H&M Emphasizes ‘Long-term Commitment’ to China

By Mimosa Spencer and Tiffany Ap on March 31, 2021

“China is a very important market to us and our long-term commitment to the country remains strong,” the Swedish fast-fashion retailer said.

H&M Group said Wednesday that it is working with colleagues in China to move forward in the wake of a widespread boycott prompted by anger at its stance on Xinjiang cotton.

“China is a very important market to us and our long-term commitment to the country remains strong,” the Swedish fast-fashion retailer said in a statement, read by the group’s chief executive officer Helena Helmersson on a conference call with analysts.

The brand has become a lightning rod for anger in the country against foreign companies who have said they won’t source cotton from Xinjiang due to concerns over alleged forced labor. A boycott of the label kicked off last week, and it faces a blackout that spans e-commerce, mapping and ride-hailing platforms. As of Monday, around six stores were closed including in Urumqi, Yinchuan, Changchun and Lianyungang, with several of the malls citing landlord decisions as the reason, and on Wednesday H&M officials said that around 20 stores are closed. The brand counts more than 500 stores in the country.

“We want to be a responsible buyer, in China and elsewhere, and are now building forward-looking strategies and actively working on next steps with regards to material sourcing,” Helmersson added. “We are dedicated to regaining the trust and confidence of our customers, colleagues and business partners in China.

“Together with all relevant stakeholders, we want to collaborate to be part of the solution and jointly build a more sustainable fashion industry,” she added.

H&M reported details of its three-month results, which slightly beat expectations. Gross profit came to 19.06 million Swedish kronor, or $2.18 million. As reported, sales over the three months ending Feb. 28 were down 21 percent, reflecting ongoing choppy trading conditions for fast-fashion retailers.

H&M is not the only foreign brand facing backlash over a stance against Xinjiang cotton. A host of foreign brands have been ensnared, including Nike, Adidas, Uniqlo and Burberry, but H&M is the only one to have had its online stores on all the major Chinese e-commerce sites blocked.

There are several theories as to why H&M was singled out, according to some observers.

For one, H&M hails from Sweden, which has less political leverage than countries like the U.S., Germany, or Japan — homes to companies like Nike, Adidas and Uniqlo. Blocking one of those labels might have triggered a larger diplomatic crisis.

Secondly, the group had not been performing particularly strongly in that market, with sales in China down 17 percent in 2020. Consumers in China have plenty of domestic fast-fashion alternatives with labels such as MJStyle or Urban Revivo, as well as inexpensive clothing options on Taobao. While Chinese netizens were quick to pledge their support of companies like Li Ning and Anta — pushing up their share prices — consumers in the country remain very attached to Nike and Adidas. And there is no obvious Chinese equivalent to European luxury fashion labels like Burberry.

Mark Tanner, managing director of China Skinny, an agency that helps with market-entry strategy, pointed out that unlike quarrels of the past this “wasn’t the result of someone sitting in an office in Europe or North America oblivious to geopolitical sensitivities in China,” Tanner said. “The Xinjiang cotton protests — whether justified or not — were the result of conscious concerns from western consumers about what’s happening in the west of China.”

Chinese consumers have been known to move on quickly, and labels that were publicly criticized for T-shirts supporting Hong Kong in 2019 went on to make record sales in 2020, noted Tanner. But H&M faces the larger issue of getting back into online channels.

“The challenge for H&M will be getting back online, which is so important. How long they will be in the cold will be based on how they deal with it in the short term, but as we saw with the NBA, if it is not handled in a way that China would like, these wounds can take some time to heal with the online platforms, who are singing from Beijing’s hymn sheet more than ever now,” he said.

Royal Bank of Canada, in a research note to clients, was also cautiously optimistic for the brand’s prospects in China.

“We have seen brands like Nike and H&M weather similar controversies in the past and maintain relatively strong sales,” the bank said.

However, there will likely be a short-term negative impact for H&M in the market, which accounts for around 6 percent of group sales, according to the analysts.

While the West has become increasingly vocal about Xinjiang cotton following reports from the BBC, The New York Times and various NGOs recounting alleged human rights abuses against the Uyghurs, many Chinese do not believe the allegations and view the government’s policies in the region as justified “anti-terrorism” measures.

In a long essay posted on Weibo on Tuesday, Hung Huang, a fashion and TV personality, criticized the Better Cotton Initiative, accusing it of double standards when it comes to Western companies and those operating in developing markets. Certification of a Chinese company’s raw materials is linked to paid membership fees, she suggested. BCI has not immediately responded to a request for comment.

In the Kearney FDI Confidence Index, an annual ranking of countries and their attractiveness for foreign investment, released before the controversy over Xinjiang cotton, China fell from the eighth spot last year to 12th. In the past, it topped the index — from 2002 to 2012.

“This result is counterintuitive when it comes to the fast restart of China’s economy last year, long before other economies began to regain momentum,” the report said.

The firm pointed to trade tensions and rethinking of supply chains as an explanation for the country’s decline in the index.

“However, it may reflect escalated U.S.-China trade tensions and other policy conflicts along with the exposure of international supply chains to China, which — consistent with Kearney analysis — has led some companies to restructure their supply chains to avoid geopolitical and tariff fallout, among other factors compelling investors to rethink their global supply chains.”

Meanwhile, H&M executives said the recent blockage of the Suez Canal were not expected to affect the business, although the company expects some congestion in European ports in the coming weeks.

Recent store closures due to coronavirus lockdowns continue to disrupt business, however, and some analysts are concerned that markdowns in the second half.

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