Canada: H&M's next move: Taking it to the streets

H&M has a Canadian problem.

It's not so much the cold and dark, at least not for Sweden's Hennes & Maurtiz AB, the roaring success of European retail. It's the national obsession with malls.

“I'm still amazed that I meet a lot of people who have no clue what H&M is,” laments Lucy van der Wal, president of H&M Canada. “Brand awareness and brand building is still a very big challenge across Canada … We have to work a little harder to get our name out.”

Ms. van der Wal, who moved to Canada in 2004 to launch H&M, still struggles with the fact that her stores don't dominate streetscapes the way they do in Stockholm and Hamburg. And her brand isn't as well known among suburban shoppers.

Enter the Canadian way of advertising. Old-fashioned billboards. Print ads that tout specific items and prices. This spring, its first TV commercial in Canada. And increasingly more online ads.

“They have no choice,” said Svetlana Uduslivaia, an analyst at market researcher Euromonitor in Chicago.

“The Canadian market is relatively small and the consumer base is pretty static, so you have to go after every single consumer there is and every area where there is a possibility of expanding sales,” she said.

Despite a global recession, H&M is bucking the industry trend and expanding. Worldwide, it plans to add 225 stores this year. In Canada, with 48 stores today, it is opening 11 this year and plans to have 100 within four years.

With the average price of a garment at about $25, H&M reproduces runway fashions in Asian and European factories and ships them to stores within four months – slicing the industry's average time in half – and replenishing the shelves daily with 20 to 50 items.

So far in 2009, the Canadian chain, with an estimated $300-million of annual sales, achieved about a 1-per-cent gain in same-store sales, Ms. van der Wal said. In contrast, in 2008 when the economy was healthier, H&M's same-store sales in Canada dipped about 2 per cent.

In April, H&M's roughly 1,700 stores around the world saw their overall same-store sales jump 8 per cent following softer sales in previous months.

It's a big leap from 2000, when H&M first set foot in North America with a large flagship store on Fifth Avenue in Manhattan, but then stumbled as it moved beyond the big city. Its stores, tucked away in malls, were no longer a big marketing vehicle for the chain. Its name was unfamiliar to many suburban shoppers, and its shopping centre locations too big.

“Go anywhere in Europe on a main shopping street, and the H&M logo will pop out a few times,” Ms. van der Wal said.

The streetside stores not only provide instant marketing, they generate greater sales per square foot than mall outlets. Her next goal – more standalone stores than the current two in Toronto and two in Montreal – may be a tougher slog.

“That is still our goal, to have multiple stores on shopping streets with different profiles, because that is what we're used to doing.”

The unfamiliar has made it challenging to recruit and retain employees, leaving H&M Canada with a staff turnover of as much as 80 per cent – and little motivation among employees to wave the H&M flag. The chain reverted to its European model: It now hires 70 per cent of staff as full-timers and the rest part time; it was the reverse five years ago.

Today, in an industry where turnover is notoriously high, H&M has it down to about 55 per cent a year, with a goal to get it down to 30 per cent. (In Sweden, H&M enjoys turnover rates close to 10 per cent, with an average of 40 per cent to 45 per cent at its European outlets.) The changes have also helped reduce costs by between 10 per cent and 20 per cent, eliminating the need to constantly train new employees and ensuring that more are promoted to management positions from within the company, Ms. van der Wal said.

To keep customers returning to the stores, H&M has kept shoppers lining up at its doors by launching collections by well-known designers, such as Karl Lagerfeld of Chanel fame, in just a fraction of its stores and for brief periods.

This spring it has taken the strategy one step further, featuring exclusives by designer Matthew Williamson on a wider scale.

The clothier isn't alone among low-cost European retailers to have to work harder in North America to build its brand. Fly, a French housewares and furniture retailer that takes a page from IKEA, struggled in Canada at the beginning of the decade. By 2005 it went into bankruptcy here and closed its five stores, dragged down by rising supply snags.

Zara, the leader in cheap-chic fashion, has only 15 stores in Canada after a decade here, and hasn't ventured beyond the big cities. It relies almost solely on its stores to act as its advertising.

But in today's downturn, low-cost retailers such as H&M and Zara, owned by Inditex of Spain, have an edge because frugal consumers gravitate to their affordable offerings, Ms. Uduslivaia said.

Still, one of H&M's best marketing tools remains the billboard, Ms. van der Wal said. But even there, Canada poses its challenges. The chain doesn't put up billboards in Edmonton or Calgary because the space is given out through a lottery system, which doesn't allow the retailer to pick its spots. And outdoor advertising is restricted in Vancouver for aesthetic reasons.

“In Europe, you hardly have to market your name,” she said. “It's different here.”

SHOPPERS HOLDING BACK

Canada’s wary consumer is crucial to driving a recovery. Ever worried by the recession and the state of household finances, shoppers are holding back, particularly on discretionary spending. Statistics Canada said yesterday retail sales rose 0.3 per cent in March, up for the third month in a rowa good sign to be sure, although they remain 6.3 per cent below the September, 2008, peak.

The sectors

The monthly gain in overall sales was driven by autos. Take new car sales out, and sales were down 0.2 per cent. Sales at food and beverage stores also rose, by 0.9 per cent, partly because of higher prices. Food and beverage outlets, and pharmacies and personal care centres, marked the only two sectors to outperform the level of last October. And home furnishing stores registered a gain of 1.5 per cent, probably on the heels of consumers taking advantange of the government’s renovation rebate program, says TD Securities senior economics strategist Charmaine Buskas. The biggest drop came from what Statistics Canada calls miscellaneous retailers, which include sporting goods and office supply stores. This was followed by a decline at building and outdoor home supplies stores, largely in the western provinces. Along with a decline in construction, poor weather in Alberta may have contributed.

Across the country

Western Canada fared the worst as British Columbia and Alberta continued to be hammered. Retail sales fell 1.8 per cent in Alberta, where sales are now down 12.2 per cent from a year ago, and 1.4 per cent in British Columbia, for a year over year drop of 11.3 per cent. Quebec, New Brunswick and Newfoundland and Labrador are faring much better.

The economist

“The consumer in Canada is clearly becoming increasingly mindful of their purchases and taking advantage of deals and necessary purchases, and retrenching on non-essential items. As job losses mount, this will no doubt be a trend for some time in Canada.”?

- TD Securities senior economics strategist Charmaine Buskas

The consumer

Cathy Schaffter, a Toronto court reporter, has kicked her eBay habit, shops for specials and, apart from a recent $32 purchase of Joe Fresh khakis, is “living in last year’s clothes.” Ms. Walker will drive her eight-year-old Audi for another year, and has curbed the impulse to splurge on clothing and jewellery.

“I used to fall into that trap. You’d see something and think, ‘Isn’t that great? I’ll get it,’ Then all that happens is you have a bigger garage sale.”