Fast Retailing (UNIQLO) Deep Dive

Japan’s two richest people epitomize the two paths to ultra wealth:

    1. Take big, bold risks in new industries (disruption)
    2. Work dutifully day-in and day-out to innovate and outwork competitors in existing businesses (process innovation)

The first of which is best represented by Softbank’s Masayoshi Son. The second is best encapsulated by Fast Retailing’s Tadashi Yanai, who built a multi-billion-dollar fashion business in a sector where bankruptcies are more common than lasting success. His company, driven in large part by UNIQLO, has pinned him a $20B+ net worth (as of YE 2021).

Founded in 1984 in the backdrop of a postwar Japan that had a historically very formal culture, his casual fashion concept caught the wave of a country coming to life after having been decimated in WWII.

Inspired by Gap, UNIQLO would offer high-quality fashion basics at fair prices, with an emphasis on enduring styles. Whereas the Zaras and H&Ms of the world would constantly chase trends, UNIQLO consciously shunned the fast fashion treadmill in favor of clothes that would be just as popular one year as it was the year before.

Most other brands dub themselves lifestyle brands as a marketing ploy to build up loyalty and exercise pricing power. UNIQLO doesn’t even put a logo on their apparel. Their unique formula is supported by focusing on “Made for All” staples.

So the question is: How does someone who commoditized his product as much as possible, to the point he eliminated major designs and relegated their branding to just the shirt’s tag not only become a billionaire, but achieve >15% EBIT margins?

This is their formula:

Their generic clothing and focus on relatively few SKUs annually allows for massive orders to be placed in the millions vs thousands for peers, which decreases their cost per unit of quality, making them the best value retailer around. The high quality for price drives demand and the “timeless” nature of the design limits the need to discount, which protects their margins. High sales allow even larger orders to be placed, further bringing down the cost per product and distancing UNIQLO from peers even more so. 

This strategy has allowed them to achieve a footprint of >800 stores in Japan and  >$1bn of profit in Japan alone. China, a market they entered over a decade ago, is now bigger than their Japanese operation with the scope to keep growing and they also are pushing new stores in Europe and the US, not to mention their house of brands also includes Theory and GU–a fast fashion brand in Japan with over $2bn in annual revenues. In typical Japanese conservatism, they have almost $10bn in cash on their balance sheet with no debt. 

Learn not only about UNIQLO in our Fast Retailing write-up, but also about the fashion industry writ large. We spend ~15k words in this month’s piece, explaining retailers’ strategies from Ross to Hermès as well as their positioning in their Consumer Hierarchy of Preferences. 

You can find the following (and more) in this report:

  1. Background History.
  2. Business.
  3. Retail Industry Analysis.
  4. UNIQLO.
  5. UNIQLO Japan.
  6. Competition.
  7. UNIQLO International.
  8. Other Brands.
  9. Revenue Build & Valuation.
  10. Risks.
  11. Summary Model.
  12. Conclusion.

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