Uniqlo’s Main Road is Overseas

TOKYO, Japan — Fast Retailing, parent company of Uniqlo, finally hit its target of ¥1 trillion (about $9.8 billion) in sales for the year ending August 2013, becoming the first Japanese apparel firm to break this symbolic boundary. The company claims that it's still on track to meet chief executive Tadashi Yanai's next target of ¥5 trillion through 2020, but it's a goal that won't be reached organically, or in Japan, with ¥3 trillion of projected sales to be generated overseas.

Fast Retailing didn’t break ¥1 trillion earlier because the company failed to make any major acquisitions in the past five years, and its string of earlier takeovers — including Cabin, Link Theory and the footwear businesses Viewcompany and Onezone, which have been dissolved, as well as overseas brands Comptoir des Cotonnniers, Theory and Princesse TamTam — have not performed as well as it had hoped. As for J Brand, one of their newer acquisitions, it’s too early to call.

To some extent, the core Uniqlo business has benefited from an injection of expertise from these Fast Retailing acquisitions, but until the emergence of GU — now a fast-growing and promising second chain — Uniqlo was Fast Retailing’s only real engine of growth.

Uniqlo, which has around 855 stores at home, now runs 450 stores overseas, reflecting the recent and rapid growth of its international operations. Indeed, the company can expect little momentum at home, where it plans to open just 10 new stores this year and expects growth of just 6.5 percent — not bad, but not enough to sustain the group’s ambitions.

With limited growth from new stores, the only way to expand the domestic business is through greater store efficiency, meaning more repeat business. But this is hard with a merchandise model that calls for long lead times for the development of new product lines based on fabric innovations and functionality rather than fashion. Many of these innovations have been a success for Uniqlo and helped differentiate the brand from fast-fashion 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 can also be a major weakness and one reason why Uniqlo’s same store sales record has sometimes been 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 last year, like for like sales rose 5.5 percent; in August they jumped 28.9 percent; in September they rose 4.4 percent and then collapsed during an unseasonably warm and wet October, falling 13.8 percent, even after a 2.2 percent drop in the same month the year before.

Clearly, work is still needed to adapt the company’s rigid supply chains to the realities of highly changeable weather, but Uniqlo is now also working on ways to complement its core fabric and function-driven basics and massive economies of scale with seasonal fashion collections that pull in more customers, especially women, on a repeat basis.

While it's not and never will be Zara, it is clear that Uniqlo 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/winter, for example, as well as fabric-based themes such as the huge and compelling cashmere promotion for both men and women, it has had several capsule-sized 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 launched a line of short pants with 31 prints produced in collaboration with Baskin Robbins ice cream, known for its original 31 flavours.

Both the core fabric and function-driven merchandise and the fashion collections are essential to Uniqlo’s overseas plans, particularly in Asia, where success is vital. And it’s overseas where Fast Retailing’s ambitions for the future lie.

Overseas sales accounted for 27 percent of turnover last year, 34 percent of store numbers, and 16 percent of profits. And this year 33 percent of sales are forecast to come from overseas. In Q1 2014, 35 percent of Uniqlo’s total sales came from overseas stores.

By 2015-2016, Fast Retailing claims store numbers overseas will match those in Japan, meaning the addition of some 400 new stores in the next two to three years. Indeed, this year alone, the company plans just under 200 new overseas stores. Last year, it opened 102 new stores in China, Taiwan and Hong Kong, out of a total of 154 overseas stores, and, going forward, much of the company’s growth is expected to come from Asia.

Although Uniqlo is planning to open dozens of stores per year in the US, in the American market the company faces levels of competition that will require a more robust merchandise model. Thus far, its 17 US stores are still not making a profit.

Uniqlo says it’s working on plans to become more competitive, creating new lines of merchandise specifically for the US market, and will work with Theory to achieve this, setting up a design centre in New York.

Fast Retailing is also working on other ways to internationalise. It plans a second listing on the Hong Kong stock exchange in March, with the aim to raise its profile in Asia, increase investment from overseas funds and internationalise its financial management.

Whether the company meets Tadashi Yanai's target of ¥5 trillion by 2020 or not, there is plenty of potential growth, especially given the new focus on sister chain GU. Yet even then, it's unlikely that organic growth alone will be enough. Rumours of Fast Retailing aiming to buy Gap and other overseas players like Topshop do the rounds, but at any rate it's clear that Japan's biggest apparel retailer will need more than just Uniqlo and GU to add ¥4 trillion in sales in just seven years.

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