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NEW ARRIVAL

Uniqlo — dubbed Japan’s Gap — opens first stores in U.S.

By Maura K. Ammenheuser

When Gap Inc. opened stores in Japan in 1996, one might well have said it had arrived in Uniqlo territory, given how frequently Gap is compared to that Tokyo-based purveyor of low-cost casual clothing. Now Uniqlo is returning the compliment, establishing its first U.S. stores, in New Jersey.

In September Uniqlo opened stores measuring roughly 9,000 square feet at Menlo Park Mall, Edison; and Rockaway (N.J.) Townsquare. A third opened in October at Freehold (N.J.) Raceway Mall.

Uniqlo (short for “unique clothes”) is a subsidiary of Fast Retailing Co., which posted ¥384 billion ($3.3 billion) in sales in this latest fiscal year ended in August. Fast Retailing hopes to achieve $1 billion in sales in the U.S. alone by 2010, says Mike Kiser, the company’s marketing officer.

Fast Retailing began operating Uniqlo in 1984. Today the company runs 680 units in Japan. The chain carries affordable jeans, T-shirts, jackets and other casual basics for adults and children.

“It’s everyday clothes for regular people,” Kiser said.

Uniqlo says it prides itself on both quality (Kiser cites the Mongolian cashmere and durable cotton T-shirts) and price, though of late the chain seems to be stressing quality more than cost in an effort to upgrade its image. Denim starts at $39.50, fleece at $10.50, and a woman’s short-sleeved cashmere sweater costs $49.50. Prices are low thanks to Fast Retailing’s vertical structure, through which it controls design, manufacture and distribution. The use of Asian labor also helps keep costs down.

Uniqlo also has a presence in the U.K., which it entered in 2001, and in China. Further, the chain opened three stores in South Korea this past fall.

Uniqlo chose the Freehold, Menlo Park and Rockaway sites partly for their proximity to its New York City office and also for the density and income levels of New Jersey’s suburbs, says David Sternschuss, a partner at Welco Realty, New Rochelle, N.Y., Uniqlo’s broker. “It’s a good market to start out in and test the waters.”

As for the venue, malls, Kiser said, are “where America shops, where the most clothing sales are generated, so there’s no reason not to be in a shopping mall.”

These particular centers have high apparel sales per-square-foot numbers, and though they operate in distinct markets, they also allow for marketing efficiencies because they lie within an hour of one another, says Sternschuss. Uniqlo is “very concerned with the caliber of the mall and the productivity of the mall,” he said.

Further, the current popularity of open-air lifestyle centers among developers notwithstanding, Fast Retailing chose malls because new retailers can gauge their sales performance there against others in the same category and location. This benchmark is obviously unavailable at a freestanding site, says Sternschuss. (In Japan, however, 80 percent of Uniqlo’s stores are freestanding, Kiser says.)

“It’s a little premature to look at other formats,” said Kiser, though the chain does not rule out the possibility of other venues for the future. For now, he said, “malls seem to be a natural choice.”

To familiarize the U.S. press with Uniqlo, Fast Retailing set up a 750-square-foot temporary store for the month of September in New York City’s SoHo neighborhood.

“Instead of having a billboard or something, it made sense to showcase our products,” Kiser said. He would not disclose the temp store’s sales, explaining that this venue was a public relations exercise. “There are lots of New York media who wouldn’t go out to New Jersey.”

Kiser would also not say whether Uniqlo plans to use the device elsewhere. “We’re open to new PR techniques, and if there’s an opportunity, we’d look into it,” he said.

The openings of the New Jersey stores fell between the back-to-school and holiday seasons. Kiser says initial sales were a bit slow, but he declined to comment on company expectations for the stores beyond saying they are still in the “trial and error” phase.

Douglas J. Healey, senior vice president of leasing at The Macerich Co.’s Pittsford, N.Y., office, says Macerich expects the Uniqlo at Freehold will achieve about $500 per square foot, roughly average at that mall.

Simon Property Group, landlord of Menlo Park and Rockaway Townsquare, declined to comment.

Healey describes Uniqlo as “Gap-ish in nature,” and though Fast Retailing says the stores draw several age groups, he sees Uniqlo as a good draw for youth. “Our junior retailers do extremely well in Freehold,” he said.

Uniqlo’s next few stores, too, are likely to be in New Jersey or New York, says Sternschuss. But Kiser says Uniqlo has no immediate plans for more U.S. stores, and he declined to specify how many the chain expects to open to meet that $1 billion 2010 sales goal. “We need to figure out what’s the ideal sales volume per store and multiply that,” Kiser said. For now, Uniqlo will nurture those first three stores. But once Uniqlo gets any kinks worked out, it will expand quickly, he says, and is willing to pay $3 billion to $4 billion on acquisitions worldwide. Fast Retailing is also open to acquiring other U.S. retailers to accomplish that growth, a tactic it has already used in Japan and France, he says.

Not every retail expert is sanguine about Uniqlo’s U.S. prospects, however.

“I don’t think Uniqlo will be that successful,” said Howard Davidowitz, head of a New York City-based retail consulting and investment banking firm. He says he suspects the concept will only work in malls, adding that that’s a liability given the plethora of other retail formats in the United States. And Fast Retailing, he says, is “a little shaky. They’re going very quickly.”

Indeed, between 2001 and 2003 the company struggled with falling sales and earnings. President and COO Genichi Tamatsuka noted in the annual report for fiscal 2004 that Uniqlo’s U.K. stores suffered “substantial losses” thanks to weak women’s sales and a too-rapid expansion. The company says it expects those stores to become profitable in the coming year, noting that the China stores did so for the first time in fiscal 2005.

“Their results have not been as good as other people doing the same thing,” Davidowitz said, referring to international expansion. The company is spreading itself too thin, he insists.

Fast Retailing’s 2005 total net sales were up 12.9 percent from the previous year’s $2.9 billion. The Japan Uniqlo stores accounted for 95 percent of the recent year’s total, at $3.1 billion, up 8.8 percent over 2004. Same-store sales, however, edged up just 0.6 percent this fiscal year, slower than last year’s 2.5 percent.

Still, Uniqlo Chairman and CEO Tadashi Yanai has said that he wants Fast Retailing to become the world’s top casual clothing company and post $10 billion in global sales by 2010. To accomplish this, the company said in its 2004 annual report, it will have to beat the likes of H&M and Gap. H&M exceeded $4.9 billion in the year past. But Gap achieved $16.3 billion in sales meanwhile, so Fast Retailing may in fact have to do significantly better than that targeted $10 billion.

Not only do Uniqlo and Gap carry similar wares, but Uniqlo has a presence as ubiquitous in Japan as Gap does in America. Even so, Kiser insists there is a distinction.

“The balance of price and quality of our product is far superior to anyone out there,” he said.

Initially, Uniqlo will do very well in the U.S. because of its novelty, opines Christine Chen, a research analyst at San Francisco-based investment bank Pacific Growth Equities. Thereafter, Chen says she is taking a “wait-and-see” attitude. Still, testing the waters in New Jersey malls is a smart strategy, she says, because that market is replete with fashion-savvy shoppers.

The biggest competitive advantage for Uniqlo, as for other international retailers that have entered the U.S. market in recent years, is speed, says Davidowitz. Uniqlo can bring fresh merchandise into the stores weekly, he says. This is vastly different from most American apparel merchants, who plan inventories many months in advance and create floor sets that change just eight times per year. By contrast, Sweden’s H&M and other European clothiers change floor sets about 50 times a year, he says.

“They’re reinventing the business,” Davidowitz said. “The ability to source goods so cheaply and … respond so fast and have newness in the stores at this pace” is novel in the U.S. “At H&M, you can change the store in six days.” A Limited, say, requires six weeks, he says.

Zara, owned by Spain’s Inditex Group, is another lightning-fast international company. Zara had three U.S. stores as of January, and its global sales topped 3.8 million ($4.5 million). Still another is women’s apparel seller Mango, which is also from Spain and a Zara competitor. Mango had said it would enter the U.S. this past fall, but as of this writing had not done so.

“They see us [American retailers] as a target,” Davidowitz said. “They see us as slow on the uptake. Fast Retailing is part of that revolution.”

But in fashion terms, Uniqlo is less cutting-edge than its international counterparts, focusing on basics, says Davidowitz. Because it focuses on basics, Uniqlo will have to compete with every U.S. retailer that peddles jeans, T-shirts and the like — JCPenney, Kohl’s and Wal-Mart among them. “There are more people in the game, and the price is more of an issue,” he said.

“There are more competitors here doing what they’re doing. When you sell basic goods, the problem is, how do you differentiate yourself?”

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