Table of contents
- Porter’s five forces for fast fashion industry
- Core competence
Fast Retailing Co. Ltd. is a global company handling a portfolio of brands including UNIQLO, GU and Theory. Fast Retailing (then Ogori Shoji) was first founded in Ube City, Yamaguchi Perfecture in Japan by Hitoshi Yanai, father of the current Fast Retailing President, Tadashi Yanai. Today, Fast Retailing’s revenue is categorised into UNIQLO Japan, UNIQLO International, Global Brands and Other. This report focuses on Fast Retailing’s UNIQLO retail in Singapore which is within the UNIQLO International category from 2009 to 2018. Business Strategy UNIQLO’s mission is to create ultimate-comfort LifeWear that enriches people’s lives. It targets a wide range of customers with differing demographics by offering a vast range of products through its creation of the specialist design teams to cater to the needs of each area.
Porter’s five forces for fast fashion industry
Threat of new entry is relatively high. Having a total of 2,068 UNIQLO stores worldwide, it can reap cost advantages from the economies of scale arising from the bulk purchase of raw materials and the reduction in fixed cost per unit. However, customers are free to switch from its products to other products easily as there is no sunk cost incurred because most of the products offered are undifferentiated even though some product lines are made with exclusive technologies. In addition, the minimum capital outlay to start a fast fashion company is not high since the only major investment is the machine used to produce the garments. Power of suppliers is relatively low. The materials required to produce clothing are commodities such as cotton, fibre, thread and many more. Since these products are exported by many countries around the globe, the supplier concentration is presumably low. In addition, these materials are undifferentiated with many substitutes readily available in the market hence, there is little to no switching cost when changing suppliers. Power of buyers is moderate. Given that clothing is standardised and undifferentiated, buyers can easily switch to another fast fashion company without incurring a switching cost. In addition, in a fast fashion industry, buyers are less likely to have high expectations on the quality of products due to rapid change in consumer preference.
As such, buyers have a relatively high bargaining power in terms of the price point of clothing. Threat of substitutes is low. Buyers buy clothing to cover themselves either to keep warm or for modesty issue. Regardless, there are no substitute for garments even if buyers find it expensive. Hence, there is literally no threat of substitute for the fast fashion industry. Rivalry amongst competitors is relatively high. There are many players in this industry ranging from big players such as Zara, Hennes & Mauritz (H&M) and Topshop as well as small players such as The Editor’s Market, TEMT and Love, Bonito. Even though there may be minor differences in terms of the material and design of the clothing offered by these players, buyers’ usage of the clothing is similar hence making these products undifferentiated and thus, reduces the firms’ ability to price its products at a premium. Moreover, the players often enter into long term contracts with suppliers in order to secure the best price for the materials.
These costs increase the exit barriers for the players because these must be paid even though the firm decides to cease its operation. However, the revenue in Singapore’s fashion segment amounted to US$999 million in 2018 and is expected to grow at an annual rate of 17. 7% to hit a market volume of US$1,917 million by 2022. The rise in revenue shows an increasing demand of clothing hence reduces the intensity of competition between the industry players. Fast fashion industry life cycleThis industry is likely to be in the growth stage. The fashion industry has emerged as a fast fashion industry mainly due to technology advancement, allowing greater access to information in relation to the latest trends and styles to buyers. These products are often worn by celebrities which are too expensive for a typical buyer.
As such, fast fashion companies enter the market with a new market disruptive innovation by offering similar products that are lower in quality but cheaper to target this group of buyers. To accommodate the ever-changing consumers’ preference, fast fashion companies are constantly engaged in process innovation through improving their supply chain management and the use of ecommerce as a distribution channel. Supply Chain Management: In order to capture the trend, fast fashion companies are working towards reducing the lead time of the products. Moreover, trends are temporary hence, fast fashion companies need to ensure a well-managed inventory to avoid incurring holding cost. UNIQLO introduced a new inventory management system in 2017 which simplifies stocktaking and search tasks by using radio-frequency identification (RFID); Zara emphasise on transparency and dialogue with all its stakeholders to reduce redundancy of resources; H&M invest significantly on advanced analytics and artificial intelligence to increase its speed, flexibility and efficiency to meet consumers’ demand.
eCommerce: A huge segment of the revenue of fast fashion companies comes from its online sales thus, they are working towards providing a seamless shopping experience for consumers. UNIQLO established online-to-offline (O2O) and Zara launched their Automated Collection Point, both of which provide consumers the option to collect their online purchases in-store; H&M’s mobile application has an in-built Image Search tool which uses self-learning algorithms to recommend similar products based on user’s uploaded photo. On top of that, there is a significant expected growth rate of 17. 7% by 2022 which further substantiate that there is room for growth in the fast fashion industry. Key value drivers – differentiation strategyBranding: UNIQLO is a short form for unique clothing.
Contrary to its name, UNIQLO offers clothing that are simple yet essential for its buyers. Through the LifeWear concept of ultimate daily clothes, UNIQLO differentiates itself by offering high quality clothing at affordable prices targeted at everyone which is aligned with its philosophy of “Made for All”. Unlike the nature of fast fashion being “disposable clothes”, UNIQLO do not compromise on quality to make its products more affordable. Product features: UNIQLO’s core products include AIRism, HEATTECH and Ultra Light Down Jacket. AIRism is a comfortable summer innerwear with the ability to release heat and moisture, keeping wearers dry at all times; HEATTECH was created through a partnership with Toray Industries, a world leading synthetic fibre manufacturer, to generate and retain warmth; Ultra Light Down is an outerwear capable of retaining body heat despite being thin and compact. In addition, UNIQLO also worked with Kaihara Corporation in search for denim that meets a certain spinning standards and dyeing specifications to create Ultra Stretch Jeans that are fitting yet do not restrict wearers’ freedom of movement.
Customer service: UNIQLO has a Customer Insight Team which utilises big data such as buying trends, customers’ request and others to forecast demand, improve existing products and create new products that best suit customers’ preferences. In addition, UNIQLO’s staff are trained to greet shoppers when they enter or leave the store. This simple gesture creates an approachable and welcoming atmosphere for customers thereby enhancing their shopping experience. Also, UNIQLO offers several perks for online shoppers such as a 30-days free returns policy, free shipping for orders more than $60 and the click and collect to entice shoppers to purchase UNIQLO products.
Branding: UNIQLO has successfully build a strong brand name over the years. Consumers believe that UNIQLO offers a combination of comfort and style at affordable prices. This is an image exclusively for UNIQLO and competitors can neither destroy nor take it away. In addition, its long-term relationship with its suppliers may also bring about advantages such as bulk discounts or credit terms which provides liquidity and allows UNIQLO to generate a higher profit margin. Innovative technology: UNIQLO has a strong research and development centres which focuses on researching the latest new materials and latest global fashion. Through the research and development department, it is able to generate multi-layered improvements in relation to the functionality, silhouette and texture of its products. Furthermore, its strong branding give rise to its ability to procure high quality materials and in turn produce high quality products. This include a partnership with Toray Industries to develop HEATTECH – a fabric capable of converting moisture into warmth and retain this heat generated through the air pockets in the fabric. Besides, it also has other patented technologies such as AIRism and UV Cut. Uniqlo and competitorsUNIQLO has two competitors namely Zara and H&M. Zara is committed to providing trendy product to customers in a responsible way while H&M offers quality and fashionable products in a sustainable way. Both companies adopt the differentiation strategy which hope to drive up customers’ willingness to pay for its products. Branding: Both companies are customer-centric in that they strive to be able to imitate expensive runway clothing into affordable trendy garments that suit consumers demand quickly. Zara takes about a week or two while H&M takes two weeks to create new designs and put them in store for consumers. In addition, both companies produce their products in small batches to create an “it’s now or never” appeal and to avoid the need to markdown its products.
On the other hand, UNIQLO takes approximately one year to launch a new product as the designers will only start to prepare and refine samples after the right design concept has been determined through the concept meeting. Although consumers demand for cheap and trendy products, but the trade off between the price and quality are of utmost importance to consumers. Through the reviews of UNIQLO, Zara and H&M from TheSmartLocal, consumers think that UNIQLO’s products are comfortable yet stylish and it is value for money; Zara products are not worth it due to the poor product quality; H&M products live up to its name as a fast fashion company as its products are cheap but not durable however, H&M has been increasing the price of its products gradually as it moves towards a new business strategy. Sustained competitive advantage: UNIQLO’s innovative technology are valuable because it allows UNIQLO to differentiate itself from its competitors. These technologies are also rare and costly-to-imitate since UNIQLO possess exclusive rights.
In addition, to imitate UNIQLO, competitors must invest huge sum of money in research and development because of the difference in the business model between UNIQLO and its competitors. Lastly, these innovative technologies are organised to capture value. Due to Singapore’s climate, consumers have the tendency to wear an innerwear to prevent visible sweat stains on their shirts or blouses. With UNIQLO’s fast-absorbing AIRism products, it solves consumers’ worry. Hence, the innovative technology that UNIQLO possess is a sustainable competitive advantage. In comparison, Zara core competence lies in its well-managed value chain system which allows Zara to quickly turn trends into products. Being a first mover in producing these trendy products is valuable to Zara as it increases consumers willingness to pay. However, this ability is no longer rare or costly-to-imitate as UNIQLO and H&M are also investing heavily on data analytics and artificial intelligence to gather the latest information on consumers’ preference. This is further proven by H&M’s ability to turnaround within two weeks.
Likewise, H&M’s new business strategy is moving towards being environmentally friendly. It has recently introduced its eco lines which uses lyocell – a recyclable and biodegradable cellulose fibre. This is valuable to H&M because being ethical has a positive relationship with the brand image and profitability of the company. However, it is neither rare nor costly to imitate because lyocell is an easily accessible material. Online distribution channel: Amongst UNIQLO, Zara and H&M, Zara has the best shopping experience for consumers. Instead of just showing the other items that consumers may like, Zara also recommends items that would complement the selected piece. This enhances the user experience and improve profitability for Zara. Customer service: UNIQLO has an edge over its competitors in term of reach in Singapore with 28 brick-and-mortar stores while Zara and H&M have 9 stores each. In addition, both UNIQLO and Zara offer free exchange or refund and free delivery with orders over $60 for UNIQLO and $79 for Zara. However, H&M do charge a fee for these services.
Over the years, Fast Retailing has reported strong performance through a gradual increase in its revenue. However, it is noted that Fast Retailing incurs a huge cost of sales likely due to the procurement of high-quality materials which translate to a profit margin of only 6. 9% which is lower than Zara and H&M at 13. 29% and 8. 09% respectively. Despite having a lower profit margin, the EPS shows that Fast Retailing is extremely profitable as each share is worth 10. 59 USD. Fast Retailing’s high current ratio of 19. 98 suggests that it is highly liquid and well able to fulfil its short-term obligations.
However, it may consider investing some of its cash and cash equivalents in its operations since more than 50% of its current assets are made of idle cash. The debt-to-equity ratio of 38. 7% suggests that Fast Retailing as a whole is largely equity funded which implies a potential growth accompanied by increasing leverage. In term of asset utilisation, a return on equity of 18. 3% shows that Fast Retailing is less efficient in using its equity to generate earning as compared to Zara and H&M which has a return on equity ratio of 26% and 26. 8% respectively. Conclusion Fast Retailing has successfully differentiated UNIQLO from its competitors through its innovative technology which allows UNIQLO to create high quality yet affordable products that consumers are willing to pay for. However, UNIQLO may look at new technologies that may reduce its lead time since it has more than enough cash and cash equivalent as well as other current assets to meet its short-term liabilities.
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