Apparel Retailing FY2013: the best year in 15

Apparel sales powered ahead last year, driven by consumer demand, excellent retailing and a stronger emphasis on value rather than price. With the exception of GMS stores sales rose across all formats – even at department stores. Displaying its boundless dynamism, the apparel industry once again included retailers achieving exceptional sales growth, with no fewer than four firms up more than 40% and 16 more than 10%. With little room for price competition and much of the nation replete with apparel retailing, all agree the challenge now is to improve product and marketing, and to create chains that stand out from the crowd.

Growth for everyone except GMS

FY2013 was a strong year for apparel retailing – sales rose 2.27%, the highest rate of growth for more than fifteen years, and only one of three years of growth since the turn of the century. Gaining even more through higher than average growth were the top 100 apparel retailers which now account for 64.2% of total apparel sales and provide a good barometer for the state of apparel retailing overall. These were last year’s highlights:

• Sales growth among the top 100 averaged 3.8%, down from 5.2% the year before, but still outperforming the market as a whole.
• While all the growth in FY2012 came from specialty and e-commerce, last year department stores also increased sales: average growth among specialty retailers was 6.5%, followed by non-store up 4.5%, and department stores rising a healthy 2%.
• Specialty retail growth slowed from 10% in FY2012.
• GMS/supermarket apparel sales fell 3.7%.
• Sogo Seibu and Tokyu were the only two top 10 department stores to see sales fall.
• Aeon and Ito-Yokado both saw apparel sales fall by nearly 5%.
• Most of the top 10 apparel retailers saw sales rise, let down only by Aeon Retail, World and Sogo Seibu.
• The 10 retailers with the highest growth were all specialty chains other than e-commerce firm Start Today.

Apparel market grows 2.27%

The top 100 apparel retailers continue to grab a larger share of the total market, a long-term trend. This is partly a result of mergers and consolidation, but also because of rapid expansion by specialty chains, online portals and improving stability in apparel sales at department stores.

• The size of the apparel market was ¥12.783 trillion* (*Small font footer: JC’s estimate of apparel market size is based on METI and JADMA data and is more inclusive than other estimates which fail to account for the sales of large stores with small ratios of apparel sales, and non-corporate retailing which still accounts for a significant, if declining, share.) in FY2013, up 2.27%, within an apparel, accessories and footwear market of ¥16.730 trillion, up 2.52% (Chart 1).
• Total sales for the top 100 reached ¥8.207 trillion, giving the top 100 a share of 64.2% of the total apparel market (excluding accessories and footwear), up from 63% the year before.
• Even accounting for mergers, the consistently higher performance of the top 100 over the last decade or more has caused the market to consolidate rapidly. In FY2006, the top 100 had sales of ¥7.450 trillion, giving them 53% share of the apparel market – in just seven years, their share has risen 11 points.
• This increasing dominance of the apparel market by corporate retailing is more clearly demonstrated by the share of the top 50, top 20 and top 10; the top 50 enjoyed share of a huge 53% of the apparel market and the top 20, 38%. The top 10 alone now own more than 26% of the entire market, and 41% of the sales of the top 100.
• Thanks to higher department store sales, market share by format stabilised last year with only GMS/Supermarkets declining significantly (Chart 2).
• Specialty stores had a mixed year; the top retailers did well but many smaller firms with sales of less than ¥15 billion suffered from the growing levels of competition, in particularly the improvements in merchandise design and quality among leading chains.

Fast growth across all formats

The rapid increase in market share is testament to the dynamism of the apparel and fashion industries. The sector is constantly being replenished and infused with new growth, ideas and innovation from new entrants who are able to grow very fast. Powerful new players in the middle of the rankings now include Mash Holdings, GU, and Trinity Arts, not to mention the overseas chains, with H&M alone up 46% (see Chart 4 – Inditex Japan and Forever 21 are not included in our calculations due to lack of available data).

• Mash Holdings (formerly Mash Style Lab) rose 48.3% to ¥30.1 billion on the back of both strong  like for like growth and new stores for its key chains, Snidel, Gelato Pique and Fray I.D.. Strong levels of presentation, merchandising and marketing suggest plentiful growth in the year ahead too.
• GU rose nearly 45%, adding a net 33 stores, but it also got a boost from successful TV spots, strong social media campaigns, and the popularity of its knitwear and leggings. Its ongoing commitment to improving product value through design and customer feedback suggest GU has considerable potential both in and outside Japan.
• Uniqlo had an excellent year, up 10.2% within Japan. As has been said before, the key to fixing Uniqlo’s Japanese sales is women’s fashions, and last year, womenswear sales rose 16%. Even more impressive was that almost all of this growth came from existing stores – Uniqlo only increased net store numbers within Japan by eight last year.
• Trinity Arts, up 42%, raided the cash reserves of its new parent Adastria Holdings and splurged on opening a net 96 stores last year, but same store sales also rose. The ongoing popularity of its key chains Niko and… and Studio Clip suggest good momentum going forward.
• This made up for slow growth at sister firm, Point, up just 2.4%. Adastria is aware of the problem, in particular the very staid, copycat product produced through its main trading partners, and is instead expanding its own direct sourcing in a bid to differentiate chains like Global Work and Lowrys Farm both from each other and from the competition. This differentiation is necessary if it is to avoid trouble ahead.
• Urban Research was the fifth fastest growth apparel retailer in FY2013, jumping 27.4%. It opened a net 46 stores. Its Doors chain for the SC market has been a significant source of growth, but its new SPA chain, Sense of Place, is one to watch, offering quality original merchandise at competitive prices, and is proving popular with SC developers and consumers alike.
• Cross Company posted growth of nearly 20%, but most of this came from heavy investment in new stores, up a net 108 to 602. It also recognises the need to up its game in terms of product design and value.
• New to the top growth rankings is Ryohin Keikaku (Muji), which rose 12.9% on the back of much improved merchandise, with more emphasis on premium lines, helping it further towards its target of 40% of sales from apparel in the medium term.
• Also new to the growth rankings is Aoki Holdings which managed to improve like for like sales as well as investing in new stores for its Orihica and other chains, increasing stores by 86 net.

Apart from specialty chains, six direct marketers/e-commerce businesses made it into the top 30 fastest growing businesses. As well as Rakuten, Start Today and Jupiter, all the leading former catalogue firms posted strong growth, partly from expanding e-commerce and mobile commerce operations. The only exception was Nissen, which had one of its worst years, down 12.5%, leading it to accept new ownership under Seven & I. Seven & I plans to make Nissen the hub of its new omnichannel strategy, marrying its strengths in direct marketing with the logistics prowess of Seven Eleven. If it can execute well, it could inject new life into the Kyoto-based firm.

Department Store revival

As reported in last month’s focus, department stores made hay last year on the back of strong demand for luxury and premium brands, including in apparel. Of the department store firms within our top 100 apparel retailers, 21 saw sales grow last year and just seven saw sales fall. Average growth rose 2.0%, which helped reduce the loss in market share by just 0.2 points to 24.6%.

Four department stores made it into the top 30 fastest growing retailers of apparel. Matsuya was again a top performer, adding new brands, refurbishment, a focus on tourists, and new marketing ideas. Hankyu-Hanshin benefited from the unveiling of Hankyu Umeda and the first full year of Hankyu Hakata. Keikyu rose 9.6% on the back of refurbishment and Takasahimaya jumped 9.8%, but this was largely due to a recalculation of its apparel share.

Considering the number of drab stores still operating within department store chains, this is a very respectable result. The leading firms are all planning to upgrade regional stores this year and next which may help boost sales further, depending on consumer demand. Their apparel market share within the top 100 may have fallen from 38% to 24.6% since 2006, but it is likely that, store closures apart, share will stabilise over the next few years.

GMS still adjusting private brand formula

Overall Aeon remains a powerful retailer of apparel; include its subsidiaries like Aeon Kyushu, Aeon Hokkaido, Taka Q, Cox, and Laura Ashley, and its apparel sales come to around ¥600 billion, making it the second largest apparel retailer within Japan. But it will be disappointed in its apparel sales last year. Both the main GMS format and its Cox subsidiary saw sales fall.  The only consolation is that all the main GMS and supermarket chains lost sales last year other than Izumi.

Gross margins improved for some, such as Ito-Yokado up 0.4 points and Daiei up 0.2 points, but there was surprisingly little real improvement across the sector despite the increasing focus on private brands. 2014 should be better as new brands and greater investment in marketing pay off (for full details see JC1409). Other than Seiyu, Aeon is leading the sector in this regard through its TopValu brand, as well as dedicated apparel brands like Espritmur and its new specialty chain F.T.

Specialty chains consolidate at the top but profits fall

Specialty chains within the top 100 apparel retailers saw average growth of 6.5%. This exceeded the growth of specialty apparel retail chains overall (150 retailers with sales over ¥1 billion) which grew 5.8%, still an exceptional result. While store expansion is normally the primary reason for growth, last year the rate of store growth was around 3.3%, lower than in previous years. One of the prime reasons was the slow down in store expansion by the likes of Uniqlo, which opened 51 stores but closed 43, a net gain of just eight stores although since new stores were generally larger, net space increased. Instead a key feature of FY2013 was the increase in same store sales.

The bulk of growth came from larger retailers – among the top 150 specialty retailers, 80% of the sales growth came from the top 11 firms. With the exception of fast growing smaller firms like Mash Holdings, this has been the rule for the last few years and emphasises the consolidation of share among the leading firms.

While sales rose strongly on the back of consumer demand prior to the tax increase, profitability suffered due to rising import prices on the back of a cheap Yen. This led to a spike in the cost of sales and a fall in gross margins, from an average of 48.2% to 47.4% across specialty apparel retailing overall. Average operating profit margins fell one point to 8.6%.

While growth was strong in FY2013, there is a sense that the specialty apparel sector overall is now mature and entering a phase of consolidation. Plenty of growth lies ahead for the innovators but, while in previous years this was at the expense of other formats, notably department stores, in the future growing specialty chains will be taking share from other specialty retailers, especially the more staid retailers churning out standardised fashions.

Top four retailers take 50% of womenswear market

This is already being seen in some areas. The low to mid-priced, young women’s market in particular is facing a shake up, with the likes of Japan Imagination, down 10%, and Honeys losing out to chains like H&M. Smaller retailers like Egoist and Maruoka Shoji were also hit hard. Indeed among the 105 womenswear specialty retailers with sales of ¥1 billion or more, 60 retailers saw sales fall last year against 45 with higher sales. And the majority of these were retailers with sales of less than ¥15 billion – 18 dropped by more than 10%.

The older, more staid casual apparel retailers like Mac House and Cox are being hit by Uniqlo and GU. Uniqlo’s womenswear sales rose an impressive 16% last year, now accounting for almost 50% of sales. The dominance of the four unisex retailers, Uniqlo, Shimamura, Point and United Arrows at the top of the womenswear rankings is striking: among all womenswear specialty retailers with sales of more than ¥1 billion, these four retailers alone took 47% of sales. The top 10 took 73%.

In menswear, the picture is even more stark; the top three, Uniqlo, Aoyama and Aoki own 52% of the market and the top 10, 77%.

It’s all about the product

Much of the country has already been covered by the main specialty chains, and while SC development continues apace, the multi-banner larger retailers and international chains dominate new builds. With little virgin territory left within Japan, competition between chains will intensify, but this does not mean on price. Rising import costs and the already extensive work done to pass on cheap sourcing to consumers in the last decade mean that the era of apparel deflation is well and truly over. Competition will instead come in the form of merchandising, marketing and retail entertainment. What marks out the likes of Trinity Arts, Mash Holdings and Urban Research is not their cheap prices but a judicious mix of distinctive merchandising, multiple well-targeted formats, dynamic presentation and the kind of store browseability that suits SC and station shopping.

Retailers are well aware that competitive advantage increasingly lies in the strength of merchandising, originality and store appeal. A recent survey of apparel retailers by Senken bears this out. While 64% of 125 firms expected sales and profits to increase in FY2014, most said this would only happen through significant improvements in merchandising. 70% said the number one priority in the next year would be on upgrading product design and quality. To do this, more firms were reviewing supply chains and looking at factories that could turn out better rather than just cheaper. Anecdotally, many are emphasising product originality, essential in a market where so much merchandise is too similar.

The lack of easy pickings within Japan also means growth is being sort elsewhere.  Among the bigger firms, the focus is overseas markets but smaller companies like Mash Holdings are also looking to expand overseas at an earlier stage than their older peers. Most are looking to take existing formats as is, but others are building entirely new chains designed for global markets, such as Cross Company’s Koe chain which opened its first store last month in Okayama, and for which the first overseas stores are slated within 18 months.

At the same time, expansion across product categories is also a key change especially among the mid-ranking fast growing firms. While apparel and accessories are core, the breadth of merchandise in stores like Studio Clip and others is striking, covering interiors, gifts, food, bicycles, and kitchen equipment. Some new chains are being planned from scratch to be something akin to general lifestyle retailers, selling fashion for both the body and the home in one store – while yet to be unveiled, Pal’s Colony 2139 looks like being one such example.

This kind of cross merchandising makes sense given the level of competition in apparel retailing, but also exploits the growing demand for fashioning the home that is at last taking hold in Japan.

All of which speaks to promising growth ahead for some retailers, but the broader issue of consumer demand for apparel remains uncertain. The cheap Yen combined with rising labour and raw material costs overseas mean that prices of apparel are rising. Uniqlo and Muji among others announced higher prices for Autumn 2014, and without a strengthening of the Yen, there does not look to be any reason to expect prices to fall. Any increase in prices will help top line sales growth at least, but at the same time, as has been said in these pages before, not without higher incomes. Aside from the wealthy, wages continue to fall in real terms when both full and part-time workers are taken into account. And when prices rise and wages fall, there is a limit to demand for fashion consumption in the mass market, even in Japan. Consumers will still buy fashion, but will want every purchase to count – adding yet another reason for retailers to seek out even better price/value performance.