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Business

Doing great in China but not in Europe

Muji's flagship China store, pictured here, in Sichuan Province, is one of a growing number of the antithetical brand's shops in the country.

TOKYO -- Ryohin Keikaku, which operates the Muji chain of trendy home ware stores, has been enjoying some recent success in China -- despite the country's windy economy.

     It is the company's money-losing European operations that have investors worrying.

     "Our Chinese business is doing quite well," President Satoru Matsuzaki said on Oct. 6 at a press conference following the company's earnings announcement for the March through August half. During the period, the retailer's consolidated net profit jumped 50% on the year to a record 10.3 billion yen ($85.4 million), thanks largely to swelling sales in China.

     That said, shares in Ryohin Keikaku repeatedly came under strong selling pressure due to the Shanghai stock market rout in August and September. To Matsuzaki, this was something of an irony. The company achieved double-digit growth of 10% to 20% even during the July through September quarter, he said.

     In China, same-store sales climbed 38% on the year for the January-March quarter and 22% for the three months through June.

     The number of Ryohin Keikaku's Chinese stores now account for 40% of all overseas Muji stores. Under the company's plan, the number of China stores will rise 25% by February next year up to 160; the chain will have a total of 343 overseas stores by then.

Lowering prices

Why does the retailer remain so bullish on China despite the country's economic woes?

     According to Takahiro Kazahaya, a senior analyst at Deutsche Securities, Muji products tend to gain popularity amid a slowing economy.

     "Muji began with three steps," its website says, "selecting materials, scrutinizing processes and simplifying packaging."

     Founded in 1980, Ryohin Keikaku has been committed to providing low-cost, high-quality products with practical functionality. During Japan's bubble economy of the late 1980s, Muji came to be known as something of an antithesis to a brand. Thirty years on, in a China enduring a government austerity drive and amid an economy that is losing steam, consumers are losing some of their affinity for luxury brands and latching on to Muji.

     "There seems to be plenty of room for growth".

     In the March through August period, the company's operating profit in East Asia including China nearly doubled from the year-earlier half to 7.8 billion yen, accounting for 49% of its overall total. Starting in late August, Chinese Muji stores lowered prices of clothing and other items. Matsuzaki said this helped increase the number of items purchased. Dairo Murata, a senior analyst at JPMorgan Securities Japan, has praised the approach.

Fixing Europe

So what will the company do to improve its bottom line in Europe, where it has been operating for more than 20 years? Matsuzaki said Europeans appreciate the simple, almost Zen-like designs of Muji products and that Ryohin Keikaku will build on this to attract more customers.

     In the March through August half, the company's European business logged an operating loss of 400 million yen, down from the previous year. While Ryohin Keikaku is counting on a little Zen to move it into the black in Europe, a fund manager grimaced at the thought. "Progress toward the company's annual target has not necessarily been good," the fund manager said.

     Matsuzaki also said the company in 2016 will establish a second European distribution base; the existing one is in the U.K. The plan is to improve distribution efficiency and mitigate the negative impact of currency fluctuations between the British pound and euro.

     An automated ordering system could also help, and efficiency could be improved by closing unprofitable stores. Ryohin Keikaku could take other measures as well to get on track in Europe -- and close in on another record net profit.

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