Uniqlo confronts China’s newly thrifty middle class

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After more than three decades of making money through Japan’s housing market crash and deflation, Uniqlo hopes it has what it takes to repeat the trick in China, as the world’s second-largest economy slows down.

The company, which is fighting to eclipse Zara owner Inditex and H&M as the world’s biggest mass-market clothing retailer, has come to rely on China as one of the biggest drivers of its business. In the last fiscal year to the end of August 2023, Uniqlo made ¥620.2bn ($4bn) in revenues in greater China and ¥2.3tn worldwide.

But Uniqlo’s parent company Fast Retailing said last month it was slowing expansion in China from a planned 80 stores this fiscal year to 55, helping send shares down sharply as investors reassessed the retailer’s prospects in the country.

At stake is whether the company’s cheap staples can win over a significantly more thrifty middle class, potentially serving as a bellwether for other consumer-facing foreign companies.

“If Uniqlo does emerge as a winner of down-trading, are they suddenly going to speed up the store expansion target in China? I doubt it,” said Oliver Matthew, an analyst at CLSA.

Uniqlo was born during the heart of the Japanese asset bubble, opening its first store in 1984, just a few years before the economy spiralled into protracted deflation. Analysts have observed parallels with China and its property crisis, which has triggered waves of developer defaults and chilled the economy.

Line chart of Fast Retailing share price, ¥ showing Slower expansion in China dents investor confidence in Uniqlo

When Uniqlo first entered China in 2002, it was not clear that it could prevail. Some investors and analysts expected the Japanese brand to struggle in an increasingly nationalistic environment.

However, not only was the retailer able to navigate the geopolitical tensions that ensnared its rivals, but its functional pieces were also snapped up by consumers, even during widespread boycotts of Japanese goods, including recent protests against Japan’s decision to release radioactive water from its stricken Fukushima nuclear plant.

Uniqlo has targeted Chinese customers with a strategy that attempts to combine reliable basics such as fleeces, office wear and comfortable underwear with hit products. During the pandemic, Uniqlo’s washable face masks were popular and more recently, Gen Z customers have embraced its banana bags.

One Uniqlo shopper in Shanghai, where the chain has 95 stores, said he typically bought products during sales, when the price of a Rmb99 ($14) T-shirt might gradually decrease to as low as Rmb39 over a period of several weeks.

But he added that the products “were cheap even without a sale” and estimated a Rmb99 T-shirt on Alibaba’s flagship shopping site Taobao would cost Rmb200 for an item of similar quality.

As economic growth slows in China, there is uncertainty over how quickly Uniqlo can continue to expand. “Fast Retailing enjoyed an earnings expansion in China under an inflationary economy, and they were able to charge more for a pair of jeans than in Japan,” said Takahiro Kazahaya, senior analyst at UBS Securities Japan.

“But if you get into a deflationary economy and competition causes one company to sell the jeans for cheaper, and at the same time people change their definition of value for money, that could make Uniqlo less competitive,” he added.

Fast Retailing’s chief financial officer Takeshi Okazaki said during results in April that the company’s situation in the country was “half internal and half external”, suggesting the macro environment was part of the issue but also that some stores were underperforming.

He said part of the solution would be to shut some locations and do more with ecommerce and livestream commerce, a popular form of shopping on Chinese social media apps.

The company told the Financial Times that its “priority is to conscientiously open high-quality stores in excellent locations that can achieve more sales per store rather than simply pursuing a higher number of stores”.

It added that since mainland China is a “huge market with distinct regions with varying climates . . . one consideration is whether we have been able to build a product mix that really suits the specific needs and characteristics of each region”.

While Uniqlo fine-tunes its strategy in China, its ambitions in the US and Europe might be more important to its success and share price.

“China has dropped off a bit and that was the catalyst for the stock for years,” said one Tokyo-based investor in the group. “But even if that keeps being the case, there’s still the EU and the US. They are both doing fine at the moment . . . the next question is if they can keep doing so.”

Additional reporting by Wang Xueqiao in Shanghai

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