BERLIN Designer collaborations are helping Hennes & Mauritz (HMb.ST) rise above a reputation for cheap chic, but the world's second-biggest clothing retailer could do more to entrench that upmarket lift and defend its shrinking margins.
Fired up by blanket billboard advertising and a social media blitz, shoppers stormed H&M stores and websites on November 14 for the launch of a limited-edition collection by Parisian Isabel Marant, famed for her edgy bohemian designs.
H&M needs that buzz to help gross margins, which have fallen below 59 percent from almost 63 percent in 2010, while mid-market rival Inditex (ITX.MC) has improved theirs to about 60 percent from 57 percent.
While H&M declined to comment on Marant's impact on figures, sales in stores open at least a year jumped by a bigger-than-expected 10 percent in November, which H&M attributed to cold weather boosting purchases of winter clothing.
The Marant range was H&M's 13th guest collection since its first by Karl Lagerfeld in 2004, with later cameos from Stella McCartney, Jimmy Choo, Roberto Cavalli and Comme des Garcons.
That contrasts with H&M's usual focus on low-priced basics, which puts it in the crosshairs of discounters like the Primark chain of Associated British Foods (ABF.L), which has expanded fast during the downturn in H&M's European heartland.
The Marant range, on sale at around 250 of H&M's 3,000 stores, retailed at a fraction of the cost of the designer's own line, but double or triple the prices of H&M's regular range.
By lunchtime, the H&M store on Berlin's Friedrichstrasse had sold out of Marant's chunky cardigans for 129 euros, tasselled boots for 199 euros and leather trousers for 249 euros. The H&M website was swamped, placing shoppers in a virtual queue. Many items were promptly selling for inflated prices on eBay.
"These collaborations really help the brand defend its margins, since virtually all these lines get sold out at full-price," said Euromonitor analyst Ashma Kunde. "They are a great way to test their potential in higher margin business."
H&M clearly sees that potential and has also moved to offer more premium products of its own and is quickly rolling out new mid-range stores branded "& Other Stories", launched in March.
This was the first November H&M has seen a big rise in sales since 2010, when sales rose 8 percent after H&M teamed up with Israeli designer Alber Elbaz from Lanvin to produce a sell-out range of party dresses and accessories. November sales had dipped 1 percent in both 2011 and 2012 despite collections from Italy's Versace and France's Maison Martin Margiela.
The appeal of exclusivity has prompted Britain's TopShop to revive a collaboration with supermodel-turned-designer Kate Moss: "There is only one Kate," said billionaire owner Philip Green. "Nobody else can have that."
Other chains to adopt the formula include Gap Inc (GPS.N), which has teamed up with GQ magazine's best new menswear designers in America, while L'Wren Scott, who has dressed a string of celebrities for red carpet occasions, is working with Banana Republic.
Santander analyst Rebecca McClellan estimates the early H&M designers generated up to 40 million euros ($55 million) in sales - not much for a company with annual sales of $18 billion (£11.03 billion). Of that, as much as 10 million euros went to pay the designer.
But the value of the H&M brand has risen to $18.2 billion from $13.8 billion in 2008, according to Interbrand, widening the gap to Zara on $10.8 billion and closing in on Louis Vuitton (LVMH.PA), the world's biggest luxury firm, on $24.9 billion.
"While associated to a very small portion of revenues, overall the designer collaborations ... help the H&M brand secure future earnings," said Bertrand Chovet, head of the Paris office of Interbrand.
H&M does appear to be gaining pricing power. A survey conducted by Societe Generale showed it has hiked prices for its premium wares in the last two years, even as it continues to trim prices for basics. A basket of seven spring/summer items cost 395 pounds ($640) in 2013 compared with 195 pounds in 2011.
"An increase in top-end pricing for H&M ... could balance price and gross margin erosion lower down the price range," said Societe Generale analyst Anne Critchlow as she upgraded H&M shares to "buy" from "hold".
But fashion experts think there are more lessons H&M can learn from luxury players if it wants a more enduring benefit than the collaborations, which sell out quickly.
"The quality of the product itself and the experience is as important as the actual collaboration," said Ferdinando Verderi, creative director of ad agency Johannes Leonardo, noting many complaints about the H&M website during the Marant launch.
He said H&M should emulate Fast Retailing's (9983.T) Uniqlo, which appointed minimalist German designer Jil Sander as creative director from 2009 to 2011 to produce permanent ranges.
H&M could also follow the example of players like Zara and Primark and invest more in its stores. Inditex has revamped dozens of flagship stores with sleek displays and targeted lighting for a more upmarket feel.
"H&M needs to better showcase its design credentials," writes Kate Ormrod of retail consultancy Verdict. "H&M has work to do to ensure its store portfolio remains on par."
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(Additional reporting by Astrid Wendlandt in Paris; Editing by Will Waterman)
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