Uniqlo’s Parent Presses to Become World’s Top Retailer; Fast Retailing CEO Says It Can Take Over as No. 1 Without Acquisitions

Uniqlo’s Parent Presses to Become World’s Top Retailer

Fast Retailing CEO Says It Can Take Over as No. 1 Without Acquisitions

KATHY CHU, KEN BROWN and MAYUMI NEGISHI

Updated March 5, 2014 11:18 a.m. ET

Tadashi Yanai, chief executive of Fast Retailing Co., poses before hitting a gong during listing ceremony at the Hong Kong Stock Exchange. Associated Press

Fast Retailing Co. 9983.TO +1.83% , already Asia’s top apparel retailer by revenue, is striving to become the world’s largest in six years, with plans to open as many as 100 stores a year in Greater China and on Wednesday lifting its profile by listing depositary shares in Hong Kong.

A significant question is whether the Japanese clothing giant and owner of the Uniqlo chain can fulfill its ambitions without buying other companies or brands to bulk up. Fast Retailing Chief Executive Tadashi Yanai says the company can get to the No. 1 ranking—now occupied by Zara parent Inditex SA ITX.MC +0.33% of Spain—from its current No. 4, on its own. Inditex had revenue of US$21.7 billion in its latest fiscal year, while Fast Retailing had US$11.2 billion.

“I believe we can be on our way to number one in the world,” said Mr. Yanai, in a Wednesday interview in Hong Kong. “I am very positive about our organic growth.”

But many industry watchers say that Fast Retailing is facing challenges—particularly in the key North American market, where tastes and sizes are more diverse than in Asia—that could make it hard to forge ahead without the scale that a large acquisition would give it.

The retailer has flirted with a number of acquisition targets in the past, and recently approached the management of J. Crew Group about potentially buying the private-equity-owned business for as much as $5 billion, people familiar with the matter said last week. The talks are at an early stage and could fall apart, one person cautioned.

Mr. Yanai declined to comment on whether the company is in talks to buy J. Crew.

Fast Retailing’s interest in J. Crew highlights the challenges the company is facing, as it tries to expand aggressively outside of its home base in Japan, where it currently generates 60% of its revenue and has more than 850 shops for its flagship Uniqlo brand.

To achieve its ambitions, Mr. Yanai said, the company will have to succeed in China, where there are 260 Uniqlo stores on the mainland, and the U.S., where there are only 17.

“We are going to need them both,” he said. “One alone is unthinkable if we aspire to be top of the world.”

The U.S. market poses a special challenge because a wider range of sizes are needed to fit consumers’ body types, compared with in Asia. That could make it more expensive to manufacture clothing, analysts say. Also, to suit U.S. consumers’ tastes, “unless [the clothing] shows sexiness, it doesn’t really sell,” Mr. Yanai said.

The company, which Mr. Yanai transformed from a small suit store in the town of Ube in southwestern Yamaguchi prefecture, said it is expanding its research-and-design center in New York to create more clothing styles that appeal to U.S. consumers.

That means a significant reworking of designs aimed for an Asian audience and recalibration of machinery at Fast Retailing-affiliated factories, which are predominantly in China. But Uniqlo’s U.S. market size might not be big enough to make such changes profitable.

At Fast Retailing’s current planned rate of expansion in the U.S., it expects to add just 20 to 30 stores a year in the U.S., with a goal of more than 100 stores in the U.S. in coming years.

That’s where J. Crew, which operates more than 400 stores and has a strong distribution network in the U.S., might help, analysts say. A purchase of the brand would help Fast Retailing cut costs and navigate those vastly different tastes, said Toby Williams, a Tokyo-based analyst with Macquarie Capital Securities.

Meanwhile, in the Greater China region that includes the mainland, Hong Kong and Taiwan, Fast Retailing expects to open 80 to 100 stores a year to reach 1,000 stores there within 10 years. The company has said that it expects China to replace Japan as the largest contributor to its sales in five to 10 years.

In China, Fast Retailing’s challenge is keeping its profitability up as it expands in lower-tier cities where consumers might not have as much disposable income as in Shanghai and Beijing, according to Takahiro Kazahaya, an analyst at Deustche Bank.

Also, the Uniqlo brand might struggle to appeal to Chinese females, who tend to dress in a “more feminine way,” said Ashma Kunde, an apparel analyst at Euromonitor International.

Mr. Yanai said the company is looking at offering lower-priced products in China, but that any products introduced in China would also be rolled out around the world.

Depositary receipts of Fast Retailing, which isn’t raising funds through the Wednesday listing, rose 5.6% in Hong Kong to close at 28.90 Hong Kong dollars (US$3.72) Wednesday on thinly traded volume.