`Superficial' Fashion Leads Uniqlo Billionaire Astray From Drucker Roots

Tadashi Yanai, Japan’s richest man, used advice from management guru Peter Drucker to build his Uniqlo clothing empire. To pull out of a slump that’s hammered profits and shares, the billionaire is revisiting the lessons.

Yanai, 61, founder and president of Fast Retailing Co., built his estimated $9.2 billion fortune over 26 years, turning his father’s tailor shops into the Uniqlo chain of low-priced casual wear to become Asia’s biggest clothing retailer. Yanai says his success was inspired by Drucker’s management strategies and the idea of “customer creation” with a product that creates demand.

This year, something went wrong with Yanai’s strategy. Fast Retailing’s shares have plunged 26 percent in 2010, sales at stores open more than a year fell 25 percent in September, continuing to slide through November, and the company forecast its first profit decline in four years for the fiscal year ending in August.

Fast Retailing lost focus on its core products,” said Mikihiko Yamato, an analyst at Japaninvest KK in Tokyo. “The company tilted to fashion items that didn’t sell well.”

Second-half Uniqlo sales through August fell 6.4 percent in Japan, where Yamaguchi-based Fast Retailing gets more than 80 percent of revenue. The company’s shares declined 0.7 percent to 12,900 yen at the 3 p.m. close of trading in Tokyo.

Basic Designs

Meanwhile, competitors such as the Zara brand from Spain’s Inditex SA and Sweden’s Hennes & Mauritz AB added stores. Zara had 54 Japan outlets in July after opening its first in the country in 1998. H&M entered Japan’s market in 2008 and had 10 outlets in November.

Trying to match Zara and H&M may have been what took Uniqlo off track, analysts and investors said.

“The company followed trendy makers like Zara,” said Yamato at Japaninvest. “Uniqlo needs some fashion items, but the company’s strength is to mass-purchase fabrics to make large quantities of functional clothing,” said Yamato, who recommends buying Fast Retailing’s stock.

“The company should stick with its basic designs to differentiate itself from Zara and H&M,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo. He declined to comment on his holdings.

Yanai got the message. Fast Retailing will focus on functional designs after “superficial fashion” items eroded sales, he said at an Oct. 8 press conference in Tokyo.

Like a Compass

Broadcaster NHK this year published a book titled “My Way of Management in The Drucker Style,” from interviews with Yanai on the management consultant’s influence.

“Drucker is not only my management professor, but he is like the compass to provide a path I should follow,” he said in the book.

Former General Electric Co. CEO Jack Welch, Intel Corp.’s co-founder Andrew Grove and Shoichiro Toyoda of Toyota Motor Corp. consulted with Vienna-born Drucker, who died in 2005.

Drucker’s “The Practice of Management” influenced Yanai “to first think what customers want and provide more value, rather than what a company wants to sell,” the billionaire said. He declined to be interviewed for this article.

Masafumi Shoda, head of retail industry research at Nomura Securities Co., said Yanai has been down and bounced back before.

Lose the Vegetables

His book “Throw Away Your Success in a Day,” published in 2009, cites his move into vegetable stores in Japan in 2002 and losing money until he pulled the plug two years later. He took Uniqlo to the U.K. in 2001, aiming for 50 stores in three years. He got to 21 outlets before shutting 16 in 2003 to stem losses and restructure.

“He makes quick decisions to withdraw from a failing business to avoid more losses,” said Masamitsu Ohki, a fund manager at Tokyo-based Stats Investment Management Co., which holds Fast Retailing shares.

Yanai has also worked a sales floor, selling kitchen items and men’s clothing at a Jusco supermarket in 1971, according to his book. He quit Jusco in 1972 to join his father’s tailoring business, Ogori Shoji. He became president in 1984, when he opened the first Uniqlo store, known at the time as Unique Clothing Warehouse.

To his admirers, Yanai’s misses show astuteness, such as in 2007 when he walked away from a bidding war with Dubai investment firm Istithmar PJSC for Jones Apparel Group Inc.’s Barneys New York unit.

“We were lucky not to be able to buy Barneys after all,” as the financial crisis cut luxury demand, Yanai said in an interview in March.

Now, the World

Even as growth has faltered this year, Yanai has doubled Fast Retailing’s sales in the past five years and targets sixfold revenue growth to 5 trillion yen ($60 billion) by 2020 to overtake H&M and Inditex.

Yanai has said he wants 4,000 stores by 2020, expanding in overseas markets including China and Southeast Asia. Uniqlo has outlets in the U.S., Russia and France.

“Yanai should keep pursuing expansion abroad, as Japan is shrinking and offers little growth,” said Daiwa SB Investments’ Ogawa.

Fast Retailing will add 44 Uniqlo stores overseas and 36 in Japan in the 12 months to August, bringing the total to 1,024, the company said Oct. 8. That’s the same pace of openings as its last fiscal year.

A hiring plan includes 1,200 overseas store-manager candidates in the year starting September 2012, compared with about 300 this fiscal year.

“Opening new stores outside of Japan is important, but training our employees is even more important,” Yanai told investors and analysts in October.

Fleece Factor

Besides Drucker, Yanai counts on Fast Retailing’s partnership with Toray Industries Inc., Japan’s biggest synthetic fiber maker, for an edge.

The two work as “a virtual company,” Toray Chairman Sadayuki Sakakibara said. “We share information including costs and technology.”

Toray supplied fabric for Uniqlo’s fleece jackets, its first hit product. They retailed for 1,900 yen each in 1998, while similar products from makers such as Patagonia Inc. were priced at $100, or about four times more.

Uniqlo’s sales of fleece items topped 26 million units in 2000 and remain at about the same level, according to the company. The retailer aims to boost sales of its best-selling lightweight Heattech apparel developed with Toray by 40 percent to 70 million units this fiscal year.

Teaching Toyota

Yanai attracted the attention of Toyota as it struggled to restore customer confidence after recalling more than 8 million vehicles. The world’s biggest automaker invited him to talk about his manufacturing and pricing strategy at its headquarters in May.

“He knows his customers well and there are things we should learn from him,” Toyota Vice Chairman Katsuaki Watanabe said.

While Uniqlo customers may be unaware of the influence of Drucker in the stores they visit throughout Japan, they are, like Yanai, reading up on his ideas.

A book about a high-school girl who takes inspiration from Drucker’s teachings to help a baseball team is set to become Japan’s biggest seller this year.

“What If the Female Assistant of a High-School Baseball Team Read Drucker’s ‘Management,’” written by Natsumi Iwasaki, sold 1.21 million copies in the year ended Nov. 21, beating out Haruki Murakami’s “1Q84” and a diet guide. Yanai knows the concepts well, according to Shuhei Abe, chief executive officer of Sparx Group Co., where Yanai served as an outside director two years.

“He is one of the few executives who understand Drucker’s thoughts and philosophy,” said Abe, whose Tokyo-based hedge fund also owns Fast Retailing shares, according to Bloomberg data. “He actually put them into practice.”

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Shunichi Ozasa in Tokyo at sozasa@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.