MBO September 2011 Nanyang Business School

Sharon Lisa Charles Manuel

A. Financial Analysis

Agenda
B. Market / Competition Analysis C. Operation Strategy
D. Operation Capabilities

Financial Analysis (1/2)

Sales ( Bn Yen)
Year Japan Intl Global Brands 10 615.1 72.7 125.2 % 75% 9% 16% 11 608 100 125 -3% +3%

Number of stores
10 878 136 1169 % 40% 6% 54% 11 844 176 1068 +2% -2%

Sales p/store
10 0.701 0.535 0.107 11 0.720 0.568 0.117

OP expenses Composition (Y10) (% to Net sales)

Advertising

Manpower
Rental Others

9
18 68

Better: Location, Time-to-market, Lay-out design, Overseas strategy, Product mix.

Financial Analysis (2/2)

PROFITABILITY(%) Y 07 Gross margin 47 Y 08 50 15 Y 09 50 16 Y10 52 16 23 13 Zara (1H11) 58 20 30 17 H&M (9M11) GAP (3Q11) 59 17 13 41 19 38 12 7.1 21.5 10

Operating margin 12

Net margin
ROE ROA

6.1
14 9

7.4
17 11

7.3
19 11

7.6 11.5

In Summary CASH GENERATION (Days) Y 07 Y 08 Y 09 Y10 Strict, Room for improvement, AR 6 8 8 7 High cash generation, Inventory 64 67 67 68 Disciplined, AP 48 64 55 45 OP-FM alignment, CASH Generation 22 11 20 30 Efficient, Strategic.

Market / Competition Analysis

Market Category:
SPA (Specialty store retailer of Private label Apparel)

Order Qualifiers
Functional and comfortable clothing Convenient locations

Major Competitors (by sales value):

Zara (Spain) 1st Hennes & Mauritz (Sweden) aka H&M 2nd GAP 3rd Uniqlo 4th (In terms of market capitalisation value, Uniqlo is the third while GAP in 4th position)

Order Winners
Excellent price-value proposition Good cutting to fit Asians Self-help visual display for matching styles and products to push sales Unique technology and quality (HeatTech with Toray Industries, Inc., denim with Kaihara) Wide Variety of colours to suit all

Major Strengths:
Research & development in materials used Low price + good quality Good supply chain management React to customers feedback

Major Weakness:
Not as quick to change designs to reflect changing fashion trends Times sales (up to 40% discount) cuts profit margins High volume required due to slim profit margins

Operational Excellence
Standardised work operations
Prescribes, records, and analyses every activity undertaken by every employee Customer advisers repeat six standard phrases Folding of clothes (six shirts within one minute) Relatively flat power structure and encourages employees to suggest ideas for improving productivity Experimentation must go through proper channels Collect customer feedback for improvement (offer 1,000,000 yen for complaints)

Kaizen

Takumi system Strong relationship with manufactures and suppliers

Quality control by industry veterans Specialises in areas like dyeing or sewing, and work with more than 70 factories, mostly in China

Consolidate fabric buys Further increases its buying power by offering a smaller selection of fabrics, across a more limited selection of clothes styles, than most other retailers

Operational Excellence
Unique products Information sharing and motivation among all employees
Heattech (developed with Toray) +J line (sophisticated work clothes)

Twice-yearly conventions for all store managers Monthly pep talks (head office supervisors)

JIT + Heijunka

Adjusted production schedule to accommodate manufacturers, e.g. Toray Industries, Inc. Monitors sales patterns weekly and orders garments just before stores likely to need them Minimise wastage Produce one item on large scale and offers it at low prices at all stores Inventory is limited to 200 items Builds shops that are as identical as possible in size

Others

Operation Strategy
Q: Is its Operations and Supply Chain strategy aligned with its marketing and corporate strategy? A: Yes. Uniqlo seeks to develop products of exceptionally high quality at
reasonable priced costs (Corporate strategy) and the following will highlight what the company has done to customise their operations and supply chain strategy to match.
Product development based on customer feedback
Customer opinions and needs play a vital role in Uniqlos product development. Its HeatTech products, for example, have been refined each year based on customer feedback such as comments asking for softer fabric, a function to keep skin both warm and prevent dryness and an expanded range of colours.

Material procurement from around the world

The Uniqlo Material Development Team is able to procure high-quality materials at low costs through direct negotiations with and bulk purchases from material manufacturers globally. For instance, take the denim fabric that is nearly synonymous with Uniqlo. This is woven, dyed and manufactured to meet UNIQLOs specifications

Expert technical guidance at factories emphasizes quality

In order to produce millions of products of standardised quality, it becomes important to implement quality control across factory production technology and management. Uniqlo sends its technical specialists to partner factories to offer technical instructions while also sending its supervisors from production department to monitor progress and quality.

Operation Strategy
Q: Is Uniqlos operations strategy based on operational excellence with some components of product innovations? A: I think that the right ratio for UNIQLO is apparel that is 70% or 80% basic.
Uniqlo is about producing high quality products at low prices (basis of its success) -- Uniqlo's owner Tadashi Yanai

Q: How does its strategy impact its operations infrastructure and capabilities? A: Its production hinges on producing fashionable designs at high quality and
reasonable prices.
Design must be easy to produce without too much complications on production (cost efficient) Reverse engineering how to produce this the best way with the same high quality and design Material procurement from around the world such as China, Vietnam, Thailand and Bangladesh. Avoid over-stocking of inventory (cost ) JIT (produce and sell without stock-out/over-stocking) High turnover products only (profit maximization of retail outlets space) Packaging of the product must be convenient and minimise space (cost reduction in shipping, storage, etc)

Operational Capabilities
Processbased
Takumi system Design process Time to produce and sell (lead time) Managing stock/ JIT process /Heijunka (minimise stock-load WIP) In-sync with market trends (colours and design to match the changing fashion trends)

Systembased

Strong team of production/design staff who are aligned with corporate strategy Good communications between different functions for design ideas and feedback on products

Organizationbased

Culture towards simplicity is the absolute sophistication Using simple basic clothing to bring out the fashion Low prices without sacrifice in quality Brand equity and image

QUESTIONS?