Yanai the main culprit in decline of Uniqlo empire
Who is most to blame for the recent plunge in the stock price of Fast Retailing Co. (operator of the Uniqlo casual clothing store chain)? Investors have likely looked on aghast as Fast Retailing's stock price has fallen by more than half its peak value—previously pegged at more than ¥60,000—in just nine months.
From the time the firm's stock was priced at a record ¥61,970 on the First Section of the Tokyo Stock Exchange on July 30 last year, it has been in decline, finally dipping below the ¥40,000 level on Jan. 7, when a drop in revenue for the first quarter from September to November 2015 was reported.
On April 9, the share price dropped rapidly by ¥3,880, or 13 percent, to below the ¥30,000 level, shortly after the company's drastic downward revision of its earnings forecast for the full business year. In terms of total market value, about ¥3.5 trillion vanished during the period.
The chief culprit behind these figures is none other than Tadashi Yanai, president and chairman of Fast Retailing. A pricing strategy introduced by the autocratic leader caused a customer exodus from Uniqlo stores—which has branches around the world—buffeting the business and sending Fast Retailing's stock price into a nosedive.
"The price hike is necessary to retain the quality of our products," Yanai said when he announced a 5-percent price increase in Uniqlo's regular products in 2014, shortly before the autumn and winter retail season got under way.
At that time, more and more companies were boosting workers' wages due to signs of a robust economy on the back of positive effects from Abenomics—Prime Minister Shinzo Abe's economic policy package—though the yen's value was decreasing and the cost of raw materials were going up; points that were perceived as ill winds for Fast Retailing.
Yanai likely believed the loss of earnings from the pricing policy-induced drop in Uniqlo customers could, to some extent, be offset by higher average sales per customer. And his strategy was successful—for a while. Though the number of customers visiting Uniqlo stores in Japan declined by 2.9 percent in the business year ending in August 2015 compared with the previous term, operating profit was ¥117.2 billion, up 10.3 percent compared with the previous period. This helped First Retailing register a record ¥110 billion in net income.
However, this has changed completely for the current business year set to end in August. Emboldened by his successful pricing increase, Yanai decided on yet another hike the following year, adding an extra 10 percent to price tags in the 2015 retail season for fall and winter goods. Consequently, there were year-on-year decreases in customer numbers for four straight months from last September, while November and December saw a two-digit drop in store visitors. To exacerbate matters, Uniqlo tried to stave off customer defection by holding a surfeit of discount sales. As a result, the prospect of profits deteriorated quickly, a Fast Retailing source said.
The company revised downward its full-year business projection, simultaneously announcing that operating profits in the first half of the business year (September 2015 to February 2016) were only ¥99.3 billion, 34 percent down on the same period the previous business year. Net income dropped 55 percent to ¥47 billion. In the second quarter (December 2015 to February 2016) operating profits were a mere ¥24.6 billion, widening the declining profit margin to 58 percent. Booking ¥21 billion in impairment losses was damaging, and the company moved ¥1 billion into the red, tumbling from a surplus of ¥35.9 billion in the same period the previous business year.
Yanai is still Fast Retailing's biggest shareholder, however, holding 22.98 million shares, or 21.6 percent of the company's issued stock. If Fast Retailing stock held by Netherlands-based asset management firm TTY Management B.V. is included, Yanai owns a total of 28.29 million shares. Yanai has headed Forbes magazine list of Japan's richest people for two consecutive years, but he himself "is estimated roughly to have lost assets equivalent to ¥1 trillion," a well-placed source said, due to the falling stock price. However, it seems Yanai has got his just deserts.
After learning a bitter lesson, the Fast Retailing chief has decided to lower product prices and get back to basics for Uniqlo clothing. He has secured the financial resources necessary to cut prices by heavily restricting the almost-constant discount sales that were introduced to supplement the decline in sales and customer traffic.
According to Yanai, he is once again trying to make customers feel that Uniqlo clothes offer value for money—a view eroded by repeatedly lowering prices—by enforcing a low-cost management policy through a drastic review of the company's cost structure, which he says "has not grown, but just inflated."
However, it may not be so easy to re-engage Uniqlo's former customers. If prices repeatedly yo-yo over a short period of time, consumers will be suspicious about the brand's justification for its pricing, eventually leading consumers to mistrust the Uniqlo name.
Discussing the essence of management, Yanai used to say: "Trust is everything in business. Consistency is important, and if you frequently change opinions and say different things every day, no one will believe you."
But, has he made decisions than run contrary to his credo in the face of a deterioration in earnings and the share-price plunge?
In reality, the company's drastic cost-structure review is a double-edged sword. Yanai likely suffered a heavy blow following repeated public criticism that claimed Uniqlo stores were "sweatshops." Since June 2014, he has made efforts to improve his company's public image, such as by introducing a policy to make 16,000 part-time or temporary store workers into regular employees.
Since damage to the corporate image could easily impact on the brand image—and in light of the fact there was a labor shortage at that time—Yanai may have believed it would be difficult to treat workers as expendable in the future. As a result, however, labor costs gradually climbed. Though revenues increased in the first half of the 2014 business year, the ratio of sales to general and administrative expenses was 32 percent, two percentage points up on a year-on-year comparison—a major cause for the decline in operating profits.
But if Yanai tries to cut labor costs again, it could rekindle public criticism of Fast Retailing as an "exploitative" company.
"At a time when customers are defecting from Uniqlo stores, if the public labels Fast Retailing as a sweatshop, it could kill the company," a market source said. "In the end, Fast Retailing would be like Watami Co.," a once-popular izakaya (Japanese-style pub) chain operator, whose reputation reached rock-bottom after being perceived by the public as a sweatshop firm.
Yanai was born in Ube city, Yamaguchi Prefecture, in 1949. After graduating from the School of Political Science and Economics at prestigious Waseda University, he entered Jusco Co. (presently, Aeon Co.) but quit after only nine months, as the job allegedly did not quite suit him. After freeloading off friends for six months, he returned home and joined Ogori Shoji Co., the predecessor of Fast Retailing founded by his father. In 1984, Yanai became the firm's president. At that time, he opened the first Uniqlo store in Hiroshima city, ushering in the era of Uniqlo's high-speed growth.
After Fast Retailing's successful 1994 listing on the now defunct Hiroshima Stock Exchange, the company proceeded to convert its business into a specialty store retailer for private label apparel (SPA). Following inclusion in the Second Section of the Tokyo Stock Exchange, the company was finally listed in its First Section in 1999.
During this rapid growth period, Yanai often pledged two things: He would retire at the age of 65, and the company's top posts would never be passed on through family succession.
However, Yanai has failed to nurture any successors, purging every would-be president hunted from outside the company. He turned 67 in February, so he has already broken his first pledge. Now it seems increasingly unlikely he will keep his second pledge, according to business sources.
At Yanai's behest, his eldest son Kazumi, who has worked for an investment banking section of the Goldman Sachs Group, joined Fast Retailing and was appointed chairman of Link Theory Japan, a company that deals with a U.S. brand of women's apparel. Kazumi was also made a group corporate officer for Fast Retailing. Thereafter, Yanai had his second son Koji, who had worked for Mitsubishi Corp., Japan's leading trading house, move to Fast Retailing, and awarded him an executive position. "It's conceivable the two sons could assume the posts of president and chairman in the future," said a Fast Retailing source.
Yanai has already made a critical miscalculation in his pricing strategy. If he makes further errors of judgment over his retirement and successors at the company, the Uniqlo empire he has built up the hard way, could come to an abrupt end in just one generation.
This is a translation of an article from the May 2016 issue of Sentaku. The original article can be found here.