The Brilliant Business Model Behind H&M's Clothes Recycling Plan

It’s not easy being green, particularly for a massive apparel retailer like Hennes & Mauritz (HMB), but it can be profitable.

The world’s second-biggest retailer has a fascinating new plan to cut waste in the fast-fashion business it helped create. It is offering discounts to consumers who turn in their old clothes at H&M stores. The initiative started in February and will be in all of H&M’s 2,900 or so outlets by the end of the year.

It’s a brilliant piece of green marketing by H&M’s corporate responsibility staff. But the company’s number-crunchers deserve some credit, too; they have carefully constructed the program in a way that makes it hard for H&M to lose.

For every bag of clothes (regardless of brand), the Swedish retailer gives a small discount. On its corporate website, H&M says it will offer £5 ($7.70) off a purchase of at least £30. On its U.S. site, H&M promises a voucher for 15 percent off one item per bag of old knickers and pajamas, with a limit of two vouchers per day.

In other words, H&M is not granting discounts of more than 17 percent—and less as shoppers spend more. That’s a commendable amount, but not overly generous for a company that routinely posts a gross profit margin around 60 percent and a net profit margin around 15 percent.

H&M also sells the castoff clothes, subsidizing the discount further. Say a London customer donates a bag and then buys £40 worth of skinny jeans and H&M’s David Beckham-brand underwear. If the retailer sells the used clothes for just £1, it has conceded just £4 overall—a 10 percent discount, effectively—and is probably still in the black.

H&M, which did not respond to phone calls and e-mails this morning, notes that revenue from the returned garments will be used to offset the rewards, but it will also donated to local charities and groups working on recycling innovation.

Meanwhile, customers get to feel virtuous about shopping at H&M, a pitch that’s been hard for the company to make in the wake of the garment factory fires in Bangladesh. H&M, which has more of its clothes made in Bangladesh than any other apparel company, quickly agreed to sign a legally binding agreement to improve building safety there.

H&M sustainability manager Henrik Lampa told Bloomberg: “We don’t want clothes to become waste, we want them to become a resource instead.” A resource indeed. By the time it next reports earnings, H&M may have recycled a bunch of ratty old skinny jeans into revenue. If the recycling program functions correctly, it could help turn around H&M’s same-store sales, which fell another 4 percent in the three months through May.

BusinessWeek.com