Japan's Fast Retailing, owner of Uniqlo, has ambitious plans in its quest to become the world's largest retailer in just six years' time, including a slew of new stores, improved global branding, and a more diversified investor base.
This strategy underlies its preparations for a secondary share listing this week in Hong Kong.
At the moment there are 260 Uniqlo stores in China, most of them in or around Beijing, Shanghai and Shenzhen. The company will now strive to open Uniqlo stores at a blistering rate of 100 per year across the mainland, Hong Kong and Taiwan. And in the US it intends to add 20 Uniqlo stores annually, mostly in the malls of the country's eastern and western coastal states.
The timing of such a rapid expansion isn't surprising after a quick glance at its earnings. Fast Retailing reported a 23% year-on-year rise in sales to ¥1.143 trillion ($11.3 billion) in the fiscal year through to August 2013. Net income, meanwhile, increased by 26% to ¥90.4 billion from ¥71.7 billion in the same period a year earlier.
But Fast Retailing learned the hard way that growing too quickly has its consequences. It opened a Uniqlo store in the Menlo Park Mall in New Jersey in September 2005. Opening day sales were a meagre ¥1 million, and the store shut a year later.
"Our first attempt then was not successful," Takeshi Okazaki, group executive vice president and CFO, told FinanceAsia on a recent trip to Hong Kong. "We failed miserably. No one knew Uniqlo in the US. The store was empty."
This led executives to re-evaluate its business strategy, marketing plan, and spend more time and money researching US consumers.
"We learned a lot and changed our strategy. We invested a lot in marketing and so, from this year, we're leveraging our brand recognition through new flagship stores," Okazaki said.
The importance of brand recognition cannot be understated, he said, noting how the company now strives to build greater brand awareness in new markets by opening flagship stores in prime locations, backed by a strong marketing effort.
It unveiled a flagship US store in Soho in New York in November 2006, followed by one on Fifth Avenue in October 2011. It also cracked the West Coast with a branch in the Union Square area of San Francisco in October 2012.
It now has 17 stores in the US, including one in the Menlo Park Mall in New Jersey, which reopened in 2013 and achieved opening day sales of ¥10 million.
"Once we [are] successful here we can gradually expand our store network [by] leveraging the perceived brand," Okazaki told FinanceAsia. "By accelerating the expansion and brand name, we can make the business profitable in a bigger way than before."
And executives believe this strategy will help propel the company to its goal – to be the number one retailer in the world by 2020.
"We want to be the number one brand [globally]. We want to be the first brand people think of when they think of clothing," Okazaki said, equating it to the perception of Starbucks and coffee.
Fast Retailing owns Uniqlo, Gu, Theory, Comptoir des Cotonniers, Princesse tam.tam and J Brand. And according to media reports, the company is in acquisition talks with private-equity owned JCrew, with the US retailer reportedly asking for $5 billion.
“M&A opportunities will likely increase in importance as we expand our global reach,” the company said in its prospectus. Mergers and acquisitions could also help expand its brand portfolio, create multiple profit-generating pillars and broaden the company’s presence in the US and Europe, it added.
Hong Kong secondary listing
To boost brand awareness, Fast Retailing, which is listed in Tokyo, will hold a secondary listing in Hong Kong on March 5 by issuing depository receipts. Hong Kong depository receipts (HDRs) would allow investors to buy and sell Fast Retailing shares in Hong Kong dollars, instead of in yen.
The company does not plan to issue new shares or raise funds.
"At this stage, our liquidity is ample. We don't need additional financing," Okazaki said. "But in the future, growth is the key word. We'll list now [and then we'll be] ready to [raise] finances for the future."
The HDRs will be traded in board lots of 300, with each HDR representing an ownership interest of 0.01 Fast Retailing shares. Morgan Stanley is the sole sponsor.
Fast Retailing also hopes that by listing its shares in Hong Kong it will help it diversify its global investor base.
Okazaki told FinanceAsia that the company is particularly interested in global investors with a long-term mindset. "Having said that, we hope this [Hong Kong] listing will be a good step to broaden our investor base in Greater China and Southeast Asian countries. We will study investor demand in these areas."
He declined to offer specifics on what kinds of investors the company will approach.
The group's shares were first listed on the Hiroshima Stock Exchange on July 1994 and, in 1997, were shifted to the Tokyo Stock Exchange.
Shares in Fast Retailing are down 18% so far this year.
Japan still core
Although the Japanese company's future potential is global – seven of the top-10 selling Uniqlo stores are outside Japan – the company's core business remains firmly in the Land of the Rising Sun for now.
"Japan's market is very important to us. The growth potential in Japan, when compared with other markets, is obviously small. Our market share in Japan is 10%, so we have a big presence," Okazaki said. "Most Japanese have our goods in their closets."
The impact of Abenomics – Prime Minister Shinzo Abe's three-pronged approach to revitalise the Japanese economy – on the company remains unclear. Market consensus is that the first two arrows, monetary easing and fiscal stimulus, have proven successful. And as the country appears to be shifting out of a deflationary environment and into an inflationary one, it is encouraging Japanese to do more shopping.
But a planned consumption tax rise in April to 8% from 5% is likely to dampen consumer sentiment in the next few months and could have a negative impact on retailers such as Uniqlo.
"It's difficult to say – I'm not an economist. It's true the mood of Japan's economy is much improved compared to before Abenomics began. Most people believe this year will be a critical period whether Abenomics takes off or loses speed," Okazaki said. "Even though consumption may decrease in April and May [because of the tax], I think it will recover in six months. But people are carefully watching what will happen."
He added on Abenomics: "I'm not so optimistic but I'm not so pessimistic either."
Even so, China and Southeast Asia represent the future for Fast Retailing. Okazaki points to the company’s flagship store in Shanghai – also the largest in the world – which opened in September 2013 and is enjoying booming sales.
“Today the Chinese apparel market is estimated at $310 billion. Asia is expected to become the world’s largest apparel market within a few years assuming China and other Asian countries continue their robust growth,” the company prospectus said.
“The region’s vast number of young people could fuel an explosion in apparel demand. We are swiftly building operations in Asia that will enable us to take full advantage of this phenomenal business opportunity.”
