Uniqlo Supply Chain PDF

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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....

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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 2 clothing brands in Japan and the number-one fashion retailer in the country. 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 1

For details, see Fast Retailing website: http://www.fastretailing.com/eng/about/business/shoplist.html (accessed 9th April 2014). For details, see Fast Retailing website: http://www.fastretailing.com/eng/ir/library/pdf/ar2013_en_13.pdf (accessed 9th April 2014). 3 For details, see Fast Retailing website: http://www.fastretailing.com/eng/about/message/ (accessed 9th April 2014). 2

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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UNIQLO: A Supply Chain Going Global

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.

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Michiko 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 5 The 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 annually7 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 socalled “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

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Stephanie 0. Crofton, Luis G. Dopico, (2007)” ZARA-INDITEX AND THE GROWTH OF FAST FASHION”, Essays in Economic & Business History — Vol XXV, 2007 9 Greg 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). 10 Stephanie 0. Crofton, Luis G. Dopico, (2007) “ZARA-INDITEX AND THE GROWTH OF FAST FASHION”, Essays in Economic & Business History — Vol XXV, 2007 11 Lau, C. (2014) “Behind H&M’s fashion forward retail inventory control,” http://www.tradegecko.com/blog/hm-retailinventory-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

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Huijuan Du, Yanjun Huang, Yan Liu, (2014)” The Analysis of the SPA Apparel Company Strategy”, College of Quartermaster Technology, Jilin University, Changchun, China 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 13

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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 c...