Moving up the fashion chain

He’s the CEO of the world’s wealthiest high-street clothing company, and son of Sweden’s wealthiest man. His family owns nearly 43% of a $20 billion (Rs 1.3 lakh crore) company (FY15 revenue). And unlike the other big Swedish company IKEA (which is registered as a Dutch charity), his family is widely respected for keeping its wealth within Sweden.

If you bump into Karl-Johan Persson on a busy street in downtown Stockholm in his open-necked, light-coloured shirt and dark trousers, you’d think he’s a mildly harried professor. What he is, though, is CEO of H&M, that high-street clothing brand with the distinctive red logo seen at nearly 150 stores in Sweden, and more than 3,900 around the world.

It’s a sunny afternoon when we meet, but we start on a gloomy note. Fears of a Chinese slowdown are rattling stock markets, and that’s bad news for a CEO for whom China is a key growth market. In 2015, H&M will be adding 400 new stores, and aims to increase the number of stores by 10% to 15% annually. While the company does not say how many, a large number of these will come up in China.

Persson admits he’s worried, but says there are reasons for optimism. H&M is entering India, with a 25,000 sq. ft. store in Delhi this month, and South Africa later this year. If one major market slows, reasons Persson, two giant ones are opening. H&M is also entering Peru and Taiwan.

“We see incredible opportunity in the new markets,” says Persson, who worked in India early in his career in sourcing. “While we want to continue to be optimistic about China, we have to take every opportunity. Think about it like this: If we can have close to 150 stores in Sweden, with its tiny population compared to India, what is the scale of opportunity in India?”

There are reports that H&M plans to build 30 stores in India in the next year but Persson says that’s not how his company operates. “We will take every good retail space as and when it comes and not force numbers and plans.”

H&M’s India entry comes at a time when arch-rival Inditex from Spain and its flagship Zara clocked $114 million in sales in FY15. That makes Zara the first high-street label to cross the $100-million-a-year mark in India. Globally, however, H&M edged past Zara’s sales of $19.7 billion last year.

But there’s more than just sales numbers transforming H&M. It is pumping in millions trying to be what no other fast-fashion company (and Persson does not like that phrase) has been—the world’s most eco-friendly fashion business. This is a challenge, to say the least, in a business that produces 600 million items every year and makes 60% of them in Asia, where there are fuzzy sustainability rules.

But it’s a challenge H&M takes seriously, says Persson. The company is the world’s biggest user of organic cotton. Though this accounts for about 14% of the cotton used, the share is steadily increasing. It has made a commitment in its 2014 annual report that all its cotton will come from sustainable sources by 2020.

Apart from sustainability, H&M, which had a bad experience in sourcing clothes from Bangladesh’s infamous sweatshops, is actively lobbying for better working conditions for the industry across the world.

In October 2014, the year he won the Fairness Award given by Washington-based Global Fairness Initiative for promoting opportunities in poor communities, Persson met Bangladesh trade minister Tofail Ahmed to push for better pay and conditions for textile workers. Later that year, he was at the BSR (Business for Social Responsibility) conference on sustainability, again to push for better pay for textile workers.

This is critical because H&M does not own any factories—just 850 independent suppliers. What adds to the pressure is that Sweden is one of the most eco-friendly nations in the world. For H&M not to be green just won’t do.

The company does not divulge how much it spends on sustainability. All Persson says is that this is one of the biggest expenses.

PERSSON’S BIG GOAL is to kickstart a new surge up the value chain. This happened before, when H&M transformed from a low-cost seller of women’s clothes to a hip, value-for-money fashion label that has worked with everyone from Madonna to Karl Lagerfeld.
The truth is, brands realise that there’s a limit to how much people can buy and how often they can buy. And there’s a limit to the raw material available. What’s a company to do?

Any talk of scaling down would be read as bad news by markets and investors. The solution is to keep going up the value chain. That’s what Persson is after, while keeping other options open.

He is building a conglomerate with products in every genre and price point. While the flagship H&M will continue to be the biggest value and revenue earner, there are strong brands that will enhance profitability at every level—from COS, which sells at a 30% to 40% premium to H&M, and the new Sport and Beauty lines, to ultra hip young labels like Monki and Cheap Monday.

So, I ask Persson, will he make another leap—into true-blue luxury? Can there be an Hermès from H&M?

Persson smiles. “Among all luxury brands, Hermès truly has a special place in quality. We want to be high-quality but also great value for money.” Hermès makes the same claim; former CEO Patrick Thomas once told me that Hermès is perfect value for money if you see the products of one of the world’s most expensive brands as an investment that will last more than one lifetime. Persson agrees. So, does he plan something along those lines, I press. All he says is: “We have many exciting plans”.

Through all my interactions with H&M, the one thing I hear over and over again is how the company is trying to do the “good” thing. It all sounds a bit like the Google ‘Don’t be evil’ motto, and I ask Persson if he wants to cue that. There’s a long pause, and then: “We want to do the good and value-conscious thing at the best price” (emphasis mine). With that sort of relentless focus on the bottom line, it looks like the fashion fight in India is just beginning.