Casual-wear giant Uniqlo's plan to launch in India casts new light on Fast Retailing Co. Ltd.'s global expansion spree, which market observers expect to be the company's main growth driver in the years to come.
If the Japanese company gets the green light from the Indian government to open stores, India would become the latest stop on Uniqlo's international itinerary. Currently, the retail chain, which got its start as a store in the Japanese city of Hiroshima back in 1984, has a presence in 18 countries. It made its first venture abroad into the U.K. in 2001. Since then, Uniqlo's overseas store count has grown to 1,124 as of the end of October, outnumbering the 833 stores it has in Japan. The company has said it expects the revenue of Uniqlo's international outlets to surpass that of Japan for the first time in the fiscal year ending Aug. 31, 2018.
Uniqlo's international growth is key to Fast Retailing's aspirations to surpass competitors such as H&M Hennes & Mauritz AB and Zara owner Industria de Diseño Textil SA to become the world's biggest apparel retailer by 2020, according to analysts. So far its success abroad has been mixed. China is now its second-largest market after Japan in terms of revenue and store count, but it is still operating at a loss in the United States. Fast Retailing declined to comment for this story.
The Japanese brand still needs to raise its brand awareness abroad, where other fast-fashion brands such as H&M and Zara have entrenched penetration, according to Ming-huei Hsieh, an international business professor at National Taiwan University. In the U.S. for example, Uniqlo only had 46 stores as of Oct. 31, with most of the presence concentrated in key cities on the coasts. In comparison, H&M has more than 500 stores across the country.
Unlike many other fast-fashion players, Uniqlo focuses on basics rather than trendy merchandise. The chain puts a strong emphasis on technological garments, like its HeatTech range of thermal undergarments and its AIRism temperature-regulating underwear collections.
"Brands like H&M and Zara may have fashion trend advantages over Uniqlo. And for those price-sensitive consumers, Uniqlo is not as attractive as discount stores like Wal-Mart Stores Inc.," Hsieh said.
Fast Retailing is still smaller than two of its biggest competitors. For the fiscal year ending Aug. 31, the Japanese retailer posted revenue of ¥1.86 trillion, or $16.57 billion. In comparison, Inditex posted revenue of €23.3 billion, or $27.67 billion, for the fiscal year ending Jan. 31, while H&M registered sales of 222.87 billion Swedish krona, or $26.64 billion, for its fiscal year ending Nov. 30, 2016.
In terms of store network, Fast Retailing has more than 3,000 stores, with about 2,000 operating under its flagship brand Uniqlo. H&M has more than 4,500 stores in 69 markets, while Inditex operates over 7,400 stores in 94 markets under banners including Zara and Bershka.
Most of Fast Retailing's future profit upside is expected to come from Uniqlo's international business, Deutsche Bank analyst Kazahaya Takahiro wrote in a note Nov. 2. The analyst forecasts core operating profit of the group to grow to ¥270.7 billion in fiscal 2020 from ¥210.7 billion in fiscal 2018, with Uniqlo International expected to contribute ¥52.3 billion of the ¥60 billion projected increase.
Not all of Uniqlo's international expansion has gone smoothly. The brand first tried to enter the U.S. market in 2005 by quietly opening three stores in suburban New Jersey, a branding strategy that failed to give Uniqlo sufficient exposure and led to poor sales. It later closed the stores, reintroduced the brand in New York City in 2006 and has since expanded its stores in the country to 46 as of Oct. 31. In fiscal 2016, the group recorded a loss of ¥7.4 billion in the U.S., primarily due to the closure of a number of underperforming stores less profitable suburban malls. But the operating loss then halved in fiscal 2017, according to company annual reports.
"Uniqlo USA is still at loss, but it is improving," Daiwa Securities analyst Jun Kawahara said in an interview, adding that the Japanese retailer is on the right track of turning profit in the U.S. with its e-commerce initiatives, management's cost control effort and new store strategy that could help lift brand awareness. It now focuses on opening in major cities and premium sites and closing unprofitable locations.
Challenges remain for the Japanese group in resonating with shoppers in western markets such as the U.S. and Europe, according to National Taiwan University's Hsieh.
"Uniqlo's products are very standardized and made based on prototypes of typical Asian body figures. It will need to adequately adjust its sizing and fit for a wide variety of ethnic groups with different body types outside of the Asian markets," said Hsieh.
Fast Retailing chairman, president and CEO Tadashi Yanai has acknowledged the challenges. "It is hard to build brand awareness swiftly in a region the size of North America with its diverse range of consumers and cultures," he said in an interview that was posted on the company website Feb. 24. "Having said that, a strong presence in the pivotal North American market is vital if we are to build Uniqlo into a leading global brand. We will address every issue in minute detail to set the North American operation on solid footing."
Despite hitting some roadblocks in Western markets, Uniqlo appears to be gaining momentum in Asia. For the fiscal year ending Aug. 31, the brand saw its operating profit in Greater China grow 37% year over year to ¥50.1 billion and sales rise 4.1% to ¥346.4 billion. While sales growth has slowed over the past two years due to sluggish economic conditions, management said during the fiscal 2017 results briefing in October that it expects the company to regain momentum from fiscal 2018 onward and reach ¥200 billion in profit and ¥1 trillion in sales within the next five years. The company also plans to bring the number of Uniqlo stores in Greater China from the current 661 to 1,000 in fiscal 2021.
"Uniqlo's performance is very good in China," said Kawahara. While its quality and brand image has been widely recognized in China, the company is quickly adapting to consumers shifting online and has gone ahead of other fast fashion brands in terms of omnichannel strategy in the country, the analyst noted.
During this year's Singles' Day shopping festival, Uniqlo's flagship store on Alibaba Group Holding Ltd.'s Tmall platform achieved top fast-fashion brand ranking in terms of gross merchandise volume in a top 10 chart dominated by electronic retailers, according to sales results released by Alibaba.
It is still unclear whether Uniqlo can replicate the success it has achieved in China in new Asian markets such as India, Hsieh said. "Like North America, India will inevitably present some other challenges since their culture and consumer tastes are different from East Asia," she said. "Uniqlo should test the water first to understand Indian consumers' preferences and stock the right styles and sizes, before opening multiple stores."
As of Dec. 1, US$1 was equivalent to ¥112.85 or €0.84 or 8.37 Swedish krona.