On July 11th, Fast Retailing, the parent company of Uniqlo, announced the financial results for the third quarter of the fiscal year 2024, which spans from March to May 2024. As of the end of May 2024, the total revenue of Fast Retailing for the first three quarters was 2.37 trillion yen, a year-on-year increase of 10.4%; the profit amounted to 401.8 billion yen, marking a 21.5% growth compared to the previous year.

Despite the overall growth in revenue and profit, as well as strong growth in other markets, Uniqlo's performance in the Greater China region has encountered a slowdown. The report mentioned that during the third quarter, the revenue in Mainland China and Hong Kong markets decreased, with a significant drop in operating profit and a contraction in same-store sales.

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The financial report indicates that for the first three quarters of the fiscal year 2024, the revenue in the Greater China region was 522.469 billion yen (approximately 24 billion RMB), accounting for 22.1% of the total revenue, which is lower than previous years.

The report attributes this to "the high comparison base in the Mainland China market during the same period of the previous year, low consumer willingness, coupled with adverse weather conditions, and product offerings that failed to meet customer needs, resulting in poor sales performance."

The contraction of Uniqlo in the Greater China region has already attracted widespread attention after the release of the financial report for the previous quarter in April. That report showed a slight decline in the company's sales in the Greater China region. At the same time, media have noticed an increasing number of store closures for Uniqlo in the Mainland market.

Regarding Uniqlo's performance in the Chinese market during the third quarter, Pan Ning, CEO of Uniqlo Greater China, mentioned in a briefing that 150 stores had low monthly sales and struggled to attract customers. He stated that Uniqlo would reorganize its store network, focusing on quality rather than quantity.

Strategic Adjustment, Driven by Large Stores

In recent years, the landscape of fast fashion foreign brands in China has been quietly changing: H&M has been continuously closing stores, including its first Mainland China store on Huaihai Middle Road in Shanghai, which had been open for 15 years; Zara has also seen a "wave of closures," with its sister brands Bershka, Pull&Bear, and Stradivarius completely exiting the Chinese market; Gap has tearfully sold its Chinese business for a total amount not exceeding 50 million US dollars, making a somber exit.

Only Uniqlo has remained resilient.In a research report targeting Uniqlo, Dongwu Securities (Hong Kong) once mentioned that since the fiscal year of 2013, the rapid growth of Uniqlo's revenue in the Greater China region has been mainly driven by the number of store openings. The number of stores in China (including Hong Kong, Macau, and Taiwan) increased from 280 in the fiscal year of 2013 to 1,031 in the fiscal year of 2023, with a compound growth rate of 13.9%, driving the overall revenue in the Greater China region to a compound growth rate of 17.4%, implying a compound growth rate of 3.0% for single-store revenue.

Focusing solely on the Mainland China business, over the past few years, Uniqlo has targeted the growth of its stores in the lower-tier markets, primarily in third and fourth-tier cities.

Around 2020 and 2021, Uniqlo clarified its strategy for penetrating these lower-tier markets, planning to add 80 to 100 new stores in China each year, with a particular emphasis on expanding into third and fourth-tier cities. In 2022, Wu Pinhui, Global Executive Director of Fast Retailing Group and Chief Brand Officer of Uniqlo Greater China, further clarified that more than half of the new stores would be opened in third and fourth-tier cities. The first stores of Uniqlo in lower-tier cities such as Shengzhou and Yueqing in Zhejiang, Huainan in Anhui, and Jingmen in Hubei, all opened during that period.

However, "Brand Number Reading" pointed out in January of this year that Uniqlo's development in third and fourth-tier cities is not as rapid as in higher-tier cities, with some stores experiencing poor performance.

One of the key initiatives Uniqlo has proposed for "improving quality" is to open larger stores in better locations.

Pan Ning mentioned that starting from the fiscal year of 2024, for three consecutive years, approximately 50 stores will undergo renovation and reconstruction. The plan is to close stores with low monthly sales and instead open large stores in better locations. They will also improve store locations in shopping centers, expand sales areas, and renovate stores. They aim to increase the monthly turnover of a single store to more than 1.5 times the current level.

Uniqlo stated that in the previous period, the company had already demolished and rebuilt 22 stores, and the average monthly turnover of a single store increased by about 1.5 times. For example, the Shenyang Dayuecheng store saw a doubling of sales and customer traffic by improving its location within the shopping center.

With this store-opening strategy, Uniqlo plans to open at least 50 new stores each year. In addition to updating global flagship stores in cities like Shanghai and Guangzhou, Uniqlo will also open global or regional flagship stores in cities with great growth potential, such as Chongqing, Chengdu, Tianjin, Xi'an, Kunming, and Zhengzhou, to enhance the brand's influence.

The strategy of large-store-driven growth has been implemented by Uniqlo in Japan for some time.

Since 2010, the business of Uniqlo in Japan has entered a mature phase. As of the fiscal year of 2023, there are 800 Uniqlo stores in Japan, which is a 5.1% decrease compared to 843 stores in 2011. However, while the number of stores has remained stable, the revenue per store for Uniqlo in Japan has been fluctuating upwards. From the fiscal year of 2011 to 2023, the compound growth rate of single-store revenue reached 3.7%.Dongwu Securities (Hong Kong) analysis believes that this is due to Uniqlo's decisive operation in opening and closing stores. Uniqlo has been continuously closing some old, less profitable, and small stores under 500 square meters, choosing to open new stores over 1000 square meters in areas with potential market demand and where products are easy to sell. Large stores allow the company to better conduct visual marketing, enhance brand visibility, maintain unit efficiency with the continuous increase in store area, and thus drive the continuous increase in single-store revenue.

Can the same large store strategy, when replicated in the Chinese market, also yield a benign growth as desired?

The answer to the question still requires a long response from the market. However, an immediate issue is how the adjusted large store model will collide with the market penetration plan that Uniqlo has been promoting.

For a long time, Uniqlo has always focused on the layout of stores in first and second-tier cities. Despite the implementation of Uniqlo's market penetration plan for two to three years, as of December 2023, about 75% of the stores in Mainland China are still concentrated in second-tier and above cities. By May 2024, this proportion has risen to 80%.

Looking at the current results, Uniqlo's market penetration has been relatively slow.

Wu Pinhui, Global Executive Director of Fast Retailing Group and Chief Marketing Officer (CMO) of Uniqlo Greater China, said in an interview with "Blue Whale Finance" in April that with the increase in product lines, the large store model can better showcase the full range of Uniqlo products and enhance the consumer shopping experience. "We believe that the store is the launch tower of the brand and products, the center of advertising," she emphasized, especially in third and fourth-tier cities, the large store model helps to enhance the brand's visibility and influence.

However, Li Yingtao, a senior analyst of the new consumer industry at Analysys, believes that if Uniqlo continues to use the store model of first and second-tier cities, it will be difficult to truly penetrate the market.

Li Yingtao mentioned that Uniqlo currently has not solved the problem of market gap between third, fourth, and fifth-tier cities and first and second-tier cities. He told us that the market hierarchy in China is quite large, and there is a big difference in per capita consumption demand and the scale of stores that the market itself can support between third, fourth, and fifth-tier cities and first and second-tier cities.

In Li Yingtao's view, the deeper the market, the more limited the scale of consumers who prefer Uniqlo. Uniqlo's clothing is mainly basic and functional, with weak fashion sense. However, for many consumers in third and fourth-tier cities, what they need is not basic styles, but more fashionable clothing.Overall, Uniqlo's basic customer base in lower-tier cities is significantly smaller compared to first and second-tier cities. However, the size of the stores that Uniqlo opens in third and fourth-tier cities is roughly the same as those in first and second-tier cities. Such individual stores struggle to achieve a large sales scale, resulting in relatively poor store efficiency.

Li Yingtao mentioned that in the lower-tier market, the size and location of the stores are extremely important, which is completely different from the logic in first and second-tier cities. "In first and second-tier cities, one can choose shopping centers of similar (levels) and stores of similar (sizes), but in third and fourth-tier cities, it is necessary to reconsider the location model and the size of the store area." For instance, Heilan Home, which has developed well in the lower-tier market, has a higher store density and smaller store sizes.

Li Yingtao also pointed out that in areas with lower market tiers, the franchise business model may be more efficient. Uniqlo operates all its stores directly, and the management costs and difficulties in lower-tier cities are greater, which further affects store efficiency.

Wu Pinhui has also expressed her stance on store location and brand capabilities in the lower-tier market: "We will consider the local population and consumption conditions, with the most important consideration being the business district. Generally, we will choose very good business districts within the city. In lower-tier cities, a crucial opportunity is how to make more consumers understand the brand capabilities and main products. Therefore, the display of clothing functions and sales services in the store will be an essential part that we must undertake."

Furthermore, Li Yingtao believes that in recent years, the consumption upgrade in the Chinese market has developed in a shock-like manner, with people becoming more rational in their consumption. Big-brand substitutes and white-label factories have risen rapidly. Uniqlo itself follows a quality and affordable route, not selling the brand. "Especially in third-tier cities, it is difficult to regard Uniqlo as a very big brand for consumption." This positioning of basic and functional styles can easily be replaced in the current market situation. Now, Uniqlo's competitors in lower-tier cities include not only products with certain brand power that have been deeply cultivated in the lower-tier market for many years, like Heilan Home, but also online white-label and big-brand substitute brands.

Pan Ning also mentioned this situation in his briefing. He stated that after the pandemic, the consumption mentality of customers in mainland China has changed, with "cost-effective consumption" being more evident among the younger generation. Under the influence of the "substitute" value, consumers no longer blindly choose branded products but opt for products with lower prices and almost no difference in quality.

Frontline staff in the lower-tier market have also felt a certain genetic mismatch between Uniqlo and the lower-tier market.

A part-time employee at a Uniqlo store in Weifang, Xiao Huan, told us that she believes the awareness of the Uniqlo brand in Weifang is not high. Currently, there are two Uniqlo stores in Weifang, and the store where Xiao Huan was at the time had relatively fewer customers. According to Xiao Huan's observation, the majority of Uniqlo's customers are young people. Many middle-aged customers seem to enter a store casually without much awareness of the Uniqlo brand.

Xiao Huan, who studies in Qingdao, found that the customer flow at Uniqlo in Qingdao is much higher than in Weifang. In Weifang, people have many more low-priced options for buying clothes offline.

However, despite the challenges faced by offline stores, Uniqlo's e-commerce performance has always been good. During the latest financial reporting period, e-commerce sales were strong, with a year-on-year increase of more than 10%. Live broadcast sales increased by about 50% year-on-year, accounting for more than 20% of e-commerce sales. Uniqlo topped the Tmall clothing sales during the "Double 11" in 2023 and the "618" in 2024. During the "618" promotion, sales on Douyin increased by about 30% year-on-year.