Is uniqlo cheaper in hong kong

Davide Lentini prepared this case under the supervision of Professor Benjamin Yen for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2016 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 15/562C

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BENJAMIN YEN

UNIQLO: A SUPPLY CHAIN GOING GLOBAL The growth and expansion of Uniqlo seemed unstoppable. With its founder and CEO Tadashi Yanai at the helm, the company grew in the span of 20 years to become the fourth largest fashion retailer in the world, with over 1,550 stores worldwide as of February 2015.1

Yanai took over the family business, Ogori Shoji Co., in 1984 and radically changed it right away. The company went from selling ready-made men’s suits to affordable basic casual wear under the “Unique Clothing Warehouse” brand. The first store was opened in urban Hiroshima, and a year later, the second followed at a roadside location. The latter format proved successful and became the template driving store expansion across Japan up until 1998. That year, the company opened a flagship urban store in the fashionable Harajuku district of Tokyo and “Unique Clothing Warehouse” was incorporated into the Uniqlo brand. The opening of the flagship store and simultaneous introduction of a new polar fleece jacket marked the beginning of a very rapid expansion for Uniqlo, which became one of the hottest clothing brands in Japan and the number-one fashion retailer in the country.2

Since day one, Uniqlo focused mainly on price and quality, adopting a counter-current approach and not relying entirely on fashion trends in developing and marketing its clothes. Direct customer feedback, based on practical every-day needs, was as important as fashion trends in shaping product R&D and research on natural and synthetic textiles. As a result of its strategy, Uniqlo clothes could be considered a fashion-basic style available in a great variety of colors and high quality materials.

UNIQLO's unique position is [as] the world's only LifeWear brand. LifeWear means everyday clothes for a better life—high-quality, fashionable, affordable and comfortable.3

Uniqlo was the pioneer of “Speciality Store Retailer of Private Label Apparel” (SPA) in Japan, a model that had been successfully used by the GAP in the US, and was common to all major “fast fashion” companies, including Inditex and H&M). Uniqlo’s implementation of the SPA model was based on an agile supply chain, where tight partnerships with a select number of

1For details, see Fast Retailing website: http://www.fastretailing.com/eng/about/business/shoplist.html (accessed 9th April 2014). 2For details, see Fast Retailing website: http://www.fastretailing.com/eng/ir/library/pdf/ar2013_en_13.pdf (accessed 9th April

2014). 3For details, see Fast Retailing website: http://www.fastretailing.com/eng/about/message/ (accessed 9th April 2014).

HK1085

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suppliers were arranged in a network-like structure inspired by top Japanese car manufacturers [see Appendix 1 for an overview of the Fast Retailing business model]. Most Uniqlo suppliers were long-term Chinese partners. Asian markets were central to driving Uniqlo’s growth, but in its quest to become the top fashion retailer in the world, the company needed to expand into the US and Europe to overtake competitors in sales. Uniqlo was a dominant force in Japan and was expanding rapidly in China, so the company remained a regional rather than a global player. Uniqlo’s supply chain proved effective in the Asia Pacific region, but could the same model be scaled worldwide? Despite Uniqlo’s excellent results and expansion rate, the company was prepared to change its supply chain to become global. Was the low growth rate Uniqlo experienced in the US and particularly Europe partly due to the limitations of its current supply chain?

At first, Uniqlo was a casual chain on the back streets of Hiroshima. Then...we became a national brand in Japan. So, the next step is to become a global brand.4 We really have to transform this company to be successful and compete. Before, we manufactured in China and sold in Japan. Now we need to manufacture in the world and sell to the world.5

Apparel retail markets worldwide, Asian focus, intense competition With an average projected annual growth rate of 9.5% in 2014-2018, Asia remained the most attractive market for apparel producers. China would account for almost one third of the entire regional market demand, which was expected to be around US$340 billion by 2018.In China, thanks to over 30 years of economic development, the middle class was growing to become the largest in the world. Along with India, the overall market size for clothing was staggering. Asian consumers appeared to be hungry for trendy fashion apparel, and thanks to rising disposable incomes, willing to spend. China was to play a central role in the region and “fast fashion” houses had aggressive expansion plans for the Mainland. Inditex, the world’s leading apparel retailer had, as of 2014, over 500 stores operating in China, The GAP was reducing its presence in the US and expanding its network of stores across China to 80, with 34 opened in 2013 alone. GAP’s retail expansion strategy focused on 50 Chinese cities with populations over five million. Its objective was to grow in a less competitive environment and double its turnover, reaching US$1 billion in revenue by 2016. H&M, the second largest retailer in the world, after Inditex, was planning to expand even faster in the Mainland, opening 80-90 new stores in 2014 and adding similar numbers in the following years. Uniqlo’s expansion plan was the most aggressive of all, with 100 new stores to be added every year in China to the 340 open as of February 2015, with a target of 1,000 stores by 2020. The top offline fast retailers were not the only ones competing for Chinese market share. Asos, the British e-commerce player, launched a Chinese website on which it was planning to sell over 2,000 of its own brand’s styles, all designed for the local market.

4Michiko Nakamoto “Japan’s King of casual smartens up” (2012) interview with Tadashi Yanai

http://www.ft.com/cms/s/2/afae506a-cb51-11e1-b896-00144feabdc0.html#axzz3mdUg3DOI Accesses on Sept 24th 2015 5The Economist online (2010), interview with Tadashi Yanai, Published on June 26th 2010

http://justinterview.blogspot.hk/2013/03/interview-with-japans-richest-person.html Accessed on June 1st 2015

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Fast-fashion retailers were focusing their expansion not only in hub cities along the Chinese coast, but also in tier two, three and four cities, where the potential for growth in expenditures was higher. Consumers in smaller cities were considered more aspirational and less influenced by the luxury brands that were dominant forces in first and second-tier cities. In the wider Asian region, South Korea, Taiwan and Japan remained hot sports. With its top designers and brands, Japan continued to be a strong influencer of consumer taste across Asia, as well as an important market. By February 2015, Uniqlo had a good presence in Korea, with over 130 stores, and Taiwan, with over 50 stores. Asian fashion retailers were also on the move. Hong Kong companies were actively engaging the Mainland market, with Hong Kong-based Giordano, Baleno, Bossini and Esprit expanding, albeit with mixed results. Despite its high rents, Hong Kong attracted top retail brands seeking to tap into mainland tourism: Topshop, J. Crew, Tommy Bahama and A&F had all established retail presences in Hong Kong.6 The local retail scene in China also had its own home-grown heavyweights, like Metersbowne, which, with over 3,000 shops covering large and small Chinese cities, was the third largest apparel brand in the country, after Nike and Anta. Anta had over 7,800 shops in China, and continued to expand, opening 100 new stores annually 7 Asia, and China in particular, were “hot” for fashion retailers focusing on expanding operations in the region to tap growth and access the world’s largest market. Competition would become intense, but with rapidly raising salaries and a resilient economy, China was to remain an attractive market for a long time. Inditex still had a dominant global-leader position and a significant presence in China. It was the first company to use a responsive supply chain with reduced time-to-market, producing “in-season designs” in tune with the latest fashion trends to argument sales. Responsive supply chains and the SPA model proved n operationally superior to offshoring at low-cost locations. All the largest fashion retailers—Inditex, H&M, GAP and Uniqlo—shared this approach. While the top three could be considered global companies, Uniqlo was still building its international presence. While a major force in Asia, its presence in the US, and Europe in particular, was marginal.

Fast Fashion companies and their supply chains: the Inditex and H&M approach Inditex and its brand Zara initiated the so-called “fast fashion” business model, a completely different paradigm that parted with seasonal collections created by “star” designers well in advance of sale dates, manufactured by sub-contractors months before reaching stores and marketed to the public with heavy advertising support. By outsourcing all production processes to low-cost locations, traditional fashion houses maximized marginal-unit cost reductions, but at the same time increased “time-to-market.” Retailers like A&F, Ann Taylor, and The Limited followed this model, were subject to high inventory levels and were forced to mark down unsold inventory at the end of each season. In contrast with traditional retailers, Inditex considered fashion apparel to be a non-durable consumer good with four-week sales periods. That meant that a continuous stream of new 6 Price Waterhouse Cooper (2015) “2015-2016 Outlook for the Retail and Consumer Product sector in Asia”

http://www.pwc.de/de_DE/de/handel-und-konsumguter/assets/pwc-studie-r-und-c-outlook-asia-2015.pdf (accessed June 4th 2015).

7 Price Waterhouse Cooper (2013) “2013 Outlook for the Retail and Consumer Product sector in Asia” http://www.pwc.co.nz/KenticoFiles/5d/5dff81f2-7242-43e0-87ff-941e1d02e8df.pdf (accessed June 4th 2015),

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products, inspired by the latest luxury, fashion and media trends, had to hit stores continuously, on an almost weekly basis, to meet customer demand. Instead of having a single designer, Inditex worked with a large in-house design team that constantly monitored trends to anticipate what the public wanted. In addition, POS sales data from Zara shops around the world, indicating which styles and products were selling the most, reached headquarters twice a week. Detailed sales data was essential in catching trends, and Inditex was the first to structure its operations in a “pull” supply chain that could match market demand by means of a shortened design-to-retail cycle, set in motion by a constant feed of POS data from stores. Inditex was vertically integrated and owned 14 automated factories, all located in Spain. Production processes related to fabric procurement, dyeing, printing and marking, fabric cutting, quality control, packaging, logistics and retailing were all under direct control. Inditex outsourced lower value-added activities, like sewing, to a network of small cooperatives located around La Coruna and in the north of Portugal.8 In Inditex factories, robots worked around the clock dyeing and cutting fabric, creating so- called “grey goods” that could be finished in a variety of ways at later stages of production. Before being distributed to shops, all garments were returned to Zara’s five-million square meter main distribution center for quality control. Its fast supply chain allowed for 10-15 days from design to retail. Stores could be restocked twice a week.9 Inditex’s business model innovated radically. In particular, it traded a cost advantage for responsiveness in a vertically integrated, tightly controlled and localized supply chain. Inditex’s operational model greatly influenced the retail clothing industry: the fast fashion model allowed production of new “in season” designs that could be rolled out to stores quickly. Sales figures showed that only 39% of Zara revenues came from seasonal collections, while 61% came from “in season” designs. The short time-to-market allowed Inditex to keep its inventory at 7% of sales, compared to its competitors’ 13%.10 H&M, the world’s second largest apparel retailer, operated without directly owning production facilities and with longer planning times than Inditex. The design and planning process was centralized at Stockholm headquarters, where over 100 designers worked under the supervision of Mr Van Den Bosh, H & M’s head designer for 20 years. While Zara was constantly exploiting fashion trends and rolling out a large number of new “in season” designs, H&M sales were dominated by seasonal collections, which accounted for 80% of total sales. The design process at H&M was integrated with sourcing and merchandising, as the retailer outsourced its production to over 700 garment manufacturers and 60 pattern suppliers, 60% of which were based in China, and the rest in Europe. H&M had over 30 directly owned production centrers that controlled supplier quality, and a sophisticated IT infrastructure connecting its design center with the entire supply chain. In contrast to Zara, H&M sold basic items of clothing that had a longer shelf- life than Zara’s more fashion-oriented items.11

8Stephanie 0. Crofton, Luis G. Dopico, (2007)” ZARA-INDITEX AND THE GROWTH OF FAST FASHION”, Essays in

Economic & Business History — Vol XXV, 2007 9Greg Petro (2012) “The Future Of Fashion Retailing: The Zara Approach (Part 2of 3),”Forbes online

http://www.forbes.com/sites/gregpetro/2012/10/25/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3/ (accessed April 15th 2015).

10Stephanie 0. Crofton, Luis G. Dopico, (2007) “ZARA-INDITEX AND THE GROWTH OF FAST FASHION”, Essays in Economic & Business History — Vol XXV, 2007

11Lau, C. (2014) “Behind H&M’s fashion forward retail inventory control,” http://www.tradegecko.com/blog/hm-retail- inventory-control (accessed April 16th 2015.

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Inditex and H&M’s supply chain were markedly different. Inditex’s was vertically integrated, while H&M used a supplier network monitored by production offices overseeing a dispersed global supply chain. Uniqlo’s supply chain emerged as a mix of elements from both Zara and H&M. Uniqlo was a younger company, and while it took inspiration from its competitors, new elements were introduced, creating a mix of Inditex and H&M operational strategies.

Uniqlo’s SPA model and China-centred supply chain: the early years The “Specialty Store Retailer of Private Label Apparel” approach adopted by Uniqlo was pioneered by the GAP in 1986. GAP started giving its own private label merchandise more prominence at the end of the ‘70s, pushing other top name brands into the background. The move proved successful, and thanks to lower pricing. GAP brand merchandise started to drive the majority of sales. The new business model allowed the retailer to have direct visibility on sales data, and use it to plan and design apparel collections that better matched customer demand.12 Uniqlo’s business model and supply chain developed gradually, having followed the SPA model since beginning operations in 1984. For the first ten years, the company relied on major Japanese trading houses, such as Marubeni, Mitsubishi Shoji and Sojitsu, to produce its garments at low cost, sourcing materials from Chinese manufacturers. Uniqlo was unable to meet the minimum order quantity (MOQ) of major garment manufacturers, and did not have the expertise and structure to source directly from China or monitor quality. Only in 1994, when sales started to reach approximately US$500 million, did the company begin to revise its sourcing strategy, taking direct control of supply-chain management. Up to that point, Uniqlo had relationships, via its trading partners, with over 100 garment manufacturers in China.13 It was critical to Uniqlo’s business model to retain and develop the capability to source garments in China at low cost, as price advantage was fundamental to the brand. While Uniqlo sold a jean jacket for the equivalent of US$24, the corresponding Japanese GAP store sold it for US$58 to $66, while Matsuya department store charged US$175. Uniqlo’s outsourcing production to China resulted in far more competitive prices for end consumers.14 Uniqlo reformulated its overall strategy in 1994, focusing on three core objectives: accelerating retail sales growth by opening over 50 stores per year in Japan; restructuring the supply chain by bypassing trading companies and lowering purchase costs; and maintaining a high-quality product level. Bypassing trading companies and maintaining efficiency and quality was not an easy task. Only four years later, in 1998, did Uniqlo establish its first two overseas production offices, one in Shenzhen and one in Shanghai. The new offices’ first task was to reduce the supplier base, bringing it from a total of 120 to 40 suppliers. The rationale was that only by working with fewer suppliers and increasing order sizes could unit prices be lowered. With growing sales and fewer suppliers, the average order size became 8.75 million pieces. While available styles sold at Uniqlo stores went from 200 in the late 1990s to 400 in 2012, the number was

12Huijuan Du, Yanjun Huang, Yan Liu, (2014)” The Analysis of the SPA Apparel Company Strategy”, College of Quartermaster

Technology, Jilin University, Changchun, China 13 Usui, T. (2014) “Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal

Qualitative Data Analysis” http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 14 Benjamin (2001)“One-man restructuring act”, Forbes magazine online post http://www.forbes.com/forbes/2001/0709/106.html

accessed 21 April 2015

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still only 10 to 30% of that offered by Inditex or H&M, so each item was produced in larger quantities. 15 In 1998, Uniqlo deployed an advanced IT system to connect supplier factories, stores and its head office online in order to improve inventory management and forecasting processes with POS data. After the opening of the Tokyo flagship store and simultaneous introduction of a cheaply priced polar fleece jacket, sales at Uniqlo almost doubled from its 1998 level to 2.7 billion units in 2000. Uniqlo polar fleece was a great success, as it was of good quality and cost a fraction of competing products sold by established sportswear brands and Japanese department stores. Uniqlo’s visibility and appeal increased considerably beginning in 1998. In 2001, sales reached a level of US$5 billion, with 433 stores having opened in Japan by the end of the year. All production continued to be managed in China, by the 40 suppliers originally selected in 1998, plus another 20 added in 2001 to cope with sales volume expansion. Uniqlo considered product quality and overall efficiency key elements of success, and, in 2000, the company created the Takumi team to assist suppliers in developing production processes to reduce defects, increase efficiency and better coordinate the entire supply chain. The so called Takumi team was composed of veteran technicians from the Japanese garment industry, who each had over 30 years of experience in various specific phases of garment production, such as fabric cutting, dyeing and sewing, and who were all versed in operation management. The technicians were hired with performance-based salaries and went to Chinese suppliers’ factories with the specific purpose of improving production processes to meet the quality and efficiency standards Uniqlo required. Based at production offices in Shanghai and Shenzhen, the Takumi team visited suppliers’ factories two or three times per week, far more often than the H&M and GAP teams did. GAP in particular had only quality-control (QC) managers visiting factories, while H&M was sending personnel in to monitor production progress only once a month. Uniqlo’s Takumi team had a far broader scope than quality control. It was in charge of developing direct manufacturing skills and quality-control systems. It worked side-by-side with supplier personnel, teaching best practices and the Kaizen philosophy of continuous improvement. Fabric dyeing was one of the most challenging processes. Obtaining the same color using different cauldrons at different production sites was extremely difficult and required specific, un-codified knowledge supplied by the Takumi team experts on-site. At the production process level, the Takumi team aimed to perfect every phase, from yarn sourcing to final quality control, optimizing the production process as a whole to achieve just-in-time performance and quick operational response.16 Uniqlo was a large customer of the Chefeng Group, a medium-size garment manufacturer located in Guangdong province. As a result of the Kaizen philosophy, signs bearing the word “Kaizen” were displayed in every production department, embedding quality control at each stage of the production process. Chefeng molded its operations with the help of the Uniqlo Takumi team and implemented a three-step process. These included: a detailed analysis of every production process to identify systemic quality issues; strict product quality control to identify defective stock-keeping units (SKUs) at every production stage; and a comprehensive staff training program. 15 Usui, T. (2014) “Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal

Qualitative Data Analysis” http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 16 Usui, T. (2014) “Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal

Qualitative Data Analysis” http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015),

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The Takumi team and Uniqlo’s own production experts worked daily with Chefeng staff to tackle production issues as they arose. To promote change, Uniqlo’s experts at times did practical demonstrations to factory managers of alternative ways of carrying out particular operations. Uniqlo quality control requirements were demanding, and included inspection of every single SKU produced, a procedure that most other fashion brands did not implement.17 In an effort to coordinate all actors in the supply chain, in 2014, Uniqlo instituted a “One Table Meeting,” where, under the supervision of Takumi experts, fabric suppliers and garment manufacturers would meet to coordinate their respective production scheduling and processes to meet Uniqlo targets. These “One Table Meetings” allowed fair negotiation and coordination among materials suppliers, garment manufacturers and Uniqlo, leading to a more satisfactory overall relationship among all participants in the supply chain.18 In 2000, Uniqlo sold a total of 300 million pieces divided into 200 SKUs, maintaining the average order size of every SKU at around 1.5 million pieces. After years of collaboration with Uniqlo’s Takumi team, supplier partners had acquired the capability to sustain Uniqlo’s level of quality at competitive cost.19

Uniqlo’s evolution: fashion as utility and supply-chain upgrades From 1998 to 2000, Uniqlo sold over 35 million fleece jackets at the very affordable price of ¥1,90020 per piece. The item’s success was unprecedented and crystallized Uniqlo’s product strategy of functionalism. Rather than serving the purely hedonistic aspects of fashion, its products were to supply practical performance and function, keeping customers warm and fresh, regulating moisture and dryness. Innovation was key to consolidation of the new LifeWear philosophy. In 2003, Uniqlo partnered with Toray to develop new fabrics. Toray was one of the leading composite material and advanced fiber manufacturers in Japan. The partnership’s objective was to create a superior-performance synthetic textile, in an effort to repeat the success of “Uniqlo fleece” and consolidate the LifeWear philosophy. The Heattech fabric was introduced in 2002 and used to manufacture a line of high- performance thermal underwear. Its considerable success sustained the sales-growth momentum Uniqlo experienced in 1998-2000, reversing falling sales trends [see Appendix 2 for Uniqlo Sales Growth]. Heattech was a special synthetic fabric designed for warmth. Toray improved its performance season after season on the basis of Uniqlo customer feedback. The fabric became softer, incorporated new anti-microbial properties, and became anti-wrinkle and anti-static. Uniqlo management believed that working with synthetic fibrer opened a path of progressive improvement that could further differentiate its products. Other innovative products followed from the collaboration of the two companies, such as Air-Sim and the Ultra-light down jacket.21 The integration of the Uniqlo and Toray supply chains was based on a stable flow of orders that could saturate production capacity throughout the year, as the fiber manufacturer’s

17Fast Retailing (2013) “Partners in Quality,” http://prd01-tky-web-main-fastretailing-62349252.ap-northeast-

1.elb.amazonaws.com/eng/csr/report/pdf/csr2013_e_06.pdf (accessed May 3rd 2015) 18Fast Retailing (2014) “Partners in Quality,” http://www.fastretailing.com/eng/csr/report/pdf/csr2014_e_05.pdf (accessed May

3rd 2015). 19 Usui, T. (2014) “Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal

Qualitative Data Analysis” http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 20 Equivalent to 16.001 USD average exchange rate July-December 2001 Japan Yen to US Dollar 118.74 21 Hong Kong Exchange website, Uniqlo Hong Stock Exchange listing prospect 2013,

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0214/LTN20140214033.pdf Accessed 29th April 2015

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production plans could not accommodate seasonal peaks and zero-production periods. Uniqlo had to manage the inventory and production schedule of Heattech and other fabrics Toray supplied in order to guarantee the constant utilization of the production capacity it had booked. To do this, Uniqlo relied on early POS data to shortlist best-sellers and develop similar designs. It utilized a responsive supply chain with a design-to-store lead time of six weeks, mimicking the “just-in-time” supply methods used by Japanese automakers. 22 Inventory management became central to execution, and only the inventory of year-round items like jeans, long-sleeved shirts, t-shirts and sweatshirts was carried over. Inventory carry-over for seasonal items was minimized by utilizing inventory pooling techniques, moving slow sellers at one store to locations where demand for the same items was strong.23 Store, warehouse and factory-level inventory positions were updated daily. Inbound store logistics were outsourced to Third Party Logistics (3PL) providers and supervised at store level by inventory controllers that monitored deliveries and inventory levels in real time. First batches of new products in particular were closely monitored. Inventory controllers analyzed new-item sales levels, and issued specific delivery instructions to logistics companies to assure that stores were never out of best-selling items. Forecasting of future production volumes based on early sales data was central both to Uniqlo’s production planning and pricing strategy.24 Slow-moving SKUs were tracked and their prices changed to stimulate sales. Prices varied almost daily based on sales forecasts versus actual sales. If an item failed to reach target sales volume, its price was lowered as often as every two days. If price reduction lifted sales, the price was again adjusted upwards, and, if sales were on target, all the way back up to the original price.25 To better serve customers, Uniqlo, in collaboration with Casio and Microsoft, created a device that allowed each member of the 40,000-strong in-store sales staff to check inventory on hand, prices and the availability of every item being sold, all in real time. Introduced in 2010, the handheld device was connected to a central database containing all information about SKUs in current production, including stock available at stores. Readily available information made it possible for employees to redirect customers to nearby stores in case stock ran out. Further, quick access to information improved customer service, helping staff in stores find rapidly updated prices.26 With regard to retail networks, Uniqlo had still more stores in Japan than in the rest of the world combined as of February 2015. Store numbers were flat in Japan, where the company was focusing instead on e-commerce. In China, Uniqlo had 340 stores as of February 2015, an increase of 80 stores in one year. This was 20% below the expansion target of 100 stores per year, but still staggering. China was Uniqlo’s second-largest international market, but Japan still had more than double the number of stores. The second-largest international market was Korea, where the number of store was stable at around 130 as of February 2015.

22Alexander, J. (2010) “Japan’s just in time clothes” (2010), CBS news website, http://www.cbsnews.com/news/japans-just-in-

time-clothes/ (accessed 29 Apr 2015). 23 Uniqlo Hong Stock Exchange listing prospect (2013), published on Hong Kong Exchange website

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0214/LTN20140214033.pdf Accessed 29th April 2015 24 Uniqlo Hong Stock Exchange listing prospect (2013), published on Hong Kong Exchange website

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0214/LTN20140214033.pdf Accessed 29th April 2015 25Kang Han Zi (2014) “The research of industry supply chain management-The comparison of the supply chain management

between Lining and Uniqlo”, Master Thesis, Hebei University of Economics and Business 26Microsoft (2010) “Intelligent System Integrates Handheld Retail Devices and Improves Customer Service”, from Microsoft

website download.microsoft.com/.../Fast_Retailing_Windows_Embedded%20.pdf accessed on June 1st 2015

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In Europe, Uniqlo’s presence was small. The UK had ten stores, France eight and Germany one. In the US, the number of stores rose from 17 to 39 between 2014 and 2015. Uniqlo still had a long way to go to establish a strong presence in the US and Europe. In an effort to sustain expansion and low prices, the company was relocating production away from China and experimenting with new supply chain models in preparing the ground for globalization.

Uniqlo production outside of China and distribution networks for online retailing In 2008, Fast Retailing opened offices in Bangladesh in order to redistribute part of its Chinese production. The goal was to reallocate a third of production volume outside Mainland China by 2020. In Bangladesh, instead of partnering with external manufacturers, Uniqlo recruited partners to create a joint venture capable of production according to its required quality and efficiency standards. Uniqlo took only a 10% stake in the first joint venture, with Pacific Textile Holdings Limited and Crystal International Limited together holding, 83% of the venture, and the remaining 7% held by Trendit, part of the Anananta Group. Uniqlo and its partners directly controlled and managed a garment manufacturing and a fabric manufacturing plant. They were also minority holders of a yarn-spinning plant that was majority-owned by the Bros Group. Uniqlo’s main partners in the venture where well established companies. Pacific Textile Holdings had a turnover of HK$4.3 billion and specialized in knitwear, with bases in Sri- Lanka and China, Crystal group, which had a US$868 million turnover, was a garment manufacturer with an annual capacity of 200 million pieces. It supplied M&S and the GAP, as well as Uniqlo. The other two investors in the partnership were a Bangladeshi company, Anananta Group, a fast-expanding garment manufacturer with a workforce 6,000 strong and an over 12 million-piece production capacity, and Bros Group, which operated spinning plants across China.27 [See Appendix 4 for the Uniqlo Bangladeshi JV structure.] Rising wages in China pushed some of Uniqlo’s suppliers, like Lever Style, to move production to Vietnam, where wages were half those in China. After a decade of nearly 20% annual wage increases, the PRC was starting to become too expensive. Uniqlo followed its suppliers to Vietnam and Cambodia, establishing a production office in Ho Chi Minh City, to which it offered the support of a Takumi team.28 At a logistical level, in partnership with the Daiwa Group, a large Japanese conglomerate, Uniqlo was setting up distribution centers to better serve its network of shops. Daiwa was to build ten distribution centres in major Japanese cities, the first of which was located in the Ariake district of Tokyo. This distribution-center set-up aimed to improve the efficiency of Uniqlo’s distribution network in Japan, and in particular to better serve online customers. Uniqlo’s existing warehouse network was divided into first-tier warehouses receiving goods from factories, and second-tier or regional warehouses distributing products directly to shops. The typical transit time was three to six days. While this was fine for offline channel deliveries, the lead times were too long for Japanese online shoppers. Once the new distribution centers were in operation, online shoppers could be served in one day. With the Japanese market saturated with over 840 stores, the growth rate was slowing at physical shops.

27Fast Retailing(2008) “FR to establish Bangladesh production joint venture,”

http://www.fastretailing.com/eng/ir/news/0811281700.html (accessed June 1st 2015). 28Chu, C. (2013) “Asian manufacturers survive by moving to Asian neighbors,” Wall Street Journal,

online ,http://www.wsj.com/articles/SB10001424127887323798104578453073103566416 (accessed June 1st 2015).

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While online retail constituted only 4% of total sales, e-commerce offered a brisk growth rate. 29 Tadashi Yanani had a radical vision of Uniqlo’s digital future:

Once it is completed in spring 2016, we plan to develop our new state-of-the- art distribution centre in Ariake, Tokyo into the world's largest digital flagship store. We intend to carve new business by combining our virtual storefronts (online retailing) with our physical store network in such a way that enhances their mutual functionality, and makes buying our clothes an even more pleasant experience for customers, wherever they are, and however they choose to shop.30

The choice of JD.com in China was an example of the level of performance Uniqlo expected from its online operations. With 123 warehouses and 3,210 delivery and pick-up stations covering 1,862 districts in China, JD.com promised same-day delivery, in major Chinese cities, of merchandise bought online.31 Uniqlo also opened an online flagship store on JD.com, using the platform not only for logistics, but as an e-commerce solution.

A supply chain for the US and the world Fast Retailing opened its first store in the US in 2006, choosing the chic Soho district in New York, and by mid-2014 operated another 26 stores across the US, mostly on the east and west coasts, with the objective of opening 200 stores by 2020. After 2014, Uniqlo planned to open around 15 new stores per year in the US, a number that has been bettered with 22 new stores [see Appendix 3 for store count by country]. High shop-opening costs prevented the retailer from posting a profit in the US, but the stores were forecast to be profitable by 2016-2017. Another factor that impacted sales at US stores was sizing: a medium-size jacket in Japan would only be a small in the US, and that left a size gap in Uniqlo’s offerings.32 Again in the words of Tadashi Yanai, development of the US market was a pillar of Uniqlo’s strategy:

We intend to work hard to develop UNIQLO as a leading brand in other regions as well, including the United States, Europe, Southeast Asia and Oceania. In fact, creating a firm operational platform and expanding the UNIQLO brand in the United States is our top priority at this stage, and we intend to channel the expertise and experience of the entire Fast Retailing Group into achieving that aim. Over the coming three years, our target is to develop UNIQLO USA into a ¥100 billion operation.33

Uniqlo’s supply chain and distribution strategy was working well in the Asia region, where brand expansion maintained momentum. Its operations in Japan were geared up to better

29 Nikkei (2014) “Uniqlo operator teams with Daiwa House on global logistics” Nikkei website, news section

http://asia.nikkei.com/Business/Deals/Uniqlo-operator-teams-with-Daiwa-House-on-global-logistics Accessed June 1st 2015 30 Yanai , T. (2015) “Pioneering a new industry”, Fast Retailing, http://www.fastretailing.com/eng/about/message/ (accessed July

4th 2015), 31Bloomberg (2015) “JD.com sees Uniqlo deal as boost for warehouse business,”

http://www.bloomberg.com/news/articles/2015-04-08/jd-com-sees-uniqlo-deal-as-boost-for-warehouse-business (accessed June 1st 2015).

32Fast Retailing press release (2015) “Uniqlo continues USA expansion plans”, Market Watch website http://www.marketwatch.com/story/uniqlo-continues-usa-expansion-plans-2015-04-06 accessed June 1st 2015

33 Tadashi Yanai, T. (2015),“Pioneering a new industry”, Fast Retailing, http://www.fastretailing.com/eng/about/message/ (accessed July 4th 2015).

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serve online shoppers and, in China, the partnership with JD.com and a network of over 340 stores yielded strong growth. It seemed Uniqlo was preparing to evolve its operations and supply chain to become the leading global apparel retailer:

Fast Retailing is keen to pioneer a new industry, which is completely different from the apparel, fashion and retail industries we know today. This will require a fundamental review of our entire supply chain. We have already established R&D centres in Tokyo, New York and Shanghai. Now we are looking to promote full-fledged product development in Paris, London and Los Angeles as well by opening additional R&D centres in these three cities.34

Fast Retailing’s supply chain had evolved organically, sustaining strong expansion in Asia for two decades. It looked likely to take over the world. Uniqlo was preparing a radical “change of style,” reinventing its Kaizen philosophy and dedication to quality.

34 Ibid.

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APPENDIX 1: FAST RETAILING BUSINESS MODEL35

35From Fast Retailing website http://www.fastretailing.com/eng/group/strategy/uniqlobusiness.html Accessed June 3rd 2015

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APPENDIX 2: UNIQLO SALES GROWTH36

36From Fast Retailing website http://www.fastretailing.com/eng/about/business/aboutfr.html Accessed July 4th 2015

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APPENDIX 3: UNIQLO STORE COUNT BY COUNTRY37 Units: Stores As of As of As of As of As of As of

November 30, February 28, May 31, August 31,

November 30,

February 28,

2013 2014 2014 2014 2014 2015

UNIQLO Operations 1,369 1,384 1,460 1,485 1,547 1,558

UNIQLO Japan: 857 850 862 852 852 842

Own Stores 838 832 841 831 824 814

Large-scale 190 191 201 199 203 203

Standard 648 641 640 632 621 611

Franchise 19 18 21 21 28 28

UNIQLO International: 512 534 598 633 695 716

China 251 260 290 306 330 340

Hong Kong 19 22 22 22 23 24

Taiwan 42 43 43 46 48 51

Korea 115 116 132 133 137 139

Singapore 13 16 16 18 21 22

Malaysia 12 14 18 21 23 24

Thailand 13 14 18 20 21 21

Philippines 10 11 12 16 19 22

Indonesia 2 3 4 4 6 6

Australia - - 1 1 4 4

USA 17 17 21 25 39 39

UK 10 10 10 10 10 10

France 4 4 6 6 8 8

Russia 4 4 4 4 5 5

Germany - - 1 1 1 1

Global Brands 1,200 1,212 1,258 1,268 1,319 1,314 GU 250 250 277 276 300 295 Theory* 425 435 449 460 482 489

COMPTOIR DES COTONNIERS* 372 374 374 374 379 375

PRINCESSE TAM.TAM* 152 151 152 152 152 151

J Brand 1 2 6 6 6 4

Total 2,569 2,596 2,718 2,753 2,866 2,872

37From Fast Retailing website http://www.fastretailing.com/eng/about/business/shoplist.html accessed July 4th 2015

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APPENDIX 4: FAST RETAILING JOINT VENTURE STRUCTURE IN BANGLADESH38

38From Fast Retailing website http://www.fastretailing.com/eng/ir/library/pdf/presen0801128_nagai.pdf accessed June 1st 2015

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