Ep 187: How H&M Group is exploring circular business models in The Fashion ReModel

[01:00:00.320] - Pippa Shawley

Hello and welcome to the Circular Economy Show. Today we're talking about the Fashion Remodel, a new initiative from the Ellen MacArthur Foundation. Later on we'll hear from one of the participants in that H&M Group. But first I'm joined by Chloe Holland from the fashion team at the foundation. Welcome, Chloe. Welcome back.

[01:00:16.160] - Chloe Holland

Thank you. Pleasure to be here.

[01:00:17.880] - Pippa Shawley

It's been a while since we met to talk about fashion. Could you maybe bring us up to speed about circular fashion initiatives?

[01:00:25.360] - Chloe Holland

Yeah, definitely. So our linear economy that we're operating in now is economically fragile and all also environmentally devastating. So we need to change this and we need a circular economy for fashion whereby products are used, more, made to be made again and made from safe and recycled and renewable inputs. Now, we have seen a lot of progress in the past few years in terms of circular economy for fashion and we've seen them across a couple of different drivers. So there's three key drivers that we talk about in the fashion initiative as being essential to meeting our vision. That is circular product design. It is infrastructure as well as circular business models. And on our circular product design, we've seen great progress. In our jeans redesign project. We saw over 1.5 million pairs of jeans being brought to life.

[01:01:15.560] - Pippa Shawley

That's a lot.

[01:01:16.360] - Chloe Holland

Yeah, it's a lot. And we also had over 100 participants in that, in that project as well. So we had brands, we had garment manufacturers and we also had fabric mills. And they all showed that it was possible to make products that are fit for a circular economy. And that's brands, big brands like Chloe, Reformation, Primark, really from high end to high street being involved in that project.

[01:01:40.180] - Pippa Shawley

And that brings us to today. Right, so your new thing is the fashion remodel. What is that?

[01:01:46.020] - Chloe Holland

Yes, great question. So the Fashion Remodel was launched last year in May 2024 and it is a three year project with some big ambitions of what will it take to begin to decouple revenue from production and in particular, how can we do that by scaling circular business models.

[01:02:05.310] - Pippa Shawley

So, Chloe, who's involved in this project?

[01:02:07.710] - Chloe Holland

We've got lots of different players involved in this project. So we have our participants, we have our technical reference group, and we also are philanthropically funded by H&M Foundation. So in our participants we have 13 participants involved. They have headquarters across seven different countries and operate across six different continents. So a real big spread of organisations there. They range from high end to high street and they are also brands as well as retailers. So they include Arc'teryx, Crystal Group, who are based in LATAM, Decathlon, eBay, H&M Group and their brands, ARKET, Cos and Weekday. We have John Lewis, we have Primark, Reformation, Tapestry and Zalando.

[01:02:52.090] - Pippa Shawley

Lots of household names there. Yes, and very global.

[01:02:55.210] - Chloe Holland

Yeah, yeah, a big reach. So we're really interested to see what our different findings are as well, from across these different regions and areas.

[01:03:02.660] - Pippa Shawley

And you mentioned our previous demonstration product project, the Jeans Redesign. We often hear about pilots that these companies are doing, but I feel like we're now talking a lot about scale. So how are these businesses planning to scale circular fashion?

[01:03:15.860] - Chloe Holland

Really this is focused on circular business models, this project. So it's looking at models like resale, rental, repair, remaking, looking at how do we keep clothes in use at their highest value and make money without having to make new clothes. So every participant that joins the project has to set a specific and confidential percentage revenue ambition that they hope to derive from circular business models by 2027, 28. And that really starts them off on their path. They have to make a plan around that. They have to agree within their organisation how they're going to achieve that. And then they report annually on progress to the foundation so that we can track over time and also know how best to support them in their journey and their endeavours to scaling circular business models.

[01:04:00.710] - Pippa Shawley

And you mentioned that this is a three year project. Where are you hoping we're going to be in three years time?

[01:04:05.750] - Chloe Holland

Really? The aim of the project is to begin to unpack and discover different proof points within circular business models. So looking at the financial viability of these models, looking at the environmental impact of these models, and also looking at what are the other systems intervention points that we need to apply to ensure the commercial viability in the future. For instance, looking at policy needs and what kind of policy measures need to change in order for these models to become commercially viable at scale.

[01:04:34.690] - Pippa Shawley

And we talked about some of those companies that have those ambitions and are trying to get there. Should we hear from one of them?

[01:04:41.090] - Chloe Holland

Yeah, let's do it.

[01:04:42.370] - Pippa Shawley

So our colleague Seb spoke to Sara Eriksson from H&M Group back in Amsterdam a few weeks ago and she talked about their ambitions for circular business models.

[01:04:52.930] - Seb Read

Great. Thanks for joining us on the podcast, Sara. I guess like the first question really, we're talking about circular business models. Why are H&M Group interested in circular business models?

[01:05:05.310] - Sara Eriksson

I guess the easy answer is because our customers are, I mean, we are catering for people who are dedicated to fashion and we see resale services growing organically across the global level. So of course we also want to meet them where they are. And at the same time we also see benefits, of course, in regards of a low resource model, a low emission model. So we can also, yeah, cater both for our customers and our climate and resource use targets.

[01:05:40.280] - Seb Read

So you're seeing the kind of macro trends around the growth of the kind of customer behaviours engaging with fashion and obviously as an organisation you're setting climate targets. I guess it's quite a different beast to like identify that like meta level trend and to shift your business model to change how you operate. So in what way, what is H&M Group doing? What sort of activities have you embarked upon to close the gap between that big level and how you actually operate as a business?

[01:06:12.970] - Sara Eriksson

Of course, absolutely. And I think, I mean we're called the H&M Group and of course everyone knows about H&M, our biggest brand that we are proud of and where we meet the most of our customers. But we're also a group of brands. So a few global brands like Cos, Arket, Weekday and Other Stories, but we also have our ventures. So we are the majority shareholder of a resale platform called Sellpy that is operating across 24 markets in Europe. So of course this is where we see then resale happening at scale within the H&M Group. And at the same time this becomes a quite amazing asset for us to use also with the brands where we already have those customer relationships and we can bridge between this venture and the existing customer relationships that we have through our brands.

[01:07:05.490] - Seb Read

So you're able to apply what Sellpy does at some level or think about how it might apply across the full scope of your business.

[01:07:13.170] - Sara Eriksson

Exactly, and vice versa. I think also Sellpy has grown incredibly over the past years and also been elevating their customer experience, working much more with curation or the things that are maybe closer to our original business model within the H&M Group. Across the 24 markets in Europe, and we have also two markets where we are exploring a more integrated model. In Germany and Sweden, you can actually shop a new pair of socks and a pre-loved dress. You do that in the same in a common customer journey. You have the same cart and the same checkout. I think for us, it's also seeing that when we put this really at the heart, we know what our customer wants, we know how to fulfil their desires and their needs, and we can actually do that with both new products and also preloved garments.

[01:08:05.590] - Seb Read

And we talk about pre loved here. Are we talking about only H&M products?

[01:08:09.750] - Sara Eriksson

No, we are actually thinking bigger than that.

[01:08:12.790] - Seb Read

And what's interesting about that I guess is what you're talking about is not an insignificant investment actually to start applying something like resale at larger scale. I guess to do that you have to make a business case internally which we talked about, the kind of macro case, the shift, the need to decarbonize the shift in customer behaviour. You're also talking about they're kind of capturing new markets because you're selling pre loved items that might never have would not been sold directly initially by a H&M brand. But what are the key like argument winners for you as a business to go after that business opportunity and to make that business case?

[01:08:54.350] - Sara Eriksson

I think again it's going back to the wide and always trying to be where our customers are. So we know that this is happening whether it's in our channels or someone else's channel. We know that customers today, they do wear a mix of new things, of pre loved things, of different brands. So this is also like you say, an opportunity for us to capture that part of a market that is already happening. But can we do that in a way that is also more convenient for the customer, that is more attractive to the customer to eventually make that share grow over time as we also see the benefits when it comes to climate and resources. So I think it's really this combination between purely serving our customers and at the same time understanding the impact towards our financial and climate nature. Because, I mean, of course, you can look across all of the impact areas when you, when you starting to decouple your, your revenue from production and that.

[01:09:55.270] - Seb Read

And actually that's worth dwelling on that point for a moment. Some of our listeners might imagine that resale actually has a negative impact on the climate because it might involve more logistics, more transportation. But I guess when you talk about the climate, H&M meeting its climate targets, you're thinking there about the production and the manufacturing new clothing which is a huge part of exactly your emissions exact.

[01:10:17.890] - Sara Eriksson

Exactly, and I think it's of course we need to consider transports and logistics and warehouse costs that oil energy used to operate in the warehouses. But like you mentioned, it's smaller than the current production. And I think also it's interesting how the supply and demand also comes closer geographically if you're operating in a recent model, often you will have someone wearing the garments in a region and most likely the next person who will wear that garment will not be that far away. So it's also breaking a little bit the distances between supply and demand.

[01:10:57.040] - Seb Read

Like a localised supply chain. And how are customers reacting, what sort of feedback you're getting?

[01:11:02.880] - Sara Eriksson

Great. I think the success that we see is also depending on how we do it. But when we really, when we curate the current trends that we do for our conventional business models and we use the same skills and the same insights that we use to cater for their needs in the conventional model to also serve the purpose of scaling our recent model, it works, we know how to do this and they trust us and we can do that also to sell pre loved garments.

[01:11:35.420] - Seb Read

I guess the kind of elephant in the room when it comes to business models if you like, is that a lot of what we've talked about right now has been the. It almost feels like it's overwhelmingly positive, like a no brainer. And in many ways it is in a meta sense and in a long term sense. Customers want it, customers respond positively, we can think about the climate benefits, but there's also no secret that it's a very relatively small percentage of the market right now, eventhough it has seen drastic growth in quite a short period of time. I wondered if you could say a little bit about where H&M Group is in on that journey in terms of mainstreaming circular business models and what are your kind of big challenges looking forward?

[01:12:21.700] - Sara Eriksson

Yes, maybe starting with the challenges I think, I mean most of those models looking at resale but maybe also repair as a circular business models, they are labour intense, and you need to, I mean, it's manual work, you need to sort, you need to populate the information. Sometimes you need to take pictures, or you need to repair something, or just store it, and handle the goods. And again coming back to the fact that supply and demand will happen in a more local, near near-shore area, It's also a different kind of labour cost that is involved. So the margin will then be just normally lower than in your conventional business models. So I think this is where we see that when you really compare it to scaling an initiative that would make your conventional business model grow and you compare it to making something grow at a lower margin. Now that's an internal challenge for steering because we are a growth company and we want to continue being a growth company. So I think, I mean I think we see opportunities also from the policy space also to really incentivise companies to actually scale these business models in a way that also make business sense.

[01:13:45.200] - Sara Eriksson

Because we know if it's does make business sense then we will have the effort and the resources to make it grow. And then coming to the size of where we are today. So I think also as we started to look at the climate impact of scaling resell, of course, we went into some very interesting internal modulation on how big this needs to be to actually impact our total footprint. And as we come closer between financial reporting and sustainability reporting, we started to build those dashboards and really keep track on the size of this, which will then enable us to disclose this for the first time in the public. And like you say, it's a very small share. So today, in 2024, it was 0.6% of our total business on an H&M Group level, that from reselling and that is small. It's a very small share, but we are a very, very big company as well. But what is positive is that we have been tracking those numbers internally over time, so this was 0.4 in 2023, it was 0.3 in 2022. So you can also see that the share had doubled in two years.

[01:15:05.980] - Sara Eriksson

So it also tells you a little bit about some hope for the future. And also looking at Sellpy, this secondhand platform, individually, they grew 37% between 23 and 24 organically, without expanding to new markets. So we see that the customers are there. It's a segment that is growing with or without us. And we're really excited to have more companies also looking at those numbers, sharing those numbers so that we can understand what actually success looks like for a native linear company that is seeing this share grow over time.

[01:15:44.470] - Seb Read

And I think it's. It is worth saying that that is quite a unique thing that you've done in terms of sharing with us on this podcast, that the actual size of the circular, the amount of revenue coming from circular business models, which isn't, you know, which is a really valuable way of starting to have a conversation about progress whilst acknowledging that there's a long way to go. I guess, the question it offers is what are some of the areas, we've talked a little bit about some of the challenges, that H&M Group needs to invest in to lift that kind of 0.64% to whatever targets you set in the future?

[01:16:24.150] - Sara Eriksson

Yeah, I think, of course, also looking at like we talked about a lot of the processes being very manual, of course. It's interesting then to see also what could potentially be optimised to a certain extent in the future to even increase the efficiency and by that potentially increase the margins. I think it's also interesting to think about the digital product passport in the future as a potential enabler of convenience of tracking additional transactions and why not even monetize on that in the future? So I think it's really looking more at kind of financial. It's really, I think about the business case again coming back to the prioritisation of really putting this in front of the customer that will make the difference for us because it looks like they are ready at least.

[01:17:20.040] - Seb Read

And I guess there's many other factors that are connected in. And I know H&M has invested a lot in the design of its products, of course, for example, and you mentioned policy and infrastructure. You kind of have to make progress in all of these fronts simultaneously to unlock the larger scale benefits.

[01:17:38.620] - Sara Eriksson

Exactly.

[01:17:40.140] - Seb Read

Sara, thanks so much for joining us on the podcast.

[01:17:42.180] - Sara Eriksson

Thank you for having me, Seb.

[01:17:43.820] - Pippa Shawley

So Chloe, what were your main takeaways from that conversation that Seb had with Sara?

[01:17:48.060] - Chloe Holland

I mean, what a great conversation. I feel like Sara was really open and honest with us about their journey at H&M Group and actually some of the harsh realities and challenges that are facing circular business models today. So one thing that Sara mentioned specifically was around the fact that today if you compare like, for like profit margins so linear to circular business models, you often find that the circular business models, profit margins are lower. And that is just a bit of the reality of where we are today, the systems that we operate in and the incentives that sit around the linear model as well, from including from like a policy perspective too, and where the investment lies. I think what Sara really jumps into there afterwards is actually how H&M Group have begun to tackle that challenge internally because often we hear from businesses that there's a huge debate about should we even invest in this model if the profit margins are lower? It's a really hard barrier for people to get over. And actually what we found from businesses that are making it happen like H&M Group is they're looking at this bigger picture.

[01:18:56.000] - Chloe Holland

So they're looking actually at how circular business models can offer value in the short term, but also really thinking into the long term and thinking across a number of different elements. So some of the elements that Sara mentioned. Sara mentioned there were things like customer. So she talked about meeting the customer where they are. They know that customers are interested in buying secondhand goods. There is a marketplace already. They're seeing that demand. So they are jumping into that space and meeting customers where they are and they're seeing the benefits from it, right?

[01:19:28.340] - Pippa Shawley

Which is amazing.

[01:19:29.740] - Chloe Holland

It's fantastic. So they're really leaning into that customer angle and element as well. I think the Other thing she talks about as well is the financial viability and that's something that they are actively tracking as well. Another thing that organisations often don't understand or maybe sometimes just aren't prioritising tracking, are actually how much revenue are you generating from these types of models? And actually just putting a number on that and tracking it is really, really beneficial to just get a baseline and understanding of where you are in comparison to the rest of your business as well. And then the third element that she talks about is climate and the impact of this circular business model and actually talking about the fact that this is a lower carbon revenue stream for H&M Group. So thinking about their broader ambition of decoupling revenue from resource use, this revenue stream, Sellpy as a platform is a huge opportunity for them in terms of being able to do that and being able to also potentially meet their, their climate goals through this, this kind of project and venture. And I think the final thing that she, she mentions as well is just how they are planning and also using the learnings from this model to apply to their wider brands as well.

[01:20:46.140] - Chloe Holland

So thinking not just in terms of Sellpy and growing it, but how can we actually take the learnings of this resale model and apply them to the other brands in their portfolio, which is.

[01:20:56.560] - Pippa Shawley

Where we'll really see that growth, right? like taking the learnings from one area and being able to carry them through large businesses and beyond.

[01:21:04.280] - Chloe Holland

Yeah, yeah, definitely. And you know, for H&M Group, this is really the starting point of their journey. They're getting really transparent as well about that percentage of revenue. And whilst it might seem very small today, it's definitely a stepping stone in the right direction. And just hearing that kind of growth potential as well is huge. Actually, you know, it's a really exciting thing that we're seeing across the market as well, other organisations stepping forward and also sharing some of their revenue around circular business models as well as sharing their growth stories. So Vinted, for instance, recently talked about the fact that they had increased their revenue by 36% from 2023 to 2024.

[01:21:45.060] - Pippa Shawley

Wow.

[01:21:45.620] - Chloe Holland

As well as increased their net profit 330% year on year, which is really, really exciting and really proves that this business model can be both revenue generating and profitable. As well as that, we're also seeing some other brands reporting and putting their revenue figures in the public domain too. So back in 23 we had Patagonia talking about their Worn Wear, their Worn Wear initiative and the fact that in 2023 it generated 5 million US dollars as well in revenue. So we're starting to see these figures out there, starting to get a feel of the growth and also the dynamic in the market of where these different models are coming into play.

[01:22:28.040] - Pippa Shawley

And seeing the ambition from those brands as well.

[01:22:30.040] - Chloe Holland

Yeah, definitely, definitely. And it's a really, really helpful starting point in terms of that transparency and acknowledging just where we are today and the journey that we need to get on to scale.

[01:22:39.480] - Pippa Shawley

That's great. Thank you so much for joining us, Chloe. Next week we're going to hear from another one of those brands. We're going to hear from Arc'teryx to find about their journey in the Fashion Remodel. But for now, thank you for listening. Thank you to Chloe for joining us. Thank you to Sara and Seb. And if you enjoy this episode, then please subscribe and share with your contacts. We'll see you next time.