The shift to a 'Circular Economy' business model in the case of H&M creates arbitrage opportunities that can be applied in the fashion retail industry.

1. Arbitrage opportunities are considered to be vital for companies aiming at creating value through
diversifying the use of products and materials across their value chain and replacing the use of virgin
materials (Nguyen, Stuchtey and Zils 2014).
The study identifies and quantifies the arbitrage opportunities in the H&M case example of recycling and
reusing clothes based on the circular economy concepts compared to a linear model. The study discusses
H&M’s material, resource, and energy saving advantages that can be achieved in the process of
transitioning to a circular business model. Furthermore, the study examines other possible benefits from
closing the loops of circularity in scenarios, such as increasing the life span of clothing products. The
issues pertaining to these scenarios are also explored in the report.
H&M recycle and reuse programme “the clothing conscious collection”
H&M (Hennes & Mauritz AB) is a Swedish fashion and design group with a global reach, 171,000
employees worldwide, 4,800 stores in 71 markets, online presence in 47 markets, and 9 unique brands
(H&M 2018a). The company’s vision and strategy is clearly directed towards making sustainable fashion
available, affordable and attractive to many people, as shown in the company’s three ambitions (Fig.1)
(H&M 2018a).
In 2011, H&M’s profits tumbled due to a rise in cotton prices - a key raw material in fashion - that they
did not transfer to customers, and this comes at a time where the reliance on the current linear model
‘take-make-dispose’ is considered to deplete natural resources and cause a rise in price volatility of
commodities, loss of energy, increasing waste levels, and damage to the environment (EMF 2013).

2. 1
H&M recognizes the need to decouple growth from scarce natural resources and move towards a circular
and renewable business model due to the dependency of the fashion industry on natural resources, such as
cotton, cellulosic fibers, and polyester (H&M 2018b). The company has laid out its strategy and vision to
become 100% circular, by creating circularity at each step of its value chain including design, material
use, manufacturing, operations, sales, and end of life shifting away from linear to a circular model (H&M
2018b). As part of its circular strategy, H&M launched its reuse and recycle programme “the clothing
conscious collection initiative” in 2013 through collecting clothes in stores worldwide and urging
customers to brings their old clothes in exchange for a 5€ voucher, and in collaboration with I:CO, a
global reverse logistics company, they are able to collect clothes for rewear, reuse, recycle or energy
production (EMF 2014; Stål and Corvellec 2018; Shen 2014). Clothes that can be reworn are sold in
second hand markets, the ones that are not adequate are cascaded and reused in producing other products,
and the ones that cannot be reused are recycled into fibers and small portion is used to generate energy
(EMF 2014; Shen 2014). Similarly, H&M collects jeans and sends them to a partner in Pakistan for
recycling into fibers as input for new jeans, saving on virgin materials (EMF 2014). In addition to
recycling cotton, H&M uses recycled polyester, plastic, and wool in its products, as these recycled
materials help in saving water and energy usage, lowers CO2 emissions, and sends zero waste to landfills
(Shen 2014).
The main challenges that faced H&M’s reuse and recycling programme since its inception were making it
easy and appealing to customers to return old clothes to its stores, and making yarns from recycled fabrics
as it is not strong enough without mixing them with virgin materials because the technology does not
currently permit to use more than 20% of recycled cotton without losing fabric’s quality (H&M 2015).
Other challenges in the supply chain come from import barriers and regulations on used clothes in key
markets such as China, EU, and Turkey, as well as the logistics costs of collecting used clothes in stores
around the world and sending them to suppliers for recycling (H&M 2015; EMF 2014). In order to
overcome the former challenges, H&M has continuously created demand and partnered with innovative
technological and other firms in the field, such as Worn Again, Re:Newcell, HKRITA, Demeto, Danone,
EMF, partnered with I:CO to collect clothes from stores worldwide, and encouraged customers to return
old clothes to stores through offering vouchers of up to 10% discount from their next purchase (H&M
2018c). For example, Re:Newcell’s technology can recycle used cotton and cellulosic fibers into new
sustainable textile fibers, and Danone’s Bottle2Fashion project recycles plastic bottles and waste into
polyester that can be used as input in making H&M clothes (H&M 2018c). Furthermore, H&M uses
organically grown and BCI (Better Cotton Initiative) cotton as part of the quality cotton blend making of
its fabrics along with recycled cotton, contributing to less water waste, pesticide usage, and better training

3. 2
of cotton farmers (H&M 2015; H&M 2018c). As for the latter challenge, H&M relies on increasing
economies of scale to reduce sea transport and logistics systems costs for its global recycling and
transport operations, allowing it to benefit from arbitrage opportunities in comparison to virgin material’s
increasing costs (EMF 2014).
Advantages of H&M’s reuse and recycle programme
Recycling in the textile industry is difficult and recycled fabrics are considered to be an expensive process,
according to Stål and Corvellec (2018), and presumably cotton is the main material used in textile
manufacturing that requires a complex process of separating fibers composition in old clothes for
recycling (Shen 2014; H&M 2018c). This seems to be at odds with the arbitrage opportunities that can be
achieved from H&M’s recycling programme, since arbitrage is expected to deliver value creation at profit.
Data from H&M’s recycling programme is only partially available, so the report relies on H&M’s
sustainability and annual reports as well as other resources to examine the advantages and arbitrage
potential from recycling, since it accounts for around 40% of H&M’s collected clothes (EMF 2014).
Considering that cotton is the main component in textile production, Wanassi, Azzouz and Hassen study
(2016) shows that there is a cost-benefit for firms using a blend of recycled waste yarns and virgin cotton
yarns at a ratio of 50:50 compared to 100% cotton yarns from virgin material. The study indicates that the
raw material cost of blended yarn is 33.5% the cost of 100% cotton yarn, and the cost of manufacturing,
including labour, capital, and energy, is 33% of the cost of 100% cotton yarn and a total cost of 66.5% the
total cost of 100% cotton yarn. Therefore, there is a saving potential of 33.5% of using a blend of recycled
and virgin cotton fibers compared to 100% virgin cotton fibers. A similar blend of recycled and virgin
materials is being used by H&M, which seems to provide an arbitrage opportunity over using virgin
materials.
Further quantification of material, resource, and energy savings and arbitrage in the H&M case is
evaluated in Table 1.

4. 3
Garments collected in stores worldwide through I:CO account for over 56,000 tonnes between 2013 and
2017, of which 34% (estimated at 22,000 tonnes) are recycled as input for new H&M products (Table 1).
Cotton is the main material used in textiles reaching a 59% sustainable sourced cotton in 2017 (Table 1).
According to H&M reports, currently only 20% of recycled cotton from collected garments can be used
due to quality concerns which implies that the share of recycled cotton of the total material use is
estimated at 12% with a cost saving advantage in replacing the use of virgin cotton in production as
discussed in the study above. Furthermore, cost savings and environmental benefits come from water and
energy usage drop of 56% and 58% respectively as well as CO2 emissions drop year on year (Table 1).
Additional cost savings, come from recycling PET bottles, collected in store bins, into polyester that is
used to replace virgin materials (although the share of recycled polyester is quite low and estimated at
around 0.2% according to H&M sustainability report). However, H&M (2015) is continuously investing
and partnering with technology companies to foster innovation around separating complex mixes of old

5. 4
fabrics and improve recycling quality of cotton yarns, which is expected to yield higher rates of recycled
cotton and more cost saving advantages in the near future.
Closing the loops of circularity
H&M aims at shifting to a circular model and further closing the loops of circularity to capture an
estimated $100 billion in lost opportunity due to unnecessary waste (H&M 2018c). So, an assessment of
value capturing potential in other stages of its supply chain, from design to use stage (Fig.2), is useful at
this point.
Life-cycle assessment (LCA) is a useful tool that assesses the effects on the environment of a fashion
product throughout its life-cycle in a linear scenario considering extraction and production of raw material,
manufacturing, transport, consumption and disposal (Kozlowski, Bardecki and Searcy 2012). The purpose
of LCA is to provide a holistic approach and to identify the areas for improvement in performance and
suggest alternative methods and innovative solutions to process or production (Kozlowski, Bardecki and
Searcy 2012).
Despite its limitations in terms of quantifying and comparing data for individual materials and fiber
variability mixes available in textile, the application of LCA in the fashion industry shows that the
consumer stage carries a high level of negative impact, and this stems from the cleaning and maintaining
of clothes (Kozlowski, Bardecki and Searcy 2012). Laursen et al.(2007, as cited in Kozlowski, Bardecki

6. 5
and Searcy 2012) conducted LCA studies on various clothing products and identified scenarios to reduce
fiber’s variability factor during manufacturing and suggest approaches to increase the life of products at
the consumer stage. Similarly, H&M realizes the benefits of prolonging the lifespan of the product and
the focus on the use stage started in 2018, when H&M launched its pilot project ‘Take Care’ in its store in
Germany to educate and inspire its customers to use, clean, and maintain their clothes in an attempt to
further close the loops (H&M 2018c). However, this has to be coupled with a change at the design stage
to influence the consumer stage through the selection of raw materials, design for longevity, finishing and
processing, including innovative solutions such as the use of nanotechnology and 3D printing that can
provide an opportunity to design at lower costs as identified through LCA (Kozlowski, Bardecki and
Searcy 2012).
LCA studies conducted in the Swedish fashion industry reveal other areas of potential benefits, and these
are characterized by the high impact of transportation in retail and heavy water consumption in the
production phase of cotton fibers as cotton requires quite a big amount of washing during production
(Roos et al. 2016). LCA studies suggest collaborative sharing of clothes as a new business model that
delivers benefits through prolonging the life of product, reducing transport costs with online sharing, and
reducing water waste in using recycled or organic cotton (Roos et al. 2016; Zamani, Sandin and Peters
2017). Similarly, H&M’s closing the loops of circularity strategy attempts to capture value at every stage
of the product life cycle with an LCA approach (Fig.4): designing with proper choice of material,
replacing virgin materials with organic or recycled cotton, reducing the use of water and energy, inspiring
consumers to maintain clothes, and encouraging them to return and recycle at product’s end of life (H&M
2015).

7. 6
Conclusion
In conclusion, H&M’s recycling and reuse programme indicates that there are arbitrage benefits
represented in cost savings on the use of virgin materials, water and energy in comparison with the linear
model. An LCA approach identifies furthers areas of potential arbitrage opportunities for H&M especially
in design, production, and use phases, despite the fact that an LCA approach is still in its infancy in the
fashion industry due to the lack of quantitative data and variability of material mixes.
However, the challenges for H&M in its path to closing the loops of circularity remain in identifying
innovative ways to use higher rates of recycled cotton and to possibly shift to a collaborative sharing
business model that has the potential to yield even more benefits through capturing value throughout its
supply chain.
Written by Elias Hayek (MBA, University of Bradford)
Management Consultant | Innovation & Business Strategist | Digital Marketing & Omnichannel Retail
Expert
LinkedIn: http://kw.linkedin.com/in/eliashayek
You might also be interested in my articles:
GCC retail brands and the inevitable path to Omni-channel
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What is Amazon really up to?
The Circular Economy in Fashion Retail: The Case of H&M

8. 7
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