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AFTER CONQUERING JAPAN, UNIQLO TAKES ON U.K.

By Susan Thorne

Uniqlo’s first U.K. stores are in London.

As if Gap didn’t already have enough to worry about, in Europe it could soon face another challenge: Uniqlo. After growing from 40 stores in Japan in 1992 to 500 today, the Japanese retailer has arrived in Britain, eager to keep on expanding.

Owned by Tokyo-based Fast Retailing Co., Uniqlo — the name is supposed to intone “unique clothes” — has become one of the most urban and popular brands in Japan, combining high quality with low prices, according to Seth R. Sulkin, president and CEO of Pacifica Corp., a Washington, D.C.-based shopping center developer with a representative office in Tokyo. Observers say Uniqlo is positioned to go head-to-head with Gap and other hitherto popular chains.

“It remains one of the few popular and profitable specialty stores and is a sought-after tenant by every developer in the country,” Sulkin said. It also appears to be sought after by nearly every customer; a recent survey by Nikkei Marketing Journal found that Uniqlo’s merchandise is popular with shoppers from 10 to 60 years old. “It is very hard to find any other brand with such breadth.”

In its home country, male and female customers of all ages and sizes can be seen wearing Uniqlo’s classic casual fashions, such as denim shirts, suedette jackets, basic T-shirts and five-pocket jeans. The low price point of the merchandise has great appeal in deflation-plagued Japan, and some promotions have been phenomenally successful. In 2000, for example, Uniqlo offered a zip-fronted fleece jacket bargain-priced at about $16; there were 12 million sold, or one for every seventh Japanese citizen.

Despite the brand-label obsession of the average Japanese shopper, Uniqlo garments do not flaunt their brand with logos on the outside of garments. “There’s no need,” the company boasts.

While Uniqlo’s low prices and popular styling are strong selling points in the customer’s eye, the company’s success also rests on its efficient operating systems. Fast Retailing follows a vertical-integration model, managing the design, manufacturing and distribution of its merchandise as well as retail sales aspects. Ninety percent of manufacturing is carried out by Chinese partners and the rest is done in Southeast Asia exclusively for Uniqlo, with the low cost of labor in both regions helping to keep production costs down.

The company is highly customer-driven, using weekly in-store shopper feedback and market surveys to keep close track of shoppers’ preferences, then adjusting the manufacturing processes accordingly to produce sufficient quantities of fast-moving items.

But there is nothing “bargain basement” about the appearance of Uniqlo’s 6,000- to 8,000-square-foot stores; the lighting, displays and design features are more like those found in mid-priced specialty retailers.

“The basic concept is that of a supermarket for clothes, but very warm, with quite a high level of design,” said Gen Tamatsuka, chairman of Fast Retailing and managing director of the new Fast Retailing (UK). Tamatsuka explained that Tadashi Yanai, Fast Retailing’s dynamic CEO, found the inspiration for Uniqlo in American university co-op stores, where self-service is combined with a well-organized layout.

The 52-year-old Yanai is unusual among Japanese executives in sourcing ideas from abroad. In addition to U.S. college co-ops, he reportedly took note of cheap Chinese-produced merchandise in Hong Kong during his extensive world travels as a young man, and later applied the same approach to Uniqlo.

His innovative, nonconformist business practices have made him something of an outsider in Japan’s somewhat conservative retailing world.

“In Japan there is always a kind of consensus [within the retail community],” said Tamatsuka. “There are traditions and customs of doing business and a less aggressive environment.”

Yanai stepped outside that collegial establishment by eliminating the middleman normally involved in Japanese retail distribution. He also ruffled feathers with Uniqlo’s low prices and unusual management system, which focuses attention on individual store performance.

It’s difficult to argue with the financial results: Fast Retailing’s total sales in the first half of fiscal 2001 reached $1.87 billion, while net income grew by 147 percent to $313.3 million. For the fiscal year ended Aug. 1, 2001, sales rose to $2.43 billion, and the chain made a net profit of $487.6 million.

Fast Retailing used the same manufacturing model when it exported the Uniqlo banner to the United Kingdom in the fall, but with inventory resized for the larger British physique. The first English stores, opened in late September, are all clustered in the greater London area, but in widely different sections. A flagship shop is located in the fashionable Knightsbridge district, while the other three stores are in Uxbridge (in a mall called The Chimes Shopping Centre), Wimbledon (a London suburb) and Romford, a retail park on the eastern working class edge of town. Prices for the English shopper include £5 ($7) T-shirts, £15 zip fleeces and £20 jeans. That positioning puts Uniqlo in direct competition with such low-pricing labels as English discounter Matalan, and undercuts French Connection, Gap, Next and other popular specialty apparel retailers in the United Kingdom. The company envisions a total of 50 Uniqlo stores in England by year-end 2003.

Uniqlo is taking London by storm, said Bryan Roberts, senior European retail analyst at Mintel Retail Intelligence, London.

“The media coverage was unbelievable,” he said. “They masterminded their marketing very well, targeting London TV, radio and press.”

Shoppers are responding strongly to the London stores, Roberts reported.

“I went to one shop with my wife a couple of weeks ago, and she left about £100 lighter,” he said. “There were people queuing at the checkout. Some of that was the usual opening week excitement, of course, but I’m perfectly confident that Uniqlo will be very successful in the U.K. in the longer term, too.”

The combination of rock-bottom prices and a pleasant store ambience is particularly appealing, Roberts said.

All of which might be bad news for Gap.

“It’s not going to help them,” Roberts said. “If I can spend £40 on a Gap fleece [jacket] compared with a £20 version at Uniqlo, I know which one I’m going to choose.”

But what about Hennes & Mauritz, with its famously competitive prices? Stockholm, Sweden-based H&M may share a price range with Uniqlo, Roberts said, but it targets a different customer group with its fashion-led garments and frequently changing designs that cater to the young. Uniqlo has found its own niche, he noted.

“I was impressed,” he said. “They have very nice stores with good design, and they’re stylishly merchandised.”

Uniqlo’s discount price point — roughly half the cost of comparable Gap fashion apparel items — is a good fit with the polarization that is hitting British shopping, he added. The world of designer labels and high fashion is doing well, as are lower-priced fashion offerings, but some middle-mass-market retailers are having trouble, Roberts said. Marks & Spencer, once a household name for quality (if somewhat conservative) clothing, has been particularly injured by some poor merchandising and management decisions in recent years.

Tamatsuka is candid when speaking about Uniqlo’s prospects and challenges in England.

“This is a more competitive market, and we are a new company,” he said. “We have to build up our brand and build consumer confidence.”

The country also offers a customer market with strong exposure to international concepts, coupled with an accessible business environment.

“It is relatively straightforward for a Japanese company to do business here,” Tamatsuka said. Though he will not disclose U.K. sales to date, Tamatsuka said the company is pleased with its performance thus far.

The United Kingdom provides a trial step toward further European expansion and, possibly, a leap into the U.S. market. He declined to specify any countries in particular, however, or a timetable for further expansion.

But certainly Uniqlo needs to look to foreign countries if it is to maintain its growth rate. Although Tamatsuka maintains that there is still room for the retailer to grow in Japan, future growth will not match the pace of the 1990s. Only 45 new Japanese stores will be launched in the current fiscal year (September 2001 to August 2002) compared with 114 in the year ended August 2001.

The battle for market share is also intensifying. Uniqlo is losing its competitive edge because rival retailers are now matching its low price offerings, said Takashi Saito, director of the retail services department at Ikoma CB Richard Ellis, Tokyo. He also said he feels that the company needs to maximize profits by locating where customer traffic and purchasing power are higher. Saito approves of two recent Uniqlo strategic measures, namely the expansion of its baby clothing line and the addition of smaller shops near public transportation stations.

Despite a decrease in year-over-year sales for October and November 2001, Saito predicted that Uniqlo will remain a leading casual clothing retailer and a strong performer. “Although Uniqlo is now so large that it is suffering from Japan’s overall economic troubles,” he said, “it will remain a powerful and important retailer.”

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