United Arrows’ star waning?

United Arrows was the investors’ darling only nine months ago when new initiatives to increase demand tracking and to attract new groups of younger male consumers seemed to be making headway. Since April, however, customers are turning away from the brand, partly as a result of price increases 12 months ago, and the generally strong shift to lower prices by rivals on the one hand, and higher end stores targeting the new rich on the other.

United Arrows has announced a 20% fall in pretax profit for 1H2014, April-September. Same store sales for the main United Arrows chain have been poor as customers have failed to support to the brand following the April tax increase. UA is now even considering reducing prices for some of its core brands.

Excluding online sales, same store sales in October were down 4.9%, another major drop and 2.5% in November. UA’s share price fell 7% the day after the October announcement. The 20% fall in pretax profit was 4% lower than forecast at just ¥3.5 billion for 1H. Inventory levels have also remained high with in-store stock rising 18% to ¥25.2 billion, ¥2 billion left over from the previous season.

At the end of last year, UA was an investor favourite, with new initiatives seen as particularly effective, emulating Inditex by monitoring customer feedback on a constant basis and reducing lead time to store on new lines and product adjustments. All of which is useful but irrelevant if customers shun the brand’s relatively higher price points. So far it has also failed in attempts to attract more younger males as its core customer continues to age and lose interest in UA’s fashions – too staid for younger men, too modern for older ones.

With the Yen weakening and raw material prices rising, UA introduced improved quality own brands a year ago, raising prices 5-10% with, for example, button down shirts that had previously sold for ¥7,000-8,000 up ¥1,000 on average. While the effects of the price rise were masked by high demand pre-April, UA has failed to rejuvenate momentum since then.

Some stores in central Tokyo, notably the Roppongi Hills and Harajuku flagships, are reportedly performing as expected with even some sales increases, but the majority of the chain, notably SC locations and suburban stores such as those in Tachikawa and Omiya are down. Even the mid-summer sales saw overall gross margins down by 1 point to 47.7% compared to 2013. The target of a 0.6% increase in same store sales for 2HFY2014 now may be unreachable, and analysts are reportedly sceptical that the brand’s target of a 4% rise in net profit to ¥8.2 billion is achievable.

UA is now looking for ways to attract customers back, even if this means rethinking its traditional high price principles on some lines and significantly repositioning. To improve profits, lower cost production facilities are being sought with urgency.

In some ways the core United Arrows chain and select shop chains like it run counter to the changing shifts in Japanese demographics and wealth allocation. Its core customer base is getting older, particularly its male customers, but more worrying is the shift in wealth distribution in Japan. The growing pressure on even middle class households and the concomitant creation of new low-income segments is hitting some premium chains. At the same time, the rapid expansion of wealth among the affluent is leading them towards ever more upscale brands and retailers with customer service and a sense of exclusivity to match. This has fed department stores in recent years but also genuinely upscale specialty chains too. This is precisely why Isetan-Mitsukoshi is so excited about its small format division, seeing an opportunity to create a new sub set of the select shop format well above the likes of United Arrows, and taking some of the latter’s customers with them (see Page 3).

At the same time, customers are getting more demanding as budgets are squeezed and want stores offering a more dynamic, fluid store experience and up to date designers. Stores like Ron Herman meet this demand well and are popular with SC developers as a result.

That United Arrows has focused more on exploiting its brand to the nth degree – with stores even in highways service areas – perhaps hasn’t helped either, diluting its brand cachet, and while operational efficiencies are a good idea, it pays to focus on product innovation too, especially when more nimble competitors are circling.