Hennes & Mauritz is refocusing its expansion plans to meet rising demand from China

By JENS HANSEGARD And LAURIE BURKITT

As consumption remains sluggish in Europe and the U.S., Swedish fashion retailer Hennes & Mauritz is refocusing its expansion plans to meet rising demand from China. But Karl-Johan Persson, the company's 36-year-old chief executive, says that while China offers great opportunities, competition there is getting tougher.

"It takes a lot of commitment to succeed in China today. And the competition is quickly growing tougher as there are so many players moving there. It's already tough today, but it will be a great deal tougher in 10 years," Mr. Persson says.

Most foreign fashion brands still have a small presence in China compared with in their home markets. H&M, which entered China in 2007, has 64 stores there, out of a total of 2,410 world-wide.

While most big foreign fashion companies have penetrated China's largest cities, such as Beijing and Shanghai, lower-tier cities remain open for expansion. H&M plans both to expand its existing store space and to move into the slightly smaller cities.

According to Swedish bank Handelsbanken, H&M is more profitable in China than in any of its other markets, and the bank expects the number of H&M stores there to treble in the next three years.

While Mr. Persson is reluctant to divulge details, he does say China is the country in which H&M will open the most stores next year.

"We have entered cities like Changchun, Nanjing, Guangzhou and Kunming, and are planning to open stores in several cities next year," he says.

Chinese consumers only spend around 1,150 yuan ($180) on clothes a year—a fifth of what Americans spend—but their appetite for new clothes is growing, according to market research firm Boston Consulting Group. Clothing sales are projected to jump to 800 billion yuan by 2015, and China will account for 30% of global fashion sales within the next five years, BCG says.

But H&M will face competition for space as other foreign retailers, such as Spain's Zara and Japan's Uniqlo, also open stores. And some of China's domestic fashion brands have already staked out a lot of turf. Shanghai Metersbonwe Fashion & Accessories Co., which makes casual and office attire similar to H&M's, has a franchise network of 3,000 stores across China.

Occupying prime retail space has been a cornerstone of H&M's strategy since Mr. Persson's grandfather founded the company in 1947, Mr. Persson says. But while competition for retail space in China is fierce, Mr. Persson says customers like H&M and this makes H&M an attractive proposition for landlords. "It's largely a question of what we bring to the table. If we move into a shopping mall we attract customers to the mall," he says.

This is important as a bargaining chip with landlords, but picking the right shopping mall or street can be tricky in the fast-moving Chinese market. "You can get a lease in a new shopping mall, which quickly becomes very popular. But one year later they'll have built a new shopping mall across town which has a much better brand mix. And that's bad news if you're stuck with your lease," Mr. Persson says, adding that H&M strives to have flexible rental contracts.

H&M's margins have taken a hit this year from record-high cotton prices and a strong Swedish krona. While many competitors have raised prices to maintain their margins, H&M has kept prices low and continued to invest in its garments to improve their quality and sustainability, by using more recycled materials and organic cotton.

"If you are a public company it's very tempting to do what's best in the short term. It's not a problem to pump up profits—we could easily do that—but we have to balance the short term and the long term," Mr. Persson says.

"Analysts have a completely different time horizon," he adds. "If we let ourselves be guided by analyst expectations and by a gross margin target it would be really bad for the company in the long term."

While analysts may be concerned about the company's margins, many also maintain that it's a good prospect for the long term, because of its fast rate of expansion.

H&M has a target of opening 10% to 15% more stores each year than the previous year, an expansion rate that would nearly double the number of stores in the coming five years.

But this rapid growth brings its own challenges. "We open a new store almost every day of the year. Since we are expanding so quickly, it's crucial to hire the right staff," Mr. Persson says. "If you go into an H&M store in Stockholm or Shanghai, the store will look pretty much the same and the products will be largely the same. But it is vital that the staff that operate the stores fit the H&M mindset, that they have the H&M spirit that we safeguard."

As a boy, Mr. Persson would accompany his father and grandfather, the company's founder, on business trips and to the office. He got his first summer job at H&M at the age of 15. And while he knew from an early age that he wanted to work within the company, he didn't know exactly what his role would be.

After business studies and various H&M jobs in Asia, Mr. Persson was put in charge of launching the company's upscale COS stores.

In June 2009, at the age of 34, he replaced his father as H&M's CEO, with his father remaining chairman.

Mr. Persson says that while he was ready to take the helm of the company, a strong team and support from his managers has been essential.

It is also very much a hands-on job, and Mr. Persson travels constantly. A father of two and an avid football fan who supports the Stockholm team Djurgårdens, he nevertheless tries to visit each of the 41 countries in which H&M operates at least once a year.

He runs the business in a simple and unbureaucratic way, he says, very much in line with how his grandfather ran the company back in 1947.

"My grandfather wanted H&M to always have the mindset of a small company. There is no room for prestige here. We insist on an open-door policy, and no hierarchies," Mr. Persson says. These ideals, he maintains, are the reason the company is profitable in every country in which it operates.

"And we are not only profitable, we are still growing in all markets where we are present," Mr. Persson says, adding that there is still plenty of opportunity for growth in mature markets.

"We expect especially good growth in France, Italy and the U.K. Of course, times are tough. There's much more price competition and markdown activities than we have seen in a long time. Europe is shaky. But we're still taking market share despite the current gloomy climate," Mr. Persson says, adding that he doesn't expect private consumption in the U.S. and Europe to turn around for a long time. In the U.S., H&M has about 200 stores, but Mr. Persson says there is scope for many more.

Meanwhile, Mr. Persson says H&M is looking at a number of new countries in Asia. He also says the company has a strategy for entering markets in the Southern Hemisphere, despite the problem of reversed seasons—when summer clothes are selling in the Northern Hemisphere, customers below the Equator want cold-weather gear, and vice versa.

He also wants to broaden H&M's product line. In 2009, it launched H&M Home, a range of homeware sold in H&M clothing stores in some countries, and Mr. Persson says he intends to introduce new product categories in coming years.

And, of course, there is the internet.

"Online sales are doing well in the eight countries where we offer them today. We're opening U.S. online sales next year and the idea is to roll out online sales in all countries where we have physical stores," he says.