Uniqlo: Asia's Top Clothier Goes Back to Basics

Tadashi Yanai, founder and president of Fast Retailing, built his roughly $9.2 billion fortune by turning his father's tailor shops into Uniqlo, the chain of low-priced casual wear stores that is Asia's largest clothing retailer. Yanai has doubled Fast Retailing's sales in the past five years and wants to increase revenue sixfold, to 5 trillion yen ($60 billion), mainly by quadrupling the number of Uniqlo stores worldwide, to 4,000 by 2020. Last year, however, things went terribly wrong. The decision to produce numerous styles of fashionable clothing—never Uniqlo's strength—left it with plenty of slow sellers in the spring. The situation worsened in the fall and winter, as its stores failed to stock enough basic items, like its popular New Ultra Light Down gear.

To top things off, growing competition in the Japanese market—home to 826 of Fast Retailing's 975 stores and the source of 80 percent of its annual sales—is forcing Uniqlo to offer discounts to hold on to customers. One result of these challenges: Revenue at stores open more than a year fell 25 percent in September and continued to slide through November. The company already is forecasting its first profit decline in four years for the fiscal year ending next August. Spooked investors sent Fast Retailing's shares plunging 26 percent in 2010. "Fast Retailing lost focus on its core products," says Mikihiko Yamato, an analyst at Japaninvest in Tokyo. "The company tilted to fashion items that didn't sell well."

Uniqlo is increasingly bumping heads against other apparel retailers hungry for international growth, including the Zara brand from Spain's Inditex and the H&M stores unit of Sweden's Hennes & Mauritz. Both chains, which offer low-priced clothing pegged to the latest fashion trends, have invaded Uniqlo's backyard. Zara opened its first store in Japan in 1998 and now has 63 outlets there. H&M has added 10 stores since entering Japan in 2008. And both have established much larger beachheads in the U.S., where Uniqlo has just one store in New York's trendy SoHo shopping district.

Analysts and investors worry that trying to match the European interlopers at home took Uniqlo off track. "The company followed trendy makers like Zara," said Yamato of Japaninvest. "Uniqlo needs some fashion items, but the company's strength is to mass-purchase fabrics to make large quantities of functional clothing." Adds Koichi Ogawa, chief portfolio manager at Daiwa SB Investments: "The company should stick with its basic designs to differentiate itself from Zara and H&M."

Yanai has gotten the message. "We were driven by 'surface fashion' too much," he told reporters in October, referring to products that he said have "a meaningless design such as a shirt with a frill attached in a meaningless part." Yanai declined to be interviewed for this story. Going forward, he said, "we will strengthen our basic lines," like denim and Uniqlo's popular lightweight Heattech apparel, whose fibers are engineered to absorb and retain heat. The company forecasts Heattech sales will grow 40 percent, to 70 million items, this fiscal year. To make that happen, Yanai has reassigned top executives well-versed in basic—rather than fashion—clothing from other Fast Retailing apparel units to run merchandising at the flagship Uniqlo chain. (Fast Retailing also owns the Theory and Comptoir des Cotonniers fashion lines, lower-priced apparel operations in Japan, and a French lingerie brand.)

Outside Japan, Uniqlo operates 149 stores in China, Britain, France, Singapore, Russia, Taiwan, Malaysia, and South Korea, plus its lone U.S. outlet. Yanai says he'll grow by opening more foreign stores, especially across China and fast-growing Southeast Asia. In the U.S., Uniqlo plans to open at least 200 stores by 2020, says Shin Odake, chief executive of its U.S. unit. The chain will hire 50 U.S. college graduates this year and send them to Japan for six months of training to become managers, he says.

Analysts say Fast Retailing is wise to target global growth, given its huge exposure at home. "Yanai should keep pursuing expansion abroad, as Japan is shrinking and offers little growth," says Daiwa SB Investments' Ogawa.

The bottom line: Japan's Fast Retailing stumbled in a move into fashion at its Uniqlo chain. Billionaire CEO Yanai is moving back to simpler clothing.

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