24 October 2016
Uniqlo, operated by Japan's Fast Retailing, has resorted to discounts to boost sales, but that has taken a toll on its profits. Photo: HKEJ
Uniqlo, operated by Japan's Fast Retailing, has resorted to discounts to boost sales, but that has taken a toll on its profits. Photo: HKEJ

Fast Retailing faces a tough time from Chinese copycats

After Texwinca Holdings (00321.HK), the owner of the Baleno brand, withdrew from Taiwan and sold its mainland unit, rival clothing manufacturer Esprit Holdings (03300.HK) also intends to cut back its China presence.

The moves come as the firms and their peers have been hit hard by “fast fashion” in recent years.

However, fast-fashion brands themselves are also facing a potential crisis after years of aggressive expansion. Their biggest threat comes from the online fashion vendors. 

Fast Retailing (06288.HK), the Japan-based owner of Uniqlo, reported a 13 percent drop in its third-quarter net profit to HK$1.75 billion from the year before, after a 53.7 percent slide in first-half profit.

The Japanese apparel maker saw its sales revenue rise 6.4 percent in the first three quarters to HK$105 billion from the previous year, while net profit plunged by 46.4 percent to HK$5.21 billion.

Following the weak results, Fast Retailing cut its net profit estimate for the fiscal year to August to 45 billion yen (US$430 million). It marks the third earnings revision this year, from a previous projection made in April for 60 billion yen profit.

The Japanese yen has jumped over 22 percent against the US dollar this year. The currency appreciation has taken a toll on Fast Retailing, as 40 percent of its revenues are generated outside of Japan.

In the nine months to May, Fast Retailing reported a staggering 23.4 billion yen in foreign exchange losses. It has now revised its full-year forecast for forex loss to up to 37.0 billion yen, from an April projection of 17.5 billion.

However, the biggest challenge for Fast Retailing is not the strong yen, but its business strategy. The modest growth in its sales revenue in the nine months to May is mainly due to fast expansion and price discounts.

The company added 12 percent more outlets in Japan and overseas in the period. And it has introduced massive discounts at overseas branches. Its Hong Kong stores, for example, have seen an average discount of 25 percent.

Given the discounts, operating profit margin has fallen by 3.9 percentage points to 10.1 percent in the period, without taking into consideration the forex loss.

That means the company’s profit margin has come under harsh squeeze.

The fast-fashion market is close to saturation, with several players like Zara, H&M, Gap, Forever 21 and Topshop seeking a share of the pie.

Uniqlo used to have a clear vision of its brand, aiming to provide high-quality, performance-enhanced, basic casual wear at low prices. The company’s Dry and Heattech lines have become best-sellers, helping the Japanese brand stand out from its western rivals.

However, the company has felt growing pressure and increased competition, particularly from the Chinese brand Miniso.

The Chinese brand, which is dubbed as a mix of Muji and Uniqlo, now has more than 1,600 shops in mainland China, three times more than that of Uniqlo.

Miniso is rapidly expanding in Hong Kong, and has also built a presence in more than 20 markets worldwide.

Meanwhile, there are also other Chinese brands such as UN!PRO, which are quite similar to Uniqlo in terms of products but sell the items at much lesser price.

Uniqlo products are mostly made in China. Its fabric technology can be easily copied by Chinese manufacturers.

The Japanese brand has tried different product extensions in response to intensifying competition.

It has expanded the low-end line GU to compete with the copycats, and cooperated with Lemaire and other luxury brands to tap into the high-end market.

The question now is whether the efforts will pay off. We can only wait and see.

This article appeared in the Hong Kong Economic Journal on July 15.

Translation by Julie Zhu

[Chinese version 中文版]

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