The world’s second largest fashion retailer, H&M made a difficult decision: its price is not to be raised even though the company is facing rising costs because of increased price of organic cotton, higher wages for garment workers overseas, and budget assigned to ensure safe working conditions in factories. Although this compromise will lower H&M’s profit margin, I believe that the company has made the right decision for the following reasons:
1) Understand customer segments
H&M employs a cost leadership strategy that appeals to customers who don’t want to spend a lot of money on clothing, yet want to be fashionable. If the company responds to the rising costs with rising price tags, it is highly likely that the new prices will drive away customers.
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2) Align with value proposition
H&M’s value proposition revolves around offering low prices and good quality. Thus, prices should not be tampered with. H&M cannot afford to increase its price the same way that Michael Kors cannot afford to cut its price. MK believes that it is competing with LV, Prada, Gucci, and therefore, as a luxury brand it refuses to “take a promotional posture.” Similarly, in order to “stay competitive in a competitive industry,” the best alternative H&M can undertake here is to embrace the status quo.
3) Create positive brand image
The unconventional decision H&M made in order to deliver the same quality of apparels at the same price to its customers while dealing with increased costs internally will garner positive comments to the brand name. In the long term, the money that H&M invests in improving working conditions will pay off as more consumers become conscious in such issues. In other words, more consumers will turn to H&M because of the corporate social responsibility associated with the brand.
H&M’s profit margin cut is, based on my reasoning, the best way to react to the increased costs. However, because such result will surely suffer pressure from investors and analysts, I hope that the management team at H&M can withstand the pressure till their long-term plan starts to pay off.
Works Cited
Berfield, Susan. “H&M Embraces Lower Profit Margins.” Bloomberg Business Week. Bloomberg, 6 Nov. 2014. Web. 7 Nov. 2014. <http://www.businessweek.com/articles/2014-11-06/why-h-and-m-is-fine-with-lower-profit-margins>.
Stock, Kyle. “Why Michael Kors Can’t Afford to Cut Prices.” Bloomberg Business Week. Bloomberg, 4 Nov. 2014. Web. 7 Nov. 2014. <http://www.businessweek.com/articles/2014-11-04/why-michael-kors-cant-afford-to-cut-prices-to-spark-holiday-sales>.
“Why H&M Is Taking a Gamble with Online Shopping in the US.” Why H&M Is Taking a Gamble with Online Shopping in the US. 2 Aug. 2013. Web. 7 Nov. 2014. <http://blog.brandid.com/bid/324159/Why-H-M-is-Taking-a-Gamble-with-Online-Shopping-in-the-US>.