In an effort to counter rising raw material costs and a weaker yen, Uniqlo, Japan’s fast fashion giant, will increase retail prices in its home market by about 5 percent. The company hopes the hikes will boost profit margins without slowing store traffic.
According to Reuters, Koichi Fujishiro, an economist at Dai-ichi Life Research Institute said the price hike is an indication that Japan is escaping deflation. “There has been a broad trend of rising prices led by higher import costs,” he told Reuters, “But this will make it easier for other apparel makers to follow suit.”
The move comes on the heels of Japan’s sales tax increase that took effect April 1. The country raised its consumption tax for the first time in 17 years, from 5 percent to 8 percent, in an attempt to rein in public debt, and the tax will go up again to 10 percent in October 2015.
Many Japanese retailers feared the tax hike would cause a dip in demand, but a Reuters study conducted in May showed that more than 25 percent of companies posted higher year-on-year sales following the tax increase, and more than 40 percent showed sales steady to that of last year.
Uniqlo’s same-store sales in Japan were up 3.3% year-on-year in April, and increased by 4.1% in May. In the first half of the fiscal year ended Feb. 28, 2014, Uniqlo posted a profit margin increase of 0.8% for Japan over the previous year, and the retailer expects to see further improvement in the second half of the fiscal year. Sales for fiscal 2014 are expected to reach 715 billion yen ($6.98 billion) in Japan and international sales at Uniqlo are expected to hit 400 billion yen ($3.91 billion).
The retailer’s domestic operating profit margin dropped to 14.2% in the fiscal year ended August 2013, down from 21.4% three years prior.
Consumer response to the new higher retail prices remains uncertain as Uniqlo has been known for its low-price product, but some say the recent tax hike has already conditioned consumers to pay more for their goods.
Credit Suisse analyst Taketo Yamate told Reuters, however, “Now that the price hike has made news, there’s a new concern over how much this would affect sales and traffic at stores.” He added, “If revenue falls, fixed costs would rise and profit margins will worsen.”
The retail price hikes will be reflected in Uniqlo’s fall and winter collection, and are only applicable in Japan.