H&M's Nearshoring Gambit: Can Strategic Shifts Salvage Margins and Market Share?

H&M's pivot to nearshoring—accelerated since 2020—has positioned the retailer as a bellwether for the fast-fashion industry's response to geopolitical risks and rising competition. As tariffs, supply chain disruptions, and rivals like Shein and Temu redefine the sector, the Swedish giant's shift toward localized production in Europe and Africa offers both promise and peril. The question for investors: Can this strategy stabilize margins and market share, or is H&M merely treading water in a rapidly evolving market?

The Nearshoring Play: Proximity Over Scale
H&M's nearshoring strategy hinges on reducing reliance on distant manufacturing hubs like Bangladesh and China, where costs and lead times are rising. By deepening ties with Morocco, Turkey, and sub-Saharan Africa, H&M aims to cut logistics costs, mitigate tariff risks, and tap into emerging markets. Morocco, in particular, has become a linchpin, with its automotive and agri-food sectors providing a robust supply ecosystem. For instance, its automotive industry—backed by European and Chinese automakers—now contributes 25% of GDP, offering synergies for H&M's need for fast, localized production.

This geographic repositioning aligns with H&M's sustainability goals: 97% of its cotton was sustainably sourced by -2020, and it aims for 100% recycled materials by 2030. However, the strategy faces hurdles. While proximity lowers logistics costs, it hasn't yet offset rising input prices. In Q2 2025, gross margins dipped to 55.4% due to currency headwinds and tariffs, despite nearshoring efficiencies.

Competitive Crosshairs: Shein's Speed vs. Zara's Precision
H&M's rivals are leveraging their own strengths to outmaneuver it. Zara's proximity-based model—50% of production in Europe—enables a 6-week design-to-shelf cycle, faster than H&M's seasonal collections. Meanwhile, Shein's China-based ultra-flexible supply chain launches 1.5 million SKUs annually, using AI to mirror trends in days. Temu, the price-warring upstart, undercuts both with “de minimis” tariff loopholes and gamified engagement.

Shein's margin estimate reflects its ultra-low pricing model.

H&M's mid-market position is eroding. In Spain, Shein commands ~50% market share, while Zara's premium shift (e.g., collaborations with Balmain) has solidified its 36% hold. H&M's 6.1% Spanish market share highlights its struggle to compete on speed and price.

Margin Math: Nearshoring's Mixed Results
H&M's 2024 financials showed promise: gross margins rose to 53.4%, aided by supply chain streamlining and nearshoring. But 2025 has been rocky. Currency fluctuations (70% of sales are SEK-denominated) and U.S. tariffs—threatening 10-15% cost hikes—have dented margins further. The company's plan to close 190 underperforming stores and open 80 new ones in high-growth markets like Brazil aims to offset these pressures.

Yet H&M's operating margin (10.4% in Q2 2025) trails Zara's 11.9%, underscoring the gap. Analysts warn that without faster inventory turnover or a premium pivot, H&M risks becoming a “second-tier” brand.

Investment Take: A Wait-and-See Stance
H&M's nearshoring and sustainability bets are strategic but unproven. While Africa and Europe offer long-term growth, near-term risks—currency swings, tariff wars, and Shein's relentless expansion—loom large. The stock's 12-month performance (-15%) reflects this uncertainty.

Investors should monitor two key metrics:
1. Gross Margin Recovery: A rebound to pre-2025 levels (56-57%) would signal nearshoring success.
2. Market Share in Emerging Regions: Brazil's 2025 entry and Africa's growth could offset declines in Europe.

For now, H&M's stock appears fairly valued at 12x forward earnings. However, without clearer margin stabilization or a disruptive innovation (e.g., AI-driven design), patience is warranted. The nearshoring gamble is a step forward, but the finish line remains distant.

Final Verdict: Hold for now. Buy only if margins rebound and market share stabilizes in 2026. Otherwise, Zara's premium resilience or Shein's IPO (if transparent) may offer better risk-adjusted returns.