Has the bubble burst for Japan’s Uniqlo?

Japan’s low-price clothing specialist, Uniqlo, registered a series of monthly sales contractions in its home market last year. Was it guilty of over-complacency on the back of seemingly unstoppable growth, or was the slowdown more to do with ramped up competition in a difficult market? Crucially, what can be done to turn things around? Euromonitor International investigates.

Time to wake up and smell the coffee

Uniqlo, Asia Pacific’s top-selling clothing retailer, might be wise to learn from mistakes made by café chain Starbucks in its local US market. Three years ago, when the US economy was already showing signs of volatility, Starbucks was opening US outlets at a rate of three a day.

Juggernaut growth over the preceding decade had bred complacency, which seemed to blind strategic planners to the fact that the domestic growth curve had become utterly unsustainable. By the second half of 2008, Starbucks was announcing the closure of 600 US stores.

The story, however, has an upbeat ending because in the interim three years Starbucks has eaten some humble pie, adapted to new competition in on-trade coffee, developed added-value niche segments (including instant coffee) and built stronger positions in emerging markets. It has, in short, put its strategic house in order and its share is now four times higher than in those dark days of 2008.

The case of Starbucks ought to resonate with Uniqlo. The domestic Japanese market has been an invaluable source of growth for the retailer, driving around 80% of annual sales over the past five years and turning the chain into the most successful clothing specialist in Asia. Things started to go noticeably awry over the second half of last year when revenue at domestic stores (those open for more than a year) dropped around a quarter. It led to Fast Retailing, the company that owns Uniqlo, to forecast its first profit decline in four years.

Inevitably the company’s shares have since nosedived. The writing, it would seem, is on the wall to the extent that no one should bet against Fast Retailing closing a cluster of its 826 Japanese outlets over the course of this year.

At a press conference in October last year, CEO Tadashi Yanai appeared to acknowledge strategic errors, notably in terms of an over-emphasis on what he called “surface fashion”. This is a reference to Uniqlo’s bid to compete on better terms with the likes of fast fashion leaders Zara and H&M, which have each expanded their Japanese penetration over the past decade. Zara now operates 63 outlets, while H&M has 10.

Both Zara and H&M spring from the cheap chic fashion stables of Western Europe, and as such tend to have a trendier image than Uniqlo, which has built its fortune on a platform of functional, less fashion-conscious clothing. One argument is that Uniqlo strayed too far from its core product base of mass functional clothing, and that going forward it would be wise to re-focus on what it does best and not get too embroiled in flexing fashion credentials. However, that assessment might be missing the point.

When everything you touch does not turn to gold

What seems likely is that Uniqlo, like Starbucks, became over-complacent. The company had, after all, navigated Japan’s faltering economy and shrinking population with jaw-dropping growth rates. It is easy to see how that type of invincible growth capacity can foster strategic carelessness.

Equally, Uniqlo should have been wary of allowing too much over-dependence on the Japanese market. You only needed to cast an eye over the country’s FMCG marketplace to see that companies of all shapes and sizes were struggling to stay afloat. Uniqlo’s domestic growth bubble was, quite simply, over-inflated in the context of such a difficult operating climate.

If anything, the company was right to make a foray into more fashionable clothing lines, positioned at discount prices. Just as Starbucks was no longer the only coffee house kid on the block in the US, so Uniqlo was coming under fiercer competition from international fast fashion brands.

It needed to raise its game and segment into fast fashion to compete more directly with those chains. It was not so much that the strategy was wrong, it was more that its execution failed. Indeed, Uniqlo should not abandon seeking stronger fashion kudos.

It needs to retune its fast fashion segmentation, even to start from scratch, while at the same time consolidating its tradition for functional clothing too. For a company with the financial clout of Fast Retailing, it should be viable to coordinate an effective strategy for both formats.

Big in Japan, but where next for Uniqlo?

Uniqlo also needs to look beyond Japan for growth. Arguably, it has been too slow in building a bigger international platform, given the precariousness of its home market. The company’s latest quarterly results show a contraction of 18% in operating income as a whole, yet the international division posted 53% growth through 129 stores, located in the Asia Pacific markets of China, Singapore, Taiwan, Malaysia and South Korea, as well as the UK, France, Russia and the US.

It is a telling disparity that sheds light on Fast Retailing’s probable expansionist strategy going forward. Certainly the company is not short on global ambition, with a long-term goal of increasing its worldwide number of stores to 4,000 by 2020, including upwards of 200 in the US. It is China, however, where Fast Retailing is chasing its biggest growth prize. Indeed, there are plans to open stores at a rate of around one every three days over the upcoming decade.

While global expansion is clearly the right way forward for Uniqlo, the company should be wary of opening stores too wantonly. If it has been slow getting off the blocks in international expansion, now is not the time to play a careless game of catch-up.

For one thing, Fast Retailing is not the only clothing company looking to China and international markets to counter sluggish domestic growth. The US’s Gap, for example, is aiming to double the percentage of sales from its international and online businesses by 2013, meaning a jump from around 12% to 25%. China is full of promise, but competition will be intense and the development strategy needs to be right.

Fast Retailing aims to increase the company’s international sales share from around 10% to more than 50% in just five years. That looks to be over ambitious. It should also be kept in mind that Uniqlo stores have, at times, struggled to compete in the mature clothing markets of the UK and the US.

What seems clear is that Fast Retailing, and its flagship Uniqlo, will not allow the recent profit forecast setback to weaken resolve. Like Starbucks, however, it might need to eat a little humble pie. In Uniqlo’s case, that could mean scaling back some of its global ambitions in order to meet more effectively the strategic challenges of an increasingly competitive fast fashion industry.

China and the emerging markets of Southeast Asia look like the most natural stomping ground for Uniqlo, but the retailer will also need to spend time nurturing stronger positions in the US and Western Europe. A bigger consumer following in those trendsetting hubs will act as a spur to future sales potential in the emerging markets, as it will fuel the ‘aspirational’ credentials of Uniqlo.

Neither should Uniqlo take its eye off the ball in Japan. The country might be ageing and going through a tough economic cycle, but it encapsulates the heritage of the Uniqlo brand. Uniqlo should risk undermining that heritage at its peril.