How Uniqlo became an irreplaceable clothing brand in China - the inspiration of Uniqlo
Uniqlo's revenue grew 160 times while Japan's clothing industry shrank by 50%. What are the lessons to learn?
Recent discussions regarding the possibility of China experiencing the phenomenon known as "Japanification" in the coming decades have sparked significant interest and debate. The term "Japanification" describes the economic stagnation that Japan has encountered over the past few decades, characterized by slow growth, low inflation, and an aging population — There is increasing concern that China may be on a similar trajectory.
However, as China's economy undergoes structural changes, we have observed that some brands and sectors still demonstrate high-growth potential. For instance, in the previous post, we shared 10 consumer trends of brands and sectors that thrive in China, despite concerns of "consumption downgrade".
In today's post, we will explore Uniqlo, one of the few foreign brands that has managed to succeed nationwide in China despite slower economic growth. We will examine the key winning strategies that drive Uniqlo's success in the Chinese consumer market.
The success of Uniqlo in China, despite these economic headwinds, is particularly notable. It suggests that certain brands and business models can thrive even in an environment of economic uncertainty and slow growth, offering valuable insights into the resilience and adaptability of businesses in such economic climates.
The in-depth analysis is prepared by Huang Hai and Rio, a pair of seasoned investors and influencers specializing in analyzing Chinese consumer sectors. The analysis on Uniqlo was originally featured in their podcast program 疯投圈 (The Crazy Capital), a top-tier investment-focused podcast in the Chinese language world followed by over 271,000 listeners. If you would like to listen to the original podcast episode (in Chinese), you may choose to subscribe to Crazy Capital’s podcast on 小宇宙, on Apple Podcast, or listen via their YouTube channel.
*Today's post is not sponsored by Uniqlo.
Below is Baiguan's translation of Crazy Capital's podcast episode on Uniqlo:
A few years ago, we discussed the "Japanese Consumer Upgrade Inspiration Record" in one of the most popular podcast episodes in the crazy capital ”疯投圈“. Recently, after the end of the COVID-19 pandemic, we went to Japan again for investigation and gained a lot. In this more uncertain global economy, how can we continue to grow in a sluggish environment? What future trends are worth paying attention to? Japanese consumer companies may be one of the best models for Chinese brands to learn from.
Uniqlo: Superb value-for-money and ultimate efficiency
In the consumer field, compared to 30 years ago, the number of Japanese consumer goods companies that still maintain strong competitiveness globally is decreasing. MUJI’s influence in China continues to decline, and Japanese car companies such as Toyota are facing strong challenges from domestic new forces. However, Uniqlo has still achieved counter-trend growth in the Chinese and even global markets.
In China, where the light industry supply chain is highly developed, the competition in terms of cost-effectiveness is particularly fierce. However, Uniqlo is still the first choice for many consumers when buying clothes. Many Chinese brands, including Luckin Coffee and Perfect Diary (完美日记), have successfully differentiated themselves from others and expanded their market share through “premium brand substitution" [Baiguan: replacing the expensive item with a more affordable one that is equal in value and function]. However, at least for now, no Chinese brand claims to be able to replace Uniqlo. This is because Uniqlo has already become the "ceiling of cost-effectiveness", making it very difficult for other brands to lower their prices further while maintaining the same quality.
So, how did this great company develop? Uniqlo was established in 1984 and mainly focused on the domestic Japanese market from 1990 to 2010. Its subsequent growth was mainly driven by international expansion. The 20 years from 1990 to 2010 were a period of economic weakness in Japan, often referred to as the "Lost Two Decades", marked by the burst of the economic bubble, and a decline in real estate and stock prices, among other challenges. However, it was precisely under such a weak background that Uniqlo achieved revenue growth from 5.2 billion yen in 1990 to 814.8 billion yen in 2010, a 160-fold increase, despite Japan's stagnant GDP. The revenue growth is already impressive, but the profit growth is even more astonishing, with revenue increasing 160 times while profit increased by over 1,500 times.
During this rapid growth period of Uniqlo, the overall Japanese clothing industry shrank by 50%. This shows that although the macroeconomic background is important for companies, the development of individual companies may not have a strong correlation with the overall economy. Among the "Four Major Needs" of food, clothing, housing, and transportation, even if there is a downgrade in consumption, people still need to eat well and cannot cut back on essential daily necessities. However, the purchase of clothing has relatively high elasticity. Clothing is a heavily oversupplied market in most developed countries. Buying clothes is often driven by psychological desires. When people are in a good mood or have a strong economy, they tend to buy more clothes. During economic downturns, people can choose not to buy clothes. Moreover, even during Japan's economic stagnation, which is already a developed country, the overall consumption level of individuals is relatively high, and most households already have a lot of clothes, so they can afford to buy less.
In the 20 years of creating growth miracles at Uniqlo, the founder of Uniqlo, Tadashi Yanai, has also consistently ranked as the richest person in Japan. In fact, many countries' richest individuals all come from the consumer industry, including the founder of ZARA, who is also consistently the richest person in Spain.
After 2010, the development of Uniqlo in Japan entered a relatively saturated stage. Subsequently, Uniqlo started to expand into overseas countries, with the international market, especially China, becoming its growth engine. Currently, Uniqlo's revenue in China is approximately 30 billion RMB, while in Japan it is around 40 billion RMB, with a gap of 20%-30%. However, it should be no problem to catch up with or even surpass Japan within the next 5-10 years.
In the Chinese market, Uniqlo has approximately 1000 direct-operated stores, surpassing the number of stores in Japan. Many listeners [Baiguan: to Crazy Capital’s podcast] may have a Uniqlo store in their local shopping mall. What sets Uniqlo apart from other fast fashion brands is that while others are retreating, Uniqlo is expanding on a large scale. Brands like Zara and H&M have been struggling in recent years. By the end of 2022, H&M had 360 stores in China, which is 85 fewer than in 2020. In January 2023, Zara only had 119 stores, a decrease of 14 compared to 2021. If we compare Uniqlo to fast fashion brands like H&M and Zara, Uniqlo's style, which focuses on basic items, is more suitable for expanding into a wide range of emerging markets. The definition of "fashion" itself implies different styles that are more cutting-edge and niche, which cannot satisfy the aesthetic needs of consumers of different ages, genders, and lifestyles.
In Rio's view, Uniqlo is better able to meet the needs of consumers of different genders, age groups, and aesthetic preferences. Both consumers who like basic styles and those who like trendy styles can find something suitable for themselves at Uniqlo.
The future goal of Uniqlo is to open 3000 stores in China. It is impossible for fast fashion brands [Baiguan: like Zara and H&H] to open stores in rural areas. Compared to e-commerce, the significant characteristic of shopping in physical stores is to ensure that local consumption can support the operation of the stores. The shelves on e-commerce websites are endless and can accommodate a sufficient number of SKUs, but the products displayed in stores cannot be showcased through algorithms or personalized matching. Although UNIQLO, ZARA, and H&M are all clothing brands, fundamentally, their genes, positioning, and future development ceilings are completely different.
Next, Uniqlo still maintains a competitive advantage in the Chinese market that other overseas brands do not have. One major characteristic of the Chinese market is the exceptionally developed e-commerce sector, where independent designer brands can be found on platforms such as Taobao and Xiaohongshu. These "ant army" style e-commerce brands, which cater to the niche demands of specific consumer groups, pose a much greater threat to fast fashion brands than Uniqlo. The strength of small and medium-sized brands lies in their ability to quickly respond to market demands and innovate accordingly. Consumers who prefer niche brands and styles can almost find all their favorite styles on e-commerce platforms, whereas fast fashion brands, even with Zara's flexible supply chain, can't keep up with the speed at which new products are released by these individual stores. Uniqlo, on the other hand, focuses on basic styles for men, women, young, and old, leaving less room for challenges from smaller brands.
From a cost perspective, Uniqlo's selling price is roughly 2-2.5 times its cost. This means that a pair of pants priced at 99 yuan would have a cost of around 50 yuan. Those familiar with the apparel industry understand the significance of a 50% profit margin, as it indicates that Uniqlo is the most efficient company in the industry. Pricing in the industry is generally 4-7 times the cost, as the high return rate and quick obsolescence of clothing items need to be accounted for in the cost.
Compared to Uniqlo's sales scale, it is actually very difficult for new brands to challenge and surpass it. Without achieving a sufficient scale, it is impossible to achieve economies of scale and lower prices. Uniqlo's advantage, on the other hand, continues to grow like a snowball due to its minimal changes in materials, fabrics, and styles, resulting in lower management difficulty and costs. Even in the highly developed environment of Chinese e-commerce, there are indeed very few e-commerce brands that can truly challenge and threaten Uniqlo.
Becoming the intersection of different consumer groups
Another topic worth discussing about Uniqlo is the online buzz around "how to wear Uniqlo and feel like a millionaire?" and the expression that many people who wear Uniqlo are actually wealthy. This phenomenon is not unique to China, as Uniqlo is also a brand that both affluent, high-income individuals and the general public in Japan purchase. The founder of Uniqlo is very proud of this fact and once said, "Both the rich and the poor buy Uniqlo because we advocate versatility." Why is it able to meet the needs of consumers from different social classes?
In Hai Huang's view, great consumer goods companies have the ability to transcend social classes. Warren Buffett and a homeless person on the street can both drink Coca-Cola and Tim Cook, even if he is infinitely wealthier than the average consumer, still uses an iPhone. For these things, the wealthiest person in the world is just like us. Good consumer goods companies can create nationally shared brands.
In Rio's view, this is related to the global trend. If Europe is considered "old money" and the United States is "new money," then the United States has a greater pursuit of the concept of "equality" compared to Europe. This may also be why Europe has many luxury brands while the United States has fewer. The same situation may apply to Japan. Uniqlo's development accelerated during Japan's economic recession period, and even the affluent class refrains from showing off their consumption in a social environment that is not ideal overall, as it is considered "socially incorrect." On the other hand, it is also closely related to the industry where the affluent class is located. Typical professionals in the IT industry are less inclined to engage in conspicuous consumption, and the same goes for China. It is possible that the income of Wall Street workers and IT company employees is similar, but clearly, Wall Street professionals tend to dress more elegantly. This may be similar to the logic we discussed earlier about luxury goods.
On the other hand, as individuals become more mature and develop their own stable values, they will be less inclined to use external objects to express their unique existence. If we view brands as a spectrum, the act of purchasing luxury goods may stem from a desire to showcase one's purchasing power through the well-known logo. However, for higher-end brands, the focus shifts towards providing impeccable service to their audience, and the emphasis on brand display diminishes. On the opposite end, platforms like Pinduoduo and TEMU represent white-label products where functional value takes precedence, and there is no pursuit of logos or symbols. In a sense, Uniqlo can be seen as the "true MUJI".
One significant feature of the Uniqlo brand is that it is actually a "logo-less" brand, rarely printing its own brand on clothing. In comparison, brands like Adidas and Nike often like to print their logos on their garments, hoping to tell everyone "What kind of person I am" when they buy this brand. However, nowadays more and more new brands do not operate in this way. For example, Lululemon has a thoughtful design: the brand will place its logo in some unintentional and inconspicuous places, such as the sleeve or waist. Huang Hai previously analyzed why Lululemon is successful in a video, and one user comment left a deep impression on him, saying that Lululemon takes good care of the feelings of people who don't like big logos.
Actually, the brand attitudes of Lululemon and Uniqlo are very similar. They are both excellent brands, but the meaning of "brand" is different from luxury goods. The former is more introverted, not flashy, and does not need to express one's identity through clothing. The latter, on the other hand, is more about wanting others to know that you have the purchasing power to buy LV or Hermès. In today's era, compared to brands, consumers may be more concerned about themselves, their comfort, and their desire for a healthy and free life, rather than becoming "the person represented by a logo". When "earning a million dollars a year and still wearing Uniqlo" becomes a social phenomenon, the underlying consumer trend worth noting may be that as such brands become more popular in society, it actually means that they are more in line with the demand of "looking inward" and "pleasing oneself" in a sluggish economy. Brands that can help users achieve this may enjoy excess profits.
In addition to Uniqlo, there are many other cases that can support this conclusion. For example, everyone is familiar with Uniqlo. When Uniqlo rose as a "Japanese domestic brand" in Japan, it also emphasized the consumption of simple and genuine happiness and challenged foreign brands with high cost-effectiveness. Of course, in the competitive market in China, there are always brands that focus more on cost-effectiveness., “躺岛” [Baiguan: a bedding brand], a brand in which Huang Hai has invested and we have interviewed before, is also like this. People generally pay more attention to their sleep environment and comfort during rest. In the past, when the economy was developing rapidly, it made sense to sacrifice some sleep time, but now that the overall environment has slowed down, getting enough sleep is even more important. Another brand we interviewed in the podcast, "Pause Laboratory," [Baiguan: an online psychological counseling service] also falls into the same category. More and more people find it difficult to face their inner restlessness and need more specialized services to help alleviate their own problems.
Embracing oneself and exploring inwardly has gradually become the main theme.
There is an interesting data point to share with everyone: In the Chinese consumer market this year, the overall market for perfumes has been declining, while the market for fragrances has been rising. The former is perhaps more commonly used on social occasions, aiming to please others, while the latter is more often used at home, for one's own pleasure. There is even a recent trend in meditation and tarot cards, and all these trends eventually form a common thread. If our audience friends are looking for new ideas for their career development, it might be worth exploring more possibilities in industries and services related to self-acceptance and self-exploration, as they may achieve better returns in an economic downturn.
Returning to Uniqlo, in addition to basic styles, Uniqlo has also invested a lot of effort in creating collaborative collections. These two aspects are not contradictory. The basic styles serve as the foundation of Uniqlo, providing consistent designs and fabrics, while the collaborations with different intellectual properties (IPs) offer a continuous stream of freshness and reasons for repeat purchases. Not all IPs have the ability to transcend time and remain popular, but there are always IPs that are currently trending. IPs are actually a strong industry in Japan, with Nintendo being a representative company that still holds significant influence. In conclusion, there are plenty of anime and game IPs in the local market that provide Uniqlo with a constant source of inspiration for their collaborations. In comparison, Zara and H&M have relatively fewer attempts at collaborating with IPs because they already have their own fashion styles, rather than serving as a versatile infrastructure.
During Huang Hai's visit to Japan, he noticed another interesting brand called DESCENT 迪桑特. This is a sports brand that was established in Japan in 1935, with its core focus on golf and skiing. Its Chinese business has now been acquired by ANTA Group. As we have analyzed before, ANTA Group has been expanding globally through acquisitions and has built a portfolio of high-end sports brands including DESCENT, becoming the third growth curve alongside the main brands ANTA and FILA. However, the DESCENT store in Tokyo's Shibuya does not look like a sports brand, but more like a trendy brand. The pricing is also very expensive, with jackets priced between 4000-5000 RMB.
Previously, when we were consulting with our business partner Baiguan, they shared an interesting piece of data: this year in the sports industry, brands with an average price above 400 yuan continue to grow, while brands with an average price below 400 yuan are actually declining. This includes the fact that air tickets and hotels have been rising this year, and it has become difficult to even get an Arc'teryx. The reality is complex and cannot be simply summarized by the phrase "consumer downgrade". On the one hand, consumers are pursuing cost-effectiveness and basic styles, but on the other hand, everyone is willing to invest more time, energy, and money in things they truly like and are interested in.
China is a large country, and many times we cannot draw conclusions based on generalizations. It may be necessary to resort to more specific methods, more accurate perspectives, and more extensive data to provide us with insights that are more practically meaningful.