At Silencio nightclub during Paris Fashion Week, a stellar lineup featuring pop icon Cher, Swedish singer Robyn, and South Korean DJ Peggy Gou took the stage, captivating an audience that included actors and models such as Jared Leto, Elle Fanning, and Irina Shayk.

Draped in dazzling ensembles from H&M‘s most recent collaboration, a collection with the label of the late fashion designer Paco Rabanne, known for revolutionizing fashion with the introduction of metal chainmail and sequins during the 1960s.

The glamorous affair orchestrated by the Swedish fashion retailer exemplifies its appeal to a more aspirational clientele, marking a strategic shift to rebuild profit margins and distance itself from direct competition with the fast-fashion powerhouse Shein.

The industry is experiencing a significant upheaval due to the swift expansion of the China-based online retailer, known for offering dresses at $8, t-shirts at $5, and jewelry at $2.

As per Coresight Research, Shein, poised for an IPO next year, currently holds the title of the world’s largest fast-fashion retailer, boasting an estimated 18% market share. Following closely are Inditex, the owner of Zara, with 17%, and H&M with 5%.

Furthermore, Shein poses a threat to key players in their primary region; data from data.ai reveals that its app has a larger user base in Europe than in the U.S. Additionally, the number of monthly active users in the region has surged, more than doubling to reach 65.5 million since January 2022.

“There’s no doubt that Shein is a disruptor. They have come into the market and grown very fast, which I’m sure has surprised H&M,” said Adil Shah, portfolio manager at Storebrand in Oslo, which holds H&M shares.

In the fourth quarter, H&M experienced a 4% decline in sales, trailing behind Zara, whose parent company Inditex reported a 7% growth in sales for its latest quarter.

Amidst last year’s inflation-driven cost increases, H&M was slower to adjust its prices compared to Zara, given that its customer base, on average, tends to be more price-sensitive.

However, in the current year, a combination of price hikes and decreased discounting has enabled H&M to elevate its operating margin to 5.9% for the initial nine months of its financial year, up from 3.9% during the corresponding period last year.

According to Alistair Wittet, a portfolio manager at Comgest in Paris, traditional high-street brands like H&M and Gap are witnessing a decline in market share to Shein. However, Zara faces a less direct threat, as its customer base is more inclined towards white-collar consumers.

“I would be very surprised if Zara were to lose share in the coming years,” Wittet said. “I don’t doubt that Shein will grow faster, but Zara will continue to outperform the broader apparel industry.”

In its pursuit of drawing in a more aspirational clientele, H&M is emulating the strategy of its Spanish counterpart, which has effectively enhanced its image through store upgrades and strategic marketing initiatives.

Investors appear optimistic about H&M achieving its 2024 target of a 10% operating margin, reflected in the nearly 60% increase in its shares this year, outperforming Inditex. However, it’s worth noting that Zara’s parent company maintains a higher valuation than H&M.

Shah, from Storebrand, mentioned that H&M is actively striving to expedite the release of new collections to enhance its competitiveness against Zara and similar brands such as Shein.

According to Barclays analyst Nicolas Champ, the Rabanne collection indicates that H&M is aiming to distinguish itself by elevating its brand and augmenting the fashion element within its assortment. This strategic move is seen as a response to the intensified competition in the budget segment of the market, driven by Shein’s rapid growth.

H&M asserts that its designer collaborations “demonstrate that design and sustainability are not solely determined by price,” even though the pricing for these collaborations significantly exceeds the retailer’s average.

The lineup comprises a metallic mesh dress crafted from aluminum priced at $749, a sequin disc mini-dress available at $399, purple sequin trousers for $299, and silver cowboy boots priced at $399.

Analysts at RBC mentioned that price hikes might potentially reduce H&M’s competitiveness. However, they also noted that the strong performance of its premium brand, Cos, indicates a demand for higher-priced products.