TT-516 -- A retail boom for some foreign brands, ebiz in Japan

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General Edition Sunday, May 03, 2009 Issue No. 516


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Today (Sunday, May 3rd) we went down to Harajuku to see
what all the hullabaloo is about concerning H&M and
Forever21. Firstly, considering we're supposed to be in the
middle of a recession, the entire area was jam packed. It
looked like the good old days of 2005-2007, with people
overflowing into the streets. Stores were full of people
making purchases, and yappari, outside Swedish brand H&M's
store, which has been open since November 2008, there was a
line of several hundred people waiting in Disneyland-style
queues to get in.

Once in, they had to jostle with at least (our estimate)
several thousand other eager shoppers who were snatching up
clothing at an impressive rate. Skirts and shirts were on
sale for between JPY4,000 and JPY12,000 each, and while we
don't do a lot of clothes shopping, compared to some nearby
stores we checked out, H&M seemed to be priced at least 30%
to 50% less for similarly styled items.

Right next to the H&M store is the new Forever21 store. It
had an even longer queue outside, probably since it opened
just this week, so we gave up trying to get in. However,
while clearly it is flavor of the month, if we were to
compare the style and colors of clothing in the display
windows to those in H&M, we'd put our money on the H&M
folks. They seem to have a better read on the preferences
of Japanese.

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[...Article continues]

One store we checked out that doesn't seem to be too
interested in its Japanese customers is Zara, just around
the corner and up the street towards the station and Yoyogi
Park. A quick check of that store showed that there were
virtually no small sizes in stock, and you had to be a
large and tall Japanese to find something that would fit.
Also, there were noticeably fewer staff and they seemed
more preoccupied with not helping customers than the H&M
team. It was just a brief impression, but we'd say that
Zara's Japanese management need to take a second look at
their operations. Indeed, those managers should go visit
H&M's well oiled in-store machine.

Also in the area are the ubiquitous Uniqlo, Gap, and the
recently debuted British brand TopShop. Gap had thinner
crowds, probably because with over 100 stores in Japan
they are a lot easier to find, and Uniqlo, well, with more
than 700 stores, they're everywhere and we didn't bother
heading down there. TopShop was packed, though.

Japan's apparel market is the second largest in the world,
and young women's clothing represents about 60% of that
-- so it's no wonder that these brands are all pretty
much targeting the same demographic. Overall annual sales
are around US$28bn, and most (93%) of what is sold is made
in China. Last month the government said it was
uncomfortable with China's dominance as a supplier to this
key economic sector, and declared that it wants imports
from other countries to increase to the extent that the
China pipeline declines to around 50%.

If the government gets its way, this would be good news
for India, Bangladesh, and Vietnam, all big producers of
textiles and apparel, but seemingly unable to break in to
the Japanese market so far. We expect that the government
will turn to Uniqlo and others and possibly give them
incentives to move production to other countries, to help
things along.

While the value-for-money brands seem to be doing just fine
at present, it comes at the cost of sales by the boutiques
and department stores. As a result, the largest apparel
maker/retailer, Onward Kashiyama, announced last month that
it suffered a massive JPY30.8bn (US$300m) loss for FY2008.
Now, true, about half of this was due to restructuring
costs of its faltering British brand Joseph, but
none-the-less, sales here in Japan also fell about 9% and
operating profit plummeted 51%. Most of this was because
of sinking department store sales, for which Onward depends
on 70% of its revenues. Clearly Onward has been caught
flat-footed by the recession and changing consumer
preferences, and urgently needs to execute a turn-around.

Visiting the Harajuku cluster of Uniqlo, H&M, Forever21,
and Gap stores allowed us to feel the excitement by
consumers of discovering excellent products for low prices.
This reminds us a lot of 2006 in the furniture market when
Ikea opened their first massive store out near Funabashi.
We went to Ikea shortly after it opened, and the buzz was
electric. Actually, it still is.

Back in 2006 the furniture industry was moribund, with the
exception of a few boutique brands. Now that Ikea is
swamped with customers every weekend, local competitors
have taken notes and come out with their own
value-for-money lines. The rewards have been handsome, as
evidenced by furniture reseller Nitori. The company has
moved production of sofas and other lines to low-cost
Vietnam and as a result is logging record profits this
fiscal year.

All this just goes to show that while we may be in the
middle of a recession, for those willing change with the
times and to take risks in investment into stores, designs,
and styles, the rewards are considerable. It also goes to
show that for all its success, Uniqlo doesn't control the
apparel market. There is plenty left over for foreign
brands willing to match customer expectations...

Changing gears for a minute, those of you who like reading
Terrie's Take should know that Japan Inc. magazine has
recently strengthened its blog section, and now has
knowledgeable writers posting almost on a daily basis. The
quality of these blogs is outstanding and we refer to them
for an understanding of current issues. Japan Inc. is one of
the very few places on the web where you can find informed
comment about Japanese finance, FX trends, politics, and
defense, in English. Usually the market professionals only
talk to paying customers -- but somehow the Japan Inc.
Editor-in-Chief, Mick Condon, has managed to get them to
talk to us as well. So, if you want to know what the experts
are thinking, visit:

Lastly, we will be taking next weekend off, one of the four
weeks of the year when we don't put out Terrie's Take.
We'll be back on May 17th.


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+++ NEWS

- Unemployment creeps up
- Dentsu to post first loss
- Hartford stops selling annuities in Japan
- Citi almost breaks even on Nikko Cordial sale
- Fujifilm to eliminate 5,000 jobs

-> Unemployment creeps up

The Ministry of Internal Affairs has released figures
showing that the unemployment rate rose 0.4% to 4.8%,
amounting to some 3m people out of work. March marked the
largest jump in newly unemployed, with about 1.06m people
losing their jobs or taking early retirement. Hardest hit
are women and part-timers, although bankruptcies and
significant downsizings have also put 20,000 full-timers
out of work as well. (Source: TT commentary from, May 2, 2009)

-> Dentsu to post first loss

Dentsu, the world's fifth largest advertising company, is
apparently going to announce its first annual loss since it
first had consolidated operations in 1978, according to the
Nikkei. The company is expected to announce a consolidated
net loss of JPY20bn on sales of JPY1.9trn. This compares to
a profit of JPY36.2bn declared for FY2007 ending March
2008. Dentsu has been hit across the board on all the major
mass mediums. ***Ed: In the meantime, Mixi, Gree, and DeNA
are raking in massive profits -- clearly someone is being
left behind in the online consumer revolution.** (Source:
TT commentary from, May 1, 2009)

-> Hartford stops selling annuities in Japan

In a huge reversal over 4-5 years ago, insurer Hartford
Financial Services Group has said that it will stop selling
insurance policies in Japan. The company, which was one of
the leaders in fixed annuities when it first introduced
them to Japan is now taking a bath due to severe
competition from Japanese firms who have caught on to how
the products work. Hartford says that it has 555,000
policies in play and assets of 3.26trn. ***Ed: The problem
for Hartford is that the guaranteed returns on the policies
now exceed the returns possible from the stock market
assets held, and so the firm is supporting the policy
annual investment pay-outs at a loss.** (Source: TT
commentary from, May 1, 2009)

-> Citi almost breaks even on Nikko Cordial sale

Citigroup announced on Friday that it will sell its
Japanese securities business, Nikko Cordial, to Sumitomo
Mitsui Bank for JPY774.5bn (US$7.9bn). The sale includes
the business, and equities and cash held by Nikko Cordial.
In doing the deal, Citi will have a loss of up to JPY20bn,
after taxes -- making it a close call. Citi bought Nikko
Cordial for US$7.7bn in April 2007.***Ed: More
importantly, Citi has raised cash at a time when the U.S.
Federal Reserve is planning to "stress test" banks for
capital reserves. It is expected that the asset sale will
bolster Citi's argument that its global assets are sound.**
(Source: TT commentary from, May 1, 2009)

-> Fujifilm to eliminate 5,000 jobs

Fujifilm Holdings has said that it will either cut or
reassign 5,000 of its 75,000 employees globally, mostly in
countries other than Japan. Much of the lay-offs will be in
the back office, such as accounting, HR, and purchasing.
Due to the restructuring, the company will take one-time
charges which are expected to put the parent firm into the
red for the first time since it was listed in 1949. ***Ed:
Fujifilm has been on an M&A bend, so this may be timely
consolidation of their 250+ subsidiaries.** (Source: TT
commentary from, Apr 30, 2009)

NOTE: Broken links
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few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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=> In TT515 we characterized the business models of Shinsei
and Aozora banks, in light of their possible merger. A
reader who has worked in at least one of these banks helps
us to refine that characterization.

Reader: Your comments that Shinsei operates primarily a
retail bank and Aozora is an institutional bank is not
really correct. The LTCB was reckoned by some observers
to be the world's 9th-largest bank, with zero retail
branches, and the commercial arm has pulled in its horns a
little, but not much. Shinsei's public image is that of a
small boutique retail institution, but the reality is that
it is a hard-nosed commercial bank. I know this since I
worked there.

In terms of the two banks getting together, the biggest
culture clash would possibly come in the field of IT - and
that would be an extremely interesting battle to watch.
Aozora was trying to put in an end-to-end OS-X solution,
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Looks like disposable high street fashion has finally taken flight in Japan. Where it used to be price and brands it's now quantity! Economic downturn or not, majority of shoppers are always going to choose to the cheaper when presented with choices that are similar to the other. The fact that these are foreign brands lend themselves to making shrieking girls shriek even more.

Eventually Harajuku's going to look like Oxford Street in London...disposable fashion everywhere.

My question nwo is if Japanese labels come up with disposable fashion ranges, will they be able to compete? What do you guys think?