Attracted by high levels of fashion awareness and spending power, the low-cost clothing retailer opened its first mainland store in April 2007as an event that had been on the lips of Shanghai's fashion conscious for months. On April 12, the first H&M store in mainland China finally opened its doors.
The Swedish retailer took its first steps into the ever-more-competitive Chinese fashion market with a bang, flying in pop star Kylie Minogue to launch her own line of swimwear and open the store on Huaihai Lu. With over 1,300 stores in 24 countries, H&M is no stranger to foreign markets but, until now, it had limited its China business to sourcing.
"We think China is a very interesting market with a huge potential for growth. There is a high level of fashion awareness and there is a high level of spending power," said Nils Vinge, head of investor relations at H&M. "We will try to offer the same business proposition as we do in the rest of the world, fashion and quality at the best possible price."
Top-end luxury fashion brands have had a difficult time squeezing profits out of China's still relatively small pool of customers, but mid-level fashion retailers - like Spain's Zara - have found a lucrative market.
"There are enough people that are in a position to afford this stuff and they're in jobs where they need to wear fairly smart clothes," said Paul French, director of market research firm Access Asia.
"It's to do with the emergence of the office lady. We saw them first in Japan, then Korea, and now we're seeing it here. It's a natural development of a more sophisticated market."
Unlike many retailers, who change their collections on a seasonal basis, stores like H&M replace their stock every six to 12 weeks. This "fast fashion" is effective in maintaining customer interest because each time they visit the store it has a different feel.
"One of the things about fast fashion is that you buy something, you wear it a couple of times and maybe it gets damaged in the wash, but you don't care because it's cheap," said French.
Fan Yang, a retail analyst with market researchers Euromonitor International, says it is important for fashion retailers not to position themselves at the wrong end of the market. And in China, the high end is still the wrong end.
"I think that they should aim low. If you aim high, you get good margins; but when you have a lot of outlets in China you can't keep your price, and when you bring the price down, you definitely bring down the brand image. This is why it is so important to position yourself correctly."
THE ESPRIT ANSWER
Yang thinks that it could be instructive for H&M to learn from its competitors.
A company that he thinks is a success is Hong Kong-owned Esprit. It keeps prices low and at a constant level so it never damages the brand by offering promotions. Esprit has also expanded rapidly across the country by opening up concessions in department stores, which means it avoids the expensive problem of always having to find a good spot for a store.
In contrast there is Italy's Benetton. "They aren't doing so well because they have a limited product portfolio and high prices. Within the same price level there are many substitute brands," said Yang. The company has also failed to expand quickly and has not taken advantage of the department stores, he noted.
Analysts are confident that H&M will prove a success in the long-term. And if the company's new Hong Kong store is any indication, they are right. When it opened in March, the queue stretched far down a popular downtown road. For weeks after, the bustle of activity on the stretch of pavement beside the store was more reminiscent of a rock concert than a high street.
Just a few months ago, the site for H&M's new Shanghai store was occupied by Benetton. This may act as a constant and poignant reminder to H&M that in China, without the right strategy, retail failure is never far away.