Foreign brands like Apple, Nike, and L'Oreal have a China problem: The world’s second-largest economy, traditionally a revenue driver, is now looking more challenging amid a sluggish economy and a shift to domestic brands.
Now Fast Retailing, owner of the fast fashion brand Uniqlo, is the latest foreign brand to warn of profit struggles in China.
Fast Retailing shares fell over 4% in Tokyo trading on Friday, following the release of results for the quarter ending May 31. The company revealed that both revenue and profit fell sharply in “Greater China,” and admitted that it's tweaking its China operations by changing its store opening and management strategies.
The investor freakout happened even as Fast Retailing unveiled a 13.5% jump in revenue to 767 billion yen ($4.8 billion) and a 31% jump in operating profit to 145 billion yen ($911 million) compared to the same period last year, thanks to strong growth in North America, Europe, Japan and Southeast Asia—every market other than China.
Fast Retailing operates more Uniqlo stores in mainland China than anywhere else in the world. It has 924 stores in mainland China; the total rises to 1030 when taking Hong Kong and Taiwan into account. By comparison, Fast Retailing operates 788 Uniqlo stores in Japan, its home market.
Together, mainland China, Hong Kong and Taiwan make up two-thirds of Uniqlo’s international footprint.
In an earnings presentation, Fast Retailing blamed a slowdown in consumer appetite and unseasonal weather for the business drop in China. The company also noted that young consumers are paying more attention to cost, going for affordable products over brands.
Greater China CEO Pan Ning said Fast Retailing's operations in China were at a "turning point." The company will now pursue a "scrap and build" strategy, closing stores with low monthly sales and opening larger stores in higher-traffic locations. The retailer will also start to give store managers the autonomy to develop local sales strategies that more accurately capture customer demand.
Uniqlo also hopes to conduct livestreaming broadcasts from all its physical stores, tapping into the increasingly popular trend of live e-commerce. Digital sales account for approximately a quarter of Fast Retailing's China sales.
The Japanese retailer still has high hopes for China. Fast Retailing wants to generate 1 trillion yen ($6.3 billion) in revenue from Greater China by 2028. It also wants to eventually reach 3 trillion yen ($18.9 billion) in China sales, though the company did not give a timeframe for this target.
In spite of its China troubles, Fast Retailing expects to have a good year overall. The Japanese retailer raised its revenue forecast for Uniqlo International to 3.1 trillion yen ($19.2 billion) and its operating profit forecast to 475 billion yen ($3 billion) for the current fiscal year, which ends in August.
