Itokin and Onward under pressure from changing market

World shocked the apparel industry with its plan to cut 500 stores, and TSI Holdings continues to slash away at its brand portfolio. Other major apparel groups are also under serious pressure too. Itokin may well be forced to accept management by its main bank and Onward has failed to see any renewal after pulling out of several loss making businesses. The competition is hacking away at their middle market positioning.

While the apparel market is stable, the big apparel groups are in trouble. We covered the 500 store closures planned by World in JC1507-8 and the changes being undertaken by Sanyo Shokai and TSI Holdings last month, but the other two major firms, Onward Holdings and Itokin, face similar pressures.

Itokin, founded in 1950 and one of the fashion success stories of the 1980s, posted a loss of ¥5.6 billion in the year ending January 2015 from sales of ¥95 billion, and has now posted losses for four straight years – i.e. all the years since the apparel market started recovering from the 2008-9 crisis.

Itokin faces several major problems: a perennially large inventory – and as a fashion company, this effectively means unsellable stock – and a portfolio of brands such as Ofuon, Michel Klein, and A.V.V all with declining appeal.

These twin pressures mean increasingly long bargain sales, offering ever deepening discounts in order to move literally unwanted stock. Most of Itokin’s brands are middle market, middle priced and middling quality brands, the market segment declining fastest thanks to the shift to retailers and brands that offer more value, whether mass market or upscale.

At the same time, Itokin’s main channel is department store womenswear floors. These are being taken over by major brand concessions and the department stores themselves, who are increasingly keen to manage space directly.

With no sign of a let up, and worse, no sign of new brands and strategies to combat these problems, Itokin’s main bank, Mitsubishi Tokyo UFJ, has had enough. It has reviewed and downgraded Itokin’s debt and established a ‘strategic development office’ to look at ways to revive the ailing business. Such moves in corporate Japan usually precede effective takeover of a business, and it is highly likely Itokin will soon be run by executives installed by the bank.

Onward Holdings is also struggling; it saw a 44% drop in operating profit last year. Although it expected to see a big increase this year thanks to pulling out of various ventures like Donna Karan Japan and kimonos, and from closing 130 stores in 1H2015, so far there has been little return from these efforts. Operating profit for 1H2015 came in at just ¥225 million, 91% down and compared to a forecast ¥2.4 billion. Sales fell 5% to ¥125 billion. As a result Onward has adjusted its full year forecasts, expecting a full year operating profit of ¥4.6 billion against the previous forecast of ¥9 billion.

This may still prove optimistic. Like everyone else, Onward faces higher production costs and higher import prices, but unlike competing specialty retailers, it has less scope to raise prices due to lower cost performance and pressure from department stores.

Onward’s problems are, like its peers, greater and more structural than this. Like Itokin, it remains dependent on a narrowing channel in department stores, and a raft of middle market brands which are increasingly a burden. Unlike World and TSI, it has been more reluctant to take an axe to these and has invested much less in SPA retail chains. It is this conservatism that is at the heart of its poor profitability.

Still, Onward has a lot more promise than Itokin. Its bigger scale and its overseas divisions can be advantages in a favourable economic climate, but most analysts agree it needs to do a lot more to rationalise its business and top heavy management.

Its overseas operations need work too. It created ‘Onward Luxury Group’ in 2013 as a way to centralise management of overseas businesses, Gibo, Iris and then Jil Sander after it was bought in 2014. This group saw sales fall 2.9% in 2014 and is expected to post a much worse 17% fall this year. Joseph is one of the few divisions doing well, with sales up 13% last year and forecast to grow 4.4% this year.

At home, Onward has come up with a plan to offset decline of its own brands: collaboration with growing retailers. It is working with Isetan-Mitsukoshi on some new brands to sell at home and overseas, and signed a deal with Laox, a fast growing tourist chain (see Page 1), in June to produce private brands to appeal to Asian tourists. Last month it also announced a collaboration with Lumine on a store project called Onward Global Fashion, with a store due in Spring 2016 at the new Lumine building at Shinjuku station.

These deals will help, but given the structural challenges the leading apparel firms face, without some major new ideas, they may well have to accept further contraction.