Welcome to The Debrief, Sarah and Kat. Thanks, Brian. Happy to be back on The Debrief. Yeah, so excited for this conversation, Brian.

1:39so let me take you back to the early 2000s in sync was on top of the charts y2k fears had just receded into history and h &m opened its first u.s store on new york city's fifth avenue marking the start of its worldwide expansion h &m was already established in europe with trendy clothes aimed at a young, fashion-conscious audience eager for the latest styles without breaking the bank. And many big American brands like Gap and J.Crew would not know what hit them. Now, I remember at the time, I was living in Arkansas in my first newspaper job. And if I was going to a city that had an H &M, I would literally plan a visit into my trip.

2:18And one time, I even asked somebody who was visiting me in Arkansas to bring me clothes from H &M because it was going to be so long until I could go back to that store. Now that I've made that embarrassing revelation, let's fast forward to today. H &M is still very big, but it feels like it's fighting to stay relevant. And maybe it's losing. Between 2018 and 2023, sales were virtually flat at$23 billion. Kat recently spoke with H &M's new CEO, Daniel Herver, a company veteran who took on the top job in January in a surprise move. So Kat, before we get into what he's been up to these last six months, how did H &M lose the plot?

2:59You know, it's really interesting to have seen its trajectory over the last 10 years, because like you, Brian, I was really, really into H &M when I was a high school student in the late 2000s. And there was an H &M that opened in not even my local mall, but a mall in Pittsburgh that we would have to drive to. But anyways, I think the biggest thing is that over the years, H &M has had competitors from the lower end of the spectrum, and then it has had competitors on the higher end of the spectrum. and it's been sort of smushed in the middle between Shein, which is ultra fast, ultra, ultra cheap, and Zara, which has become more premium, commanding higher prices, really elevating their assortment and the look of the brand.

3:54And H &M has been stuck in the middle with kind of a muddled identity. And at the same time, H &M has really struggled to compete on trends. Both Shein and Initex leverage a lot of data, a lot of scraping what's trending on the internet to inform their designs, whereas H &M has always relied on its team of hundreds of designers to dictate what products look like. And sometimes that can result in really special products, but in other times, it's not hitting on what customers actually want. And just to emphasize how successful the strategies of H &M's two biggest competitors have been, Zara about a decade ago was about the same size as H &M, maybe a little bigger.

4:44And in that period I talked about where H &M sales were flat, Zara's grew by 27%, even with Shein entering the market. And now they're almost twice as big in terms of annual revenue. And Shein, which didn't exist a decade ago, has already surpassed H &M with over$30 billion in revenue last year. Let's focus on Zara before we turn to Shein. Why didn't they fall victim to the exact same forces that undermined H &M? I think it's obvious if you go to Zara.com how differentiated that shopping experience is. It really does feel premium. I mean, Zara's been working with Stephen Mizell on photography.

5:30It's tapped Karl Templer, a pretty famous stylist for capsule collections. All the while, you know, it is a more premium price, but it's not so far out of the range that H &M plays in either. And so you're really feeling a strong value proposition of something premium at an affordable price. And honestly, the product is just very exciting. And I think at the end of the day, Zara has, for a lot of consumers, unbeatable products. I think it's also worth sort of just remembering here also that we're not talking about entirely the same business models. If you think about H &M, it's really, although it's contrasted with Inditex, Zara's owner, a lot in terms of size and scale, it really sits more in the more traditional retail model of a Gap, a J.Crew, this model that's really struggled over the last few years.

6:29Zara, by contrast, is the original fast fashion player. And by that, what I mean is before Inditex came and turbocharged this model, as Kat referenced, they were using data very smartly to test and repeat and drop lines faster, quicker, bring clothes to market more swiftly and more in line with the trends. And so Inditex was also able to adjust more swiftly to the pressures and variations that have come to bear in the industry over the last decade. So after the financial crisis in 2008, 2009, H &M was left with this huge overstock of inventory that overhung its business for years and years and years.

7:13And Inditex was much better at managing its inventory. And that's been a big part of how the two companies' fortunes have diverged as well. So it seems like Shein's model is most similar to Zara, but Zara figured out if we have this premium or editorial branding, that helps differentiate us from Shein and it helps us hold on to our customers. H &M doesn't seem like they've quite figured out the answer to that. Now, Kat, I imagine you put some of these very questions we're asking here directly to H &M's CEO. What did he say? Well, the answer was pretty surprising. Sarah had been on the interview too, and we explicitly positioned H &M in the dilemma of this middle position, this very difficult middle position.

8:01And the answer was pretty explicitly that they were doubling down on this position of wanting to offer something to everybody. They're actually expanding their price points on the lower end and on the higher end to emphasize their stature as the middle of the road, maybe not middle of the road, that that's not how they would say it, but as the fast fashion player that, you know, someone who shops at Zara could maybe find something in there, but someone who shops at Shein could find something just as affordable as well. So let's look at sort of best case, worst case for this strategy. What are the merits of doubling down and trying to carve out that elusive middle as we put it in the headline?

8:48I think that value and price are effective in bringing in customers. Cheaper retailers will always have a wider base of customers and that base reduces as you go up the range of prices. And I think that if H &M can deliver on the lower end of the spectrum, which is cheap basics, basics under$20, then I think the products will sell. And then on the higher end, I think they're focusing on this new creative direction. A few weeks ago, they wiped their Instagram. And since then, they've only posted images from this new fall campaign. It's shot by Sam Rock, who's done a lot of editorial work. And they are introducing this new H &M look.

9:45It's very sleek. They've tapped Charlie XCX to host this big party during London Fashion Week. And so they're definitely trying to tap into the cultural conversation. And that's going to help with the top end, the top range of the customers that they're trying to reach. I think there's some merit to that. I mean, they're basically saying we're cheap like Shein, but there's a baseline of quality and editorial judgment that Shein definitely doesn't have. And I think there's a certain customer who that might appeal to. I think there's some risks there, though, starting with there's plenty of other retailers.

10:25Primark is one that are making that exact same case right now. Now that is a very crowded market and seemingly a very easy one to enter. What are some of the other challenges to this strategy, Kat? I think the hardest one is reminding customers again that H &M can be an exciting retailer because it's been so many years since H &M has occupied that kind of real estate in relevant cultural fashion. But for what it's worth, on the product end, they have changed processes. They have empowered their design teams to streamline decision-making. Shien and Zara, while they over-index on using data to inform designs, H &M again is doubling down on its original approach of relying on their human designers to dictate the direction of each collection.

11:19And as I mentioned earlier, I do think, yes, there is a risk there, but I also think that that could yield something exciting, something unexpected, and that will win over customers or that could win over customers. I think there's something also to be said for the fact that they're just everywhere. If you put out a minimum viable product, but you have 4 ,300 stores in 77 countries, which is, I believe, the most recent count, you're going to have a pretty powerful platform to spread that message that, hey, maybe there's something going on here again. People are just going to see those stores just walking around any city they're in.

11:57Absolutely. And they're planning pretty far-reaching store renovations, just little things, big things. That's definitely in the works as well. I think at the end of the day, this is their big push, their first push, I would say in a number of years to be like, hey, everyone, H &M exists and we are trying to be cool again. And I think that even creating that energy alone can be effective. I think we're seeing that with Gap. Having that energy can result in at least, you know, at least it may be very ephemeral, but people notice the brand. And in order to really succeed, of course, it's a matter of sustaining that energy and proving quarter after quarter after quarter that the product is good, that the marketing is good, and just hitting on exactly what shoppers want.

12:55We'll see how that plays out. Another area where H &M has tried to differentiate itself within the fast fashion space is on sustainability. Sarah tell us about H &M's efforts in that area and how that might also be a tool they could use when they're battling Shein at the low end of the market I mean that is a difficult needle for H &M to thread as well because you know I think arguably they are both probably the most prominent advocate for sustainability within the fast fashion space whilst also being one of the most vilified players in the space. And part of that is a function of just being so big.

13:38So, you know, they're big and they're based in Sweden where people care about climate a lot. So they get asked about their track record on this and attacked for any failings a lot. Partly in response to that, they have moved more swiftly than many others in the industry to try and address what they're doing. And they're more vocal in talking about what they're doing. A few years ago, when they laid out that their strategy through to 2030 sent this very lofty goal to double their earnings whilst halving their emissions. The two things are diametrically imposed, of course, because if you increase sales that suggest higher volumes and higher volumes, then you're making more stuff.

14:13And if you make more stuff, you're probably polluting the planet more. Growth comes with more impact. Those two things have not typically go hand in hand. So this is a huge challenge for H &M to deliver on. And it's not really clear if they're going to deliver on either their sales target or their sustainability target as yet, but they maintain that they're going to try. The reason I ask, though, is that you just wrote an article with the headline, Shein colon fashion's biggest polluter. And to me, that says H &M. I mean, yes, maybe they'll fall short of their emissions targets, but there is no story in BOF yet anyway.

14:48H &M colon fashion's biggest polluter. So tell us, why is Shein fashion's biggest polluter? So Sheehan has become fashion's biggest pollution as a function of its growth. It has grown phenomenally over just looking at the last three years, which is what they've put out data in terms of emissions for. And over the last three years, their emissions have tripled as their sales have grown hugely. However, their emissions have grown even faster than their sales and now outpace even into techs. And the reason for that is twofold. One, where most of the impact takes place is in their manufacturings. They're making really a huge amount of clothing and they're making it largely out of things like polyester.

15:33And they're making it in China where most factories run on a grid that's powered by coal. So it's quite polluting. And then they're shipping it to people on planes. And that is also very polluting. And those two things together means that they now outpace all the other very large publicly traded fashion companies. I want to come back to this question of how you grow without growing emissions. But first, I noticed in your story, you have these great charts and this very scary looking data. And a lot of it came from Shein directly. Why are they releasing this information at all if it doesn't make them look good?

16:08It is increasingly normal for companies to release data about their environmental impact in the same way they release financial data. What is interesting about Shein, of course, is that they are not a public company. Where public companies, certainly on a financial data side, have to disclose it, and increasingly investors want them to disclose environmental data, Shein really doesn't have to disclose anything at all. But this is a company that wants to go public, has been trying to go public for some time and has faced a lot of questions from both potential investors and from governments about its environmental and labor force track record.

16:51And so being more transparent and talking about its impact and in doing so, talking about what it plans to do to address that impact is part of how it convinces regulators that it should be allowed to go public and investors that they should invest in it. I guess that would be one strategy for H &M to just wait it out and let regulators take care of their competition. Well, I think that's going to take a little while. The hand of regulation moves slowly. And so far, the most companies are being asked to do is provide a bit more transparency. No one's facing any real penalties for being the worst polluter at the moment.

17:28Fair enough. So let's get back to that question of how do you grow without also growing your impact on the planet? And you had a very interesting chart in your story that showed that H &M and Zara have actually bent that curve a little bit. They're not having emissions and doubling growth like H &M says they're going to, but they are increasing sales a little in H &M's case, a lot in Zara's case, without increasing emissions as much. Interestingly, Shein not doing this, but neither is LVMH, which is at the very opposite end of the fashion spectrum here. Why is this so hard to do, whether you're a luxury brand or a fast fashion brand?

18:07So before I give you the meat of that answer, I'll give you a more boring but important part of the answer, which is to do with how crummy the numbers we have are and how difficult they are to compare. So for instance, in the case of LVMH, one of the reasons why it has increased quite substantially compared to last year is because the numbers from 2023 include new acquisitions that were not there in 2022. So part of its growth is bringing in new business lines. And so that has meant the number, it's not a direct like-for-like comparison. They haven't given pro forma numbers that would allow you to do a life like comparison, which is why you see this discrepancy creeping in.

18:52But more specifically and generally as to why you see this happen, part of it is to do with pricing. So one strategy that companies are bringing in to try and grow without increasing their impact is by selling more elevated, higher value goods. So as Kat was saying, this is Zara's strategy. It's trying to position itself upmarket, which means it can increase its sales, but it doesn't need to sell as much because it's selling stuff at a higher price. That's something the luxury companies are really trying to lean into. Other strategies that companies have started to try and use are shifting the kinds of materials that they're using to use more recycled polyester, to use more recycled cotton, trying to use other types of material that have been certified to be better.

19:42So cottons that are grown in a more responsible way. The real thing that companies need to figure out is manufacturing, but that's very difficult. And I don't think anyone's really figured that out yet. And what you've seen over the last few years is companies have been able to make kind of incremental changes. It's whether they can really maintain this disconnect will be interesting to see. Shein, on the other hand, is in a different position because it is growing just so fast. So a lot of the companies that we're talking about elsewhere in the industry are quite mature. And when we're talking about growth in terms of revenue of, at the highest end, 10%, Shein's revenue grew 40 % last year.

20:26So there's exponentially more growth, exponentially more stuff that they're producing. And when you produce that much, that has an exponentially higher impact. How did H &M's CEO talk about sustainability when you two met with him? Well, the company has a longstanding sustainability strategy. And what H &M's message is, is that whilst they've changed their CEO, their strategy remains the same. They are very, again, the message is they are very committed to delivering on their ambitions to reduce their environmental impact. They've got a number of different pathways they're trying to take to deliver on this.

21:12Also, the most other companies that they do have some focus on the manufacturing side of things. They've put in place a few different programs that are exploring ways in which they can help finance investment in decarbonization in the supply chain. But those are still very early days and they've not figured that out yet. No one's figured that out yet. And this is a question for both of you. How much do you think the sustainability question is resonating with consumers? Are there people out there who are going to shop H &M instead of Shein for sustainability reasons? No, probably not. but okay but let me let me refine that answer though i think there is a market out there for people who will shop for products because they're sustainable in the same way there's a market out there for people who only want to buy organic food so they like yeah there's a market and they'll go and buy it but that market isn't going to go to h &m for their organic food right they're going to go and find that nice boutique or they're going to whole foods or our one they're not going to um you know i don't know what the american equivalent would be they're not going to stay Bainsbury's.

22:20Yeah, no, absolutely. I mean, H &M and Shein, even H &M, despite its records in sustainability, they are antagonized over and over and over again in the text as well by this faction of consumers who see any kind of fast fashion as unethical because of the volume that these retailers are producing. And yeah, I mean, I did a story earlier this year about how all these actually sustainable companies like resellers and Patagonia are actively poking fun and also villainizing fast fashion. And there's a lot of consumers with whom that resonates. And then there's a lot of consumers that really don't like that kind of messaging either.

23:14Yeah, there's a lot more consumers who seem to just be buying as much of fast fashion as they can get their hands on. You said 40 % growth for Shein last year, and I think that might have been a decline from previous years. And we haven't even talked about Timu, which, you know, in some ways makes Shein look like, you know, Patagonia. So I guess just looking ahead, setting sustainability aside, where are we in this cycle of fast fashion disruption? Is Shein and Timu just going to gobble up more and more share? Are we maybe seeing the peak of this somewhere off on the horizon? Honestly, I think that we are at the end of the beginning for Timu and Shein.

23:58We've seen this for Shein where their growth has leveled. Temu is still growing pretty quickly, high double digits, But at the same time, you know, their share over the overall market is plateauing. I think that ultimately fashion is very fickle. I think it's easy for disruptors to make a splash when they enter the scene. I think it's much, much harder to sustain that splash over time. Will they continue to be formidable players? Absolutely. But at the same time, there are established retailers that are also doing an exceptional job standing out. I mean, look at Abercrombie, you know, and Abercrombie doesn't have this fast fashion model either, but it's coming out with a very, very attractive product at a very, very attractable price point.

24:51And that strategy is working. I think at the end of the day, there will always be new disruptors as well. I mean, the past couple of years, we've been consumed by Temu and Shein, but, you know, who knows? Next year, in two years, there might be a new superpower coming out in fashion, you know, that we would be scrambling once again to cover. And I think that's why it's interesting to see brands like H &M going back to what sounds like perhaps a fairly traditional strategy where the focus is on the creative side and on the brand identity, because that's a point of differentiation. If you look at the, there has not been an e-com disruptor that has really been able to create longevity.

25:34You know, before Shein, you had Forever 21 and Boohoo and ASOS. Those aren't names that people talk about that much anymore. Like it's very hard to build a moat in that space. I think that's right. Well, we are about out of time and we didn't even get to my favorite subject, which is the de minimis tax loophole. So we'll have to do a whole other podcast about that at some point in the future. Next time, Ryan. We'll get there. We will get there, debrief listeners. Thank you so much, Sarah and Kat, for joining me today. Please be sure to check out Kat's article, H &M's Big Bet on Fashion's Elusive Middle.

26:11and Sarah's piece, Sheehan, fashion's biggest polluter in four charts at businessoffashion.com. These and other stories are available to BOF Professional subscribers only, and you can find the links in the episode notes. You've been listening to The Debrief, produced and edited by Olivia Davies, mixed and mastered by Eric Bria, and I'm Brian Baskin. We'll be back next week with a new episode. Thanks so much for joining us, and be sure to follow us wherever you get your podcasts.

26:41Thank you.