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Fast Retailing Co., Ltd. UNIQLO

2009 9th Porter Prize Winner Apparel Retailer
UNIQLO offers high-quality, low-priced, easy-to-coordinate casual basics.

Industry Background

In light of the value chain, clothing retailers in Japan are divided into three groups: those specializing in the retail business, such as department stores, general merchandizing stores and boutiques; those who do planning but outsource production; and those using a vertical integration system to control all the processes from planning and manufacture to sales. Forever 21 belongs to the first group, Point the second, and World, Gap, Zara and H&M the third. Giant retailer UNIQLO procures materials on its own and initiates joint fabric developments, so it pursues the system more intensively than those belonging to group 3. However, the company asks affiliated factories, not its own ones, to produce products, so it pursues the system in a rather unique way while taking advantage of strong ties with the production facilities.

Based on the lead-time of product development and the lifecycle of merchandize, clothing retailers are classified into fast fashion and slow fashion. Point, Zara, H&M and Forever 21 are the former type, and UNIQLO the latter.

Executive Summary

UNIQLO has successfully established a unique strategic positioning in the apparel industry. It provides basic items as "components" to be arranged with other components by the customers, yet offers high-quality items at an extremely low price. For example, it has popularized existing materials that were previously used in specialized market segments or in high-end market segments, such as fleece pullovers (sold for 1,900 yen in 1998) and cashmere sweaters (launched in 2003), and offering these products at significantly lower prices. UNIQLO sold 2 million fleece pullovers and jackets in 1998, 8.5 million in 1999, and 20 million in 2000. UNIQLO's 100% cashmere sweaters were priced between 4,900 yen to 7,900 yen in 2003, which was 20 to 30% lower than low-priced competition, while cashmere sweaters sold at department stores costs 30,000 yen to 40,000 yen. It also popularized new, high-performance materials, such as the heat-retailing fabric, HEATECH, in the fall and winter of 2007, by working with Toray, Japan's leading fabric manufacturer. HEATECH had only a limited introduction in 2003, yet after continuous improvement, it sold 20 million units in 2007 and 28 million in 2008. One HEATECH item sells for 1,000 yen to 1,500 yen.

UNIQLO is a division of Fast Retailing, which manages other apparel brands, such as Theory and COMPTOIR DES COTONNIERS. UNIQLO has 810 outlets with annual sales of $4.9 billion (as of August 2009), far bigger than $3.9 billion, which was recorded by Shimamura, the second largest [apparel retailer] in Japan (March 2009), but the company needs to expand its business further to beat global competition (Gap sold $15.7 billion, Inditex (Zara) $14 billion, and H&M $12.3 billion. UNIQLO had 6.0% market share in the world in 2008 and 6.5% in 2009).

Unique Value Proposition

UNIQLO does not define its target customers in terms of gender, age, or ethnicity. It targets all people. Apparel makers often focus on specific designs to satisfy their target customers, but UNIQLO serves a wide range of customers by offering high-quality, casual basics.
UNIQLO's product offering is broad, which covers men's, women's, and children's items. Products in the casual category range from T-shirts, sweaters, and pants, to jackets, and even include underpants, undershirts, and shoes. The products are basic in design, and come in many colors.

The products are priced lower than those sold at department stores, but higher than similar items sold at general merchandising stores.(※1) However, when the quality of materials is considered, UNIQLO is a better bargain than those sold at general merchandising stores. Quality, style and fashion are usually sacrificed to keep the price low, but UNIQLO sacrifices none of these to produce attractive, inexpensive products.

UNIQLO's value propositions are: 1) apparel items treated as components (to be worn with other items on offer, all featuring a basic design); 2) high quality with a significantly lower price; and 3) apparel proposing new performance features, such as With a high heat-retaining function, HEATTECH clothes can keep the wearers warm enough to not have to put on extra clothes in winter.

UNIQLO's value proposition of targeting a wide range of customers with low-priced, high-quality products resulted in the hit product HEATECH, with record-breaking sales of 28 million units in 2008. This roughly translates as one out of four Japanese buying a HEATECH product.

(※1)First Retailing (FR) has a brand called g.u. which offers products in that price range.

Unique Value Chain

As stated above, UNIQLO makes high-quality, low-priced, easy to-combine casual basics and offers added value to customers. To do this, the company has introduced the vertical integration system in which all operations, including planning, material development, manufacturing, marketing and sales are integrated (to become a manufacturing retailer) thanks to cooperation with excellent Japanese textile suppliers, foreign manufacturing facilities and other partners.

Technology development
UNIQLO makes use of not only popular fashion trends but also potential customer needs, to make it a rule to provide valuable, inexpensive, quality products while developing fresh designs, new colors and functional materials.

Compared with other apparel enterprises, UNIQLO takes time to develop products. R&D at UNIQLO centers on: 1) raw material development, and 2) product development. Regarding raw material development, UNIQLO works closely with fabric manufacturers to develop high-performance materials that are heat-retaining, help to retain the skin's moisture, quick-drying, and antimicrobial, with elasticity and superior thinness. It commits to a large purchase volume, which is sold at the 810 stores. It continues to improve the new materials for several years, and when it considers these products ready for launch, the products are prominently featured in promotional campaigns. HEATECH, for example, was introduced in 2003, but was not sold in large volumes until 2005. The product required continuous improvements. This was also the case with brightly colored skinny jeans. Skinny jeans were first introduced in 2005. Meanwhile, UNIQLO worked to develop better stretch fabric and colors to ensure a significant volume of sales.
The product planners carefully study the previous year's sales performance, information from the stores and trend data gathered from around the world(※2). And, not only the product development staff responsible for R&D and merchandising, but also those in charge of management, shop operation, marketing and production participate in planning sessions from the beginning. Thus, the company creates products with novel designs and colors in order to attract even more customers.

Manufacturing
UNIQLO does not have its own factories. Worldwide sales now exceed 500 billion yen, but the maker ties with only 70 long-term-partner companies that comply with UNIQLO's quantity, delivery and cost standards to produce products at their factories. With most of them in China, UNIQLO sends 170 of its own people to monitor and provide guidance to these factories with regard to manufacturing quality, safety, trueness to the design, and manufacturing volume. UNIQLO personnel spend three to four days a week at the partner factories. In addition, it formed teams of craftsmen, (called "Takumis" in Japanese), who are the retirees from leading Japanese sewing companies with over thirty years' experience, to transfer know-how to the partner factories. The Takumis are involved in every process conducted at the partner factories, from thread inspection to shipment of finished products. Manufacturing quality is important for UNIQLO because its average production lot is about a million.

Inbound logistics
Products are sent to UNIQLO's warehouses in Japan from the partner factories overseas. UNIQLO uses a third-party transportation service provider to ship merchandise from the warehouses to the stores.

Store development
At first, UNIQLO opened stores along the highways to attract suburban family customers, but then started to build outlets with various floor sizes - from 50 tsubo (165 square meters) to 1,000 tsubo (3,300 square meters) ?in urban areas, to explore new customers there.(※3) Sixty percent of UNIQLO stores in Japan are road-side shops, and the overall ratio of rent to sales is low. By increasing the size of small branches to standard or larger sizes, and the standard size branches to larger sizes, the company expanded overall floor space. In 2008, it closed 45 stores, while opening another 55 new stores.

Store operation
Due to its "help-yourself" business model, UNIQLO can get by with fewer sales people at its stores, and a high degree of standardization of work tasks in all stores.
Help-yourself stores are needed to arrange their sales floors in a way that customers find their necessary items easily by themselves. The product shelves are organized to provide enough information such as added values, functionality and fashion. Also, it limits the variety of products on display per square meter to make it easier for customers to find products. Products being featured in sales campaigns occupy even larger areas, so that customers can find them easily.

Marketing and sales
The marketing staff join product planning and apply the best way to promote products through various means, including TV, the Internet and newspapers. It also uses flyers on weekends to introduce seasonal products and to invite customers to discount campaigns run for a limited period only.

Also, television commercials are very effective for introducing UNIQLO's strategic new products, such as fleece in 1998, cashmere in 2003, HEATECH in 2007, and BRATOP in 2009.

The company also invests its money on not only promoting products but also generating values and communicating its pioneering features to the public. Also, its television commercials seek a clear differentiation, expressing the company's philosophy that it should be the people wearing the clothes that have character, not the clothes themselves. The company works closely with creators around the world to develop "Uniclock" and other novel techniques and attract customers through the Internet, which helps boost the innovative corporate image.

Human resource management
Noting the importance of experienced store managers, UNIQLO has created positions for them, such as supervisor, block leader, Super-Store-Manager, Super-Star-Store-Manager, and franchise owner. Chosen from store managers, superstar store managers are asked to handle a large amount of stock and budget, and their pay varies depending on their performance. By conducting this personnel policy, the company makes sure that each shop should be the solo profit center with its manager as a hard-working merchant, not an ordinary company employee who is supposed to do his job ordinarily. Young talented employees are always promoted rapidly.

Firm infrastructure
Placing the stores and their managers in the heart of its organization, the company makes decisions based on information from them. And the headquarters becomes the store support center that provides the branches with maximum service and sales assistance.
The company conducts competitive, streamlined operations by cutting unnecessary costs and spending on wasteful investment projects.
The company uses the world's most effective management measure called "global one" as its standard to manage worldwide operations. The measure includes various actions, such as global merchandizing (unite the product line-ups in the world without difference in countries) and global marketing (promote products in an internationally organized way as demonstrated by the HEATTECH promotion).
The employees are asked to understand the entire operations in the company as if they are managers and work hard to help the company grow and flourish (specific examples).

(※2)UNIQLO has its R&D centers in Tokyo and New York, where fashion trends, materials, changes of lifestyle and diversified customer tastes are examined.
(※3)The size of each shop depends on its location: UNIQLO has the largest branch in Ginza and the smallest ones at the railway stations. The average shop has a floor space of about 700-800 tsubo (2,300-2,600 m2) or 1,600 tsubo (5,300 m2).

Fit among Activities

UNIQLO focuses on the limited number of designs to produce casual basics which are easily coordinated with other items as "clothing components." This allows the company to produce fewer, targeted items in large quantity, improve quality and reduce costs. Because of this, the products are little affected by fashion trends while customers of all ages like to wear basic designs, so the company that serves no specific customers can even do fairly well. While satisfying a wide range of customers, UNIQLO strengthens its ability to develop and procure materials and produce products. So far, the company has implemented many successful joint developments with textile suppliers and quality improvement projects which usually take a few years to complete (Refer to UNIQLO's activity system map).

Innovations

  • Became the very first apparel company to develop partnerships with factories in China, thereby enabling large-volume production of affordable, high-quality items. Thanks to the training provided by UNIQLO's experienced Takumi fabric and sewing professionals, workers at local factories were able to improve their manufacturing technologies. They were asked to produce the same products in large volumes constantly, so their quality went up.
  • Created exclusive alliances with fabric manufacturers to develop high-performance materials. No other Japanese apparel retailers are large enough to do this
  • Established a vertical integration system thanks to cooperation from the partners. The processes of development, planning, production and sales were all combined.
  • Product innovations, such as HEATECH and BRA TOP.
  • The company, which makes HEATTECH items based on Japanese technologies and the UT (T-shirt) series inspired by Japanese pop culture, is now called a unique Japanese corporation in the world and draws attention worldwide.
  • Uses the value proposition of "innovative basic apparel."

Consistency of Strategy Over Time

In 1984, UNIQLO entered the basic/casual clothing business by offering unisex clothes of high quality at low prices to customers of all ages. The company, however, needed to improve the products and satisfy customer needs, and, in 1987, it installed a system in which all the business processes from planning to sales were completely combined. Then, the firm began to expand its operation from road-side branches with a floor area of about 150 tsubo (500 m2) to open new outlets in various sizes from 10 to 1,000 tsubo (30-3,300 m2) in city buildings, shopping malls in the suburbs and foreign countries. Throughout these changes, the corporate strategies have, however, remained unchanged: 1. Sell high-quality, low-priced basic/casual clothes in large volume, and 2. Focus on the shops, control product planning, production, sales and marketing in a total way, and build a structure to explore potential customers and satisfy their needs.

Trade-offs

  • Does not own factories (To succeed in selling each of the products in large volume, the company needs to have facilities with huge production capacity. In light of investment and management, the company cannot produce a broad range of clothes, such as bottom, outer, inner and cut&sew, on its own. So, it asks big factories to meet that demand.).
  • Does not sacrifice quality, performance, or design for a low price. (It continuously offers high-quality, value-added products at the lowest prices in the market. By developing products people really want, the company helps create huge market demands not ever seen before, and cuts costs through mass production, which helps lower the prices continuously.)
  • Offers popular products to a wide range of customers (unlike other apparel makers). Mass marketing does not work in a targeted business (The company aims to produce clothes that people want to wear anywhere at any time).
  • Does not undertake small-lot production of a wide variety of products.
  • Does not operate stores in a franchise or license business format. (Franchises are limited only to proven Super-Star-Store-Managers, and this opportunity is very limited.)

Profitability

Both return on invested capital and return on sales exceed industry average.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2004 2005 2006 2007 2008
39.1%P 25.8%P 16.4%P 32.7%P 57.2%P 85.7%P
Inter quartile range (IQR) = 17.2%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2004 2005 2006 2007 2008
11.6%P 12.9%P 8.1%P 10.8%P 10.6%P 15.8%P
IQR = 4.4%P
Return on sales =Operating income / Net sales

Activity System Map

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