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Big U.S. Plans for H&M and Uniqlo, But Can the Market Support Them?

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

H&M and Uniqlo have big plans for the U.S. retail market. But is America big enough for the both of them? Both firms are planning to expand at a breakneck rate in the coming years.

Uniqlo currently has 7 stores in the United States, but their goal is to have $10 billion in U.S. sales by 2020. The firm has a long way to go, and Yasunobu Kyogoku, previous Chief Operating Officer for the firm’s U.S. division, said, “We need to go where the customer is, and in the United States, malls are the premier location where Americans shop.” That’s a big departure from their current bi-coastal model.

They took a big step in January, hiring former Toys R Us, Gymboree, and Pepsico exec Larry Meyer to be the new U.S. COO. He’s the firm’s first American executive, and it’s clear that Uniqlo understands the need for U.S. retail experience.

H&M has 269 stores in the U.S., with 40 stores opened in 2012. They plan to open more than 40 stores in 2013, and have indicated that they may open as many as 500 or 600 ultimately, to keep them competitive with firms such as Forever 21 (500 stores) and Express (600 stores).

Like Uniqlo, H&M’s expansion plans will take it to the middle of the country. The question raised in a recent Forbes piece is whether or not the U.S. apparel market has enough growth in it for Uniqlo and H&M to both meet their targets.

According to the piece, projected growth in the U.S. should be around $32 billion in growth over the next six years. H&M is hoping to have around $4 billion in U.S. sales by that point, based on their stated sales goals, U.S. sales to date, and expected growth. Uniqlo, as previously mentioned, hopes to have $10 billion. For that to happen, the two stores would have to take up 44% of all U.S. retail growth in the next six years. That would leave the rest of the industry with a miserable 1.5% rate of growth for that time, sharing only $3 billion a year in additional sales.

This seems unrealistic, at best. Gap alone saw a $1.1 billion revenue increase in the last year – a trend that is expected to continue. Other firms, including Macy’s, Ascena Retail Group, Limited Brands, VF Corp, and American Eagle, are all expecting similarly impressive growth. There is simply not enough growth for all these companies to meet their goals.

So, what’s likely to happen? The Forbes article compares the current situation in apparel to the U.S. auto industry before 1970. At that time, consumers were conditioned to expect functional, average quality cars. When Japanese and European automakers came in, they changed the market by bringing in high quality cars that were intensely focused on consumer needs. Over time, those firms stole market share from the Big 3 U.S. automakers because of their approach to understanding the U.S. consumer. They provided a driving experience and aesthetic that U.S. automakers had ignored.

Uniqlo and H&M have the potential to do the same thing in apparel. They both focus on what management consultant Steven Denning calls, “Delighting the Customer.” Their products regularly exceed quality expectations, and the styles focus on delivering exactly what the consumer wants, when they want it (or slightly before).

But that doesn’t change the underlying reality of the growth math. So where can Uniqlo and H&M go to make their numbers? First, they need to look beyond the over-retailed major cities where firms normally try to make a splash. Instead, they might want to focus on medium sized, second tier cities, which are chronically under retailed. Companies offering affordable, high quality, fashionable products could take a huge amount of market share in those areas.

At the same time, they have to be cognizant of the fact that the U.S. is a graveyard for foreign retailers. Midwestern consumers in second tier cities have different tastes than people in New York or Tokyo. If H&M and Uniqlo try to sell them the same clothes, they’ll lose money and alienate customers. They will need new sizes and new styles.

That’s why Zara hasn’t expanded more in the U.S. They understand that accessing the U.S. market requires creating a parallel supply chain – they can’t do it with the clothes they’re already making. For Zara, it just isn’t worth the hassle. H&M and Uniqlo, both of which rely more on contractors for their manufacturing, are betting they can make it worth their while. If they can delight consumers, they just might be able to.

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