Uniqlo: the only road is overseas

Fast Retailing finally achieved its target of ¥1 trillion in sales for the year ending August 2013. It took four years more than originally hoped, but is still a significant achievement as the first apparel firm to break this iconic target. The company claims to be still on track to meet CEO Tadashi Yanai’s next target of ¥5 trillion by 2020 but it is one that won’t be reached organically.
Fast Retailing didn’t break ¥1 trillion earlier due to its failure to snag any major acquisitions over the past five years – and the string of earlier takeovers have floundered too. Purchases include Cabin, Link Theory, and the footwear businesses Viewcompany and Onezone, a quite substantial footwear retail operation that has been entirely dissolved, as well as overseas brands Comptoir des Cotonnniers and Princesse TamTam – J Brand is a new acquisition and too early to call. The Uniqlo business itself has benefited from an injection of expertise from these acquisitions to some extent but until the recent emergence of the GU chain, Uniqlo was Fast Retailing’s only growth engine.
Today Uniqlo has 853 stores at home and 446 overseas, reflecting the rapid growth of its overseas operation in recent years. It can expect little growth at home with plans to open a net 10 stores this year, and overall growth of 6.5% – not bad but not enough to sustain the group’s ambitions. Since August it has opened 12 stores but closed 11, reflecting its policy to close older roadside stores and replace them with more efficient SC and city locations, with the new design that better reflects its global brand positioning.
With little growth from new stores, the only way to expand the domestic business is through more store efficiency and the only way to do that is ensure more and repeat business. This is hard with a merchandise model that calls for long lead times for R&D of new product lines based on fabric innovations co-developed with textile partners. Many of these innovations have been a success for Uniqlo, and have helped differentiate the brand from global rivals, but successful lines are quickly emulated by competitors, a fairly simple process given the reliance on fabric and function over fashionability. As always, a major strength is also a major weakness and one reason why Uniqlo’s same store sales record is so uneven – a problem exacerbated by its policy of installing new season merchandise and removing the old, even though the weather doesn’t necessarily play to the same schedule. Thus in July like for like sales rose 5.5%, in August jumped 28.9%, rose 4.4% in September, and then collapsed in an unseasonably warm and wet October, falling 13.8% – even after a 2.2% drop in the same month the year before.
Clearly work is still needed to adapt rigid supply chains to the weather, but Uniqlo is now working on ways to complement its core fabric expertise and massive economies of scale with seasonal fashion collections that pull in more customers, especially women, and on a repeat basis. While it is not and never will be Zara, it is clear that it is attempting to shift itself at least part way to create a mixed planning model that plays to its strengths as well as offsets some of its weaknesses. This Autumn, for example, as well as fabric based themes such as the huge and compelling cashmere promotion for both men and women, it has had no fewer than five mini fashion collections in store, including extensions of its collaborations with fashion magazines on dresses, leggings and knitwear. It has also developed a series of collections with brands such as Ivana Helsinki and Green Gate from Denmark and, during the summer, even a line of 31 prints of short pants with Baskin Robbins Ice cream.
Although short cycle, small lot fashion merchandising is not in Uniqlo’s DNA, it is central to sister brand GU, and it is the latter’s growing expertise in sourcing diverse ranges of fashion basics in small lots and at low prices that is helping Uniqlo planners to become more flexible. GU’s management team is wholly committed to direct sourcing of small lots and is building a capability that Uniqlo is now tapping into for its fashion collections. As GU expands, it is likely to develop more sophisticated skills in this area.
Both the core fabric merchandise and the fashion collections are essential to Uniqlo’s overseas plans, particularly in Asia where success is vital. Overseas sales accounted for 27% of turnover last year, 34% of store numbers, and 16% of profits. Last year it opened 102 new stores in China, Taiwan and Hong Kong out of a total of 154 overseas, and going forward it is Asia from where all the growth will come; although Uniqlo is targeting dozens of stores per year in the US, there it faces levels of competition that require a more robust merchandise model.
Nevertheless, by 2015-6 Fast Retailing claims store numbers overseas will match those in Japan, meaning some 400 new stores in the next two to three years – this year alone it plans just under 200 new overseas stores.
Uniqlo has always been a very profitable operation and, theoretically, overseas expansion should make it even better, allowing it to maintain and grow its economies of scale and providing plenty of opportunity to shift merchandise and improve sell through levels. Overseas markets can also be solid profit centres, with China profit rising 74% in 2013 for example.
Whether Fast Retailing meets Tadashi Yanai’s target of ¥5 trillion by 2020 or not, there is plenty of potential growth, especially given the new focus on GU too. There is increasing speculation that Yanai may actually retire, and, despite his own denials, most sources expect one of his sons to take the reins, although Fast Retailing has proven a training ground for some of the country’s top retail executives, both past and present. Whoever leads the firm into the next decade, changes will be needed if it is really to challenge the world’s top firms. Rumours of Fast Retailing wanting to buy Gap and other overseas players like TopShop do the rounds, but what is certain is that it will need more than just organic growth to reach its ¥5 trillion target. But then meeting forecasts has never been as important to Yanai as announcing them, providing a goal for Fast Retailing’s army of driven and relentless managers.