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Swede shop: How do H&M stay on top?

High-street fashion used to be simple: stores sold fast trends at low prices. Then shoppers got wise to fair trade. The recession hit. So how does a billion-pound brand stay one elegant step ahead?

In the golden age of shopping – before the environment, the economy and eBay got their claws into our consciousness – all a high-street store had to do was produce clothes that chimed nicely with current trends and catwalk looks, clothes that made shoppers spend and cash registers sing. But as our belts have tightened in the current economic climate, brands have responded in different ways; some have upped their prices to accommodate rising production costs, others have slashed them in an attempt to keep themselves afloat.

But H&M has chosen to occupy the middle ground. It has stuck to its guns and kept true to its catchphrase: "Fashion and quality at the best price". The famous red H&M logo speaks of a singular place, where you can either pick up a lurex jumpsuit, or stick to a five-pack of white pants; you might even be purchasing the same item as someone else in the queue who is more than 20 years your junior or senior. But you know that you can rely on the label and, whether you call it by its acronym or the more traditional "Hennes", the brand is likely to occupy a solid and reliable place in your heart.

H&M's company HQ is in Stockholm, a city where even the most ordinary looking person is astonishingly beautiful or cool. Head of design Ann-Sofie Johansson is, unsurprisingly, both. "At the beginning, it was only 'fashion at the best price' but several years back, we added the term 'quality'," she says. Johansson is dressed impeccably in this season's putty tones: trousers from H&M, a blouse from sister brand Cos, and rather flashier loafers by Miu Miu. "We're working really hard on that and we always have the customer as the focus. Our goal is to satisfy them with great collections every year."

The "collections" that Johansson refers to don't function according to the usual spring/summer and autumn/winter stereotypes; rather, H&M operates on the basis of constantly shifting stock, introducing new pieces throughout the season, according to customer reception and demand, as well as more transient influences such as which celebrities are wearing what. In the workrooms at the company's Stockholm HQ, designers and pattern-cutters are already working on the spring/summer 2011 collection, which will be in the shops this time next year.

"We don't want to dictate fashion," continues Johansson, "we just want to be a source of inspiration, to allow our customers to dress the way they want to dress." This sort of democracy is integral to the chain's success. Since 2004, the store has also collaborated with globally recognisable designers, including Karl Lagerfeld, Stella McCartney and Comme des Garçons, on capsule collections that have sold out in frenzied scenes of speed shopping. Earlier this year, it worked with Jimmy Choo to produce a range of styles starting at £70 – more than the usual H&M price tag for a pair of shoes, but about a tenth of the price of the real thing.

"We think that good design shouldn't be a question of money," says Johansson. "We want to be an including company." So far, so Swedish. The company started life in the city of Vasteras, right in the centre of the country, as a family business called Hennes in 1947; the "M" came along when founder Erling Persson bought gentlemen's outfitters Mauritz Widforss in 1968, and began producing mens- and childrenswear. There are now over 2,000 stores worldwide, with concessions opening this year in Israel and South Korea. Persson's son Stefan – who was born the year the first Hennes opened – is a major shareholder in the company and remains chairman of the board, while his son Karl-Johan Persson is the CEO. It is company policy to hire internally and to promote employees from shop floor to boardroom, so many of those in the upper ranks have done their time in the changing rooms and behind the till.

The British love affair with H&M began in 1976, when London became the first city outside Scandinavia to have its own store; today there are 167 outlets in the UK, which last year generated almost £700m alone out of a near £2bn global profit for the company. The Arcadia group, which owns high-street rivals Topshop and Miss Selfridge, announced profits of £213.6m over a similar period.

Equally, while many companies whose remit was affordable fashion were threatened by the emergence of Primark at the beginning of the decade, H&M's strategy of using disparate suppliers for ease and speed of distribution and its policy of keeping down costs by not owning any of their own factories meant they were in a position to offer similar prices to the budget giant, while maintaining quality. "H&M's focused international expansion strategy has kept its expenditure inflation in check," explains Luca Solca, an analyst at Sandford C Bernstein.

H&M's system of fashion works by filtering high-end design into even its most basic, egalitarian ranges. Each season it produces a small amount of what are known as "trend" pieces – challenging or directional garments that might tempt only the most fashion-forward customers. Sales of these are monitored, and if they are well-received, they go back into production at a greater number so that a broader base of consumers can try them out. The middle of the triangle is then made up of recognisable and popular trends, while the bottom is a vast collection of T-shirts, vests and black trousers, the sorts of things which are produced every season and which are bought unfailingly.

"It's good to try things out," Johansson tells me, "If you see that something is popping up, but you don't know how big it will be, it goes to fewer shops and we see if there is a demand." Recent success stories of this ilk include an oversized shirt in pale pink with shoulder pads, several versions of ponchos and some "trashed" ripped skinny jeans. Next season's likeliest sell-outs are a leather-edged camel coat and a grunge-tech inspired hooded leather gilet. "Most recently, the more uniform-looking pieces have done well," says Johansson. "It was a very small trend and it has grown. We get selling figures on each specific garment, so we can follow the selling closely and react very quickly."

And reacting quickly, despite lead times of over a year for upcoming collections, is key to H&M's dominance. Their in-house designers don't go to the international shows, but they do follow style blogs and cult television; the design studio in Stockholm is home to a vast "inspiration library", where books on Bauhaus architecture sit alongside a Beatles annual and cartoon strips about dinosaurs. Dotted around are mood boards decorated with pages torn from shoots in magazines, archive photographs and street style shots; next to them are storyboards for collections, with evocative phrases like "New England" and "Carnaby" and swatches of materials pinned to them to illustrate patterns, prints, colours and themes. Trend co-ordinator Catarina Midby sits in the midst of it all.

"In 1993, we did an ethical, organic cotton collection called 'Nature Calling'," she explains, "but the fashion level was not right – it was more about sustainability than fashion. We had specific dyes and unbleached cotton, but nobody bought it." Since then, H&M has become the fifth biggest buyer globally of organic cotton, which they blend with ordinary cotton in most pieces they sell without flagging it up, sensing the ambivalence that shoppers have for anything labelled "eco" or "green", which is often seen as either overpriced or a bit naff. "We see it as helping customers make a better choice," Midby says. "We choose not to charge extra for the organic cotton we use, because we want to democratise sustainable fashion just like we try to democratise design."

The goal is to increase the amounts of organic cotton used each year for the next five years by 50 per cent, and, by 2020, for all cotton to come from a sustainable source. The reason they don't use more, explains Midby, is that there are not currently enough suppliers making anything like the amounts such a company of H&M's size needs.

High-street brands can no longer afford to ignore trade and welfare issues. This year also saw the launch of H&M's "All for Children" project with the charity UNICEF, in which it donated £5m to schools in areas where their suppliers have factories, in order to ensure that children from the area are not forced into work at a young age. "We play a leading role in the fashion industry and no one would expect a company as big and successful as us to take responsibility," says Jorgen Andersson, head of branding. "But we don't want to be like McDonald's. For the next generation, we want sustainability and environmental and social awareness to be just something that everyone does."

This autumn, H&M will open a futuristic hyperstore designed by French architect Jean Nouvel on the Champs Elysées in Paris, having negotiatied arcane French building law for more than five years. The company will also launch online shopping for UK customers and a brand new homeware store in London this November. H&M Home is a concept that suits the current mood on the high street: a small operation requiring a modest showspace, it is intended to re-create online shopping for real life. On arrival, visitors will collect a magnetic board on to which they stick magnetic tiles depicting the pieces they wish to purchase. The entire showroom contains only one display sample of each item; the rest is kept in the stockroom boxed up, minimising overheads and price; H&M will be in direct competition with Ikea.

The Swedish outfitters has come a long way. No longer just a machine for spewing out trends, it's a collective that recognises the one trend that will shape us all: the need to reform our consuming passions. If this is what the future looks like, then the fashion crowd are sure to follow.