UNIQLO Case Study : Strategic Partnership of UNIQLO and Toray
Fast Retailing Co., Ltd. (hereafter Fast Retailing) is a Japanese holding company that owns fashion brands such as UNIQLO, GU, and Theory. Its sales volume is the world’s third largest, next to Inditex with its Zara brand and Hennes & Mauritz
(H&M).
The consolidated net sales of the fiscal year ending in August 2018 is 2130 billion yen (approximately 19.3 billion USD).The head office is in Yamaguchi, which is located at the western edge of the main island of Honshu.
Fast Retailing has experienced rapid growth since 2000. In particular, its growth has been driven by the domestic and international sales of the UNIQLO brand, which accounts for over 80% of the company’s total sales. According g to its homepage, as an SPA (specialty-store retailer of private-label apparel) that controls the entire clothes-making process from design through manufacturing to retail, UNIQLO offers high-quality casual wear at reasonable prices, and products that other companies are unable to offer.
They define such products as “Life Wear.” For example,since its launch in 2003, the total sales quantity of “HEAT-TECH” products, their line of heat-generating clothing, grew to one billion units by September 2017.
HEAT-TECH products are those that offer new and unique value to customers by commercializing Japanese fiber technology. Specifically, HEAT-TECH products have transformed winter from a cold, heavy clothes season to a warm, lightweight dress season.
HEAT-TECH products were jointly developed by UNIQLO and Toray industries, Inc. (hereafter Toray), the largest Japanese textile manufacturer. Similarly, other mega-hit items such as “BRA TOP” (the top with support cups built in, launched in
2008), “Ultra Light Down” (thinner coats and jackets, launched in 2009), and “AIRism” (spring/summer innerwear for men and women, launched in 2012) were also developed through the combination of UNIQLO’s marketing and merchandising
capabilities and Toray’s world-class textile technologies, high quality, and worldwide production network. We next examine the journey of the strategic partnership between UNIQLO and Toray.
Before UNIQLO and Toray Strategic Partnership
To do a proper analysis of UNIQLO Case Study we need to jump back to understand the UNIQLO position before the strategic partnership it did with Toray
After opening its first UNIQLO store in Japan in 1984, Fast Retailing built a chain of suburban roadside stores. In 1998, they began opening UNIQLO stores in urban locations and ran a large campaign for fleece products. The products were offered at significantly lower prices (1900 yen about $17.3 USD) and as a result, 2 million units were sold. Continuing its boom with fleece products throughout Japan, the company sold 8.5 million units in 1999.
Since its fleece products were such a mega hit, UNIQLO needed to procure a large amount of its main material, polyester
spun yarn. UNIQLO selected Toray as a supplier because its raw materials were the best in the world.
Mr. Tadashi Yanai, the founder and president of Fast Retailing, directly negotiated with Mr. Katsunosuke Maeda, known as Toray’s restorer and the president at that time, without going through any trading companies.This was the beginning of a close relationship between UNIQLO and Toray.
The following year, in May 2000, Toray established a dedicated organization called “GO (global operation) team” in the fibers and textiles division. This was the first time, not only for Toray but also in the industry, that an organization was set up to be in charge of a particular customer (Asahi Shimbun 2008). On this occasion, the two companies began joint product development. The first products were lighter and warmer jackets using “Air Tech,” an original inner cotton, which was launched in October 2000. After that, UNIQLO and Toray developed new products one after another, including HEATTECH items and BRATOP.
Forming the Strategic Partnership
In March 2006, UNIQLO and Toray first reached an agreement to develop a strategic partnership. Their common goal is to develop a revolutionary business model rarely seen in the world to date. Based on that partnership, in June, 2006, they announced the direction of a mid- and long-term cooperative relationship to work closely on new product development.
Under the mid- and long-term relationship agreement, Toray was expected to supply UNIQLO with materials and products in excess of 200 billion yen (about 1.8 billion USD) over the 5-year period through 2010; deals on this scale were very rare in the textile industry. The two companies set up a project team called the Next Generation Material Development Project. The project team picked out themes in 73 areas and worked on material development.
A typical example is the improvement in the fibers used in HEATTECH. Specifically, adding to the three previous fibers, rayon, polyester, and polyurethane, they adopted a micro-acrylic fiber developed by Toray for HEATTECH in 2006. This fiber is one-tenth the thickness of a human hair.By spinning these together, combining the unique properties of micro-acrylic and rayon in a single yarn, they have functions of both heat generating and heat retaining. This improvement became the turning point for its subsequent mega-hit. In December 2006, Toray’s Ishikawa factory set up an exclusive production line for yarn, bundling these four fibers together.
The first joint creation, launched in 2007, was “Stylish White,” a less transparent women’s summer pant. This product was born through a combination of customer requirements gathered by UNIQLO; for example, “I want to wear white pants in
summer, but would not want my underwear to show through,” and Toray’s textile technology, specifically the technology cultivated in the development of a white swimsuit that is opaque. In addition, they jointly developed “Silky Dry,” which is
spring/summer innerwear for men and the forerunner of AIRism, introduced earlier, “Machine Washable Sweaters” in 2008, and Ultra Light Down in 2009.
Second and Third Five-Year Plan Under the Strategic Partnership
UNIQLO and Toray entered into an agreement for a second five-year (2011–2015) plan for the strategic partnership in July 2010. This means that the first five-year (2006–2010) plan was a mutually beneficial collaboration. In fact, the amount of the first five years’ transactions between the two companies was 250 billion yen (about 2.3 billion USD), more than expected. Under this agreement, Toray established a flexible production system based on its global production network.
In particular, Toray built a dedicated production facility in Bangladesh that integrated knitting, dyeing, and sewing of UNIQLO products, which began operating in August 2010. Further, in April 2014, Toray upgraded the GO team to the GO department and gave the department authority over budget and personnel management (Nikkei Business
2014). It is said that the department’s members talk with UNIQLO’s merchandizers and marketers in the UNIQLO office almost every day. Consequently, the amount of the second five years’ transactions was about 800 billion yen (about 7.3 billion USD), significantly higher than the expected target of 400 billion yen (about 3.6 billion USD).
In November 2015, UNIQLO and Toray jointly announced the third stage of their strategic partnership for the next five years (2016–2020). The latest agreement aims at further strengthening collaborative efforts. They have accelerated globalization and digitalization to achieve certain initiatives, that is, achieving an end-to-end business model by utilizing the Internet of Things(IoT), further reducing production lead times, increasing globalization of production sites and locations, optimizing production in each location, and expanding production sites to support business growth in Greater China (China, Hong Kong, and Taiwan).
By sharing real-time information such as the actual sales of UNIQLO stores and electronic commerce websites and Toray’s production status, they aim to flexibly develop and manufacture products in response to changing customer needs and fashion trends, such as increasing the production of goods in a popular color.14 The total value of transactions in the third five years agreement is expected to reach one trillion yen (about 9.1 billion USD).
How is UNIQLO Different From Brands Like ZARA and H&M
While brands like ZARA & H&M are UNIQLO’s competitors yet UNIQLO is very different from other brands.
UNIQLO focuses on providing basic casual quality clothes at affordable prices. While brands like ZARA and H&M focuses much more on fancy clothing and bringing out latest trendy fashion design, UNIQLO focuses much more on bringing out variety of causal outfits for everyday use.
Next, UNIQLO invests heavily in research and development for innovating new fabrics which results into amazing products like its ultralight but very warm HEAT-TECH jackets or bringing out its fleece products.
It even takes its customers feedback very seriously as we discussed earlier that when a woman asked for stylish white but less transparent summer pant, UNIQLO worked on it and innovated the required fabric fulfilling their customer wish.
Learnings from the Strategic PartnershipBetween UNIQLO and Toray
What is the relationship between UNIQLO and Toray? Let us learn from some comments of members of top management from both companies and a comparison with the theory of external structure.
In the press conference announcing the first five-year plan in 2006, Mr. Sadayuki Sakakibara, Toray’s president and chief executive officer (CEO), said that “We will break away from the traditional relationship of simple buyers or sellers of textile materials or apparel manufacturers. Instead our partnership will seek to develop operations with a clear focus and speed covering the entire process of clothing production from development of materials through planning and manufacture to store sales.”
The above comment shows that their relationship is completely different from an arm’s-length one where the seller and buyer conduct transactions in the market with a short-term view,while keeping a certain distance.
Their relationship is more a “collaboration” or “partnership” with the same benefits as a joint venture and vertical
integration, through collaborative initiatives between a focal firm and its specified trading partner.
With respect to the question of why they did not decide to form any capital links or capital tie-up,
Mr. Yanai answered that “We do not have a capital relationship at present. I can’t say that there is no possibility of this ever happening in the future.However, at this current time, I feel that it is better for us to work together as strategic partners with the new drive and tension that such a relationship will instill.”
This comment impliesthat he thinks that they can obtain the same benefits as a capital relationship through a collaborative business relationship. On this issue, Mr. Sakakibara also answered “I don’t know how things might develop in the future, but currently this does not feature in our relationship. I feel that the mutual trust between Mr. Yanai and myself, and the long years spent building up the trust between our two companies probably carries more weight than a capital tie up.
Some Possible Disadvantages of UNIQLO and TORAY Exclusive Partnership
- One is that bargaining power is weakened by such a high degree of dependence on a particular supplier. In this case UNIQLO is completely dependent on TORAY for its raw materials. Regarding this point, Mr. Yanai noted in the press conference that “This is obvious, but if you are going to work at a partnership with another firm, then you can’t do it unless you have that tension. I think you pay even more attention to your dealings with each other than you might with a regular purchase deal.”
- A second disadvantage is the increased supply risk in unexpected situations. This problem has been addressed in the second (2011–2015) and third (2016–2020) phases. Toray has increased its production sites and locations globally to stably supply their materials to UNIQLO. However, if the yarn manufacturing of HEATTECH has been centralized in Toray’s Ishikawa factory, the supply risk remains.
- Third, it is more difficult to access new technologies. In regard to this issue, Mr. Yanai’s comment provides interesting implications. He said that “But, I don’t believe we can be successful in the same relationship in the next 10 years. In the environment where the speed of both technological evolution and information transmission has become extremely fast, we need to respond to customer needs around the world. To deal with such changes, Toray’s and our capabilities alone would no longer be enough. Namely, we should strongly promote ‘open innovation’…We want to build win-win relationships for Toray and UNIQLO involving other companies that aim to be the best in the world… Once in a closed relationship, we could miss a big chance” (Nikkei Business 2014). This comment means that it is possible to build a stronger union with three or more companies than with a dyadic union. Because such a relationship is rare in the business world, we must keep our eyes on the future of their relationship.