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Muji slips into red after cruel summer in US and Europe

Japanese lifestyle brand books record write-downs on unprofitable stores

A Muji store on 59th Street in New York. The pandemic took a toll on the company's U.S. and European operations. (Photo by Ken Moriyasu)

TOKYO -- The parent of the Muji lifestyle brand has suffered a 12.8 billion yen ($121 million) quarterly net loss and posted its biggest write-downs to date as it struggles to draw American and European customers back to its stores during the pandemic.

Ryohin Keikaku on Thursday reported its first-ever net loss for the June-August quarter, down from a net profit of 6.7 billion yen in the same period a year earlier. It booked 14.2 billion yen in write-drowns on underperforming stores for the abbreviated fiscal year ended August.

This year has been a brutal one for Muji in North America and Europe, which together accounted for less than 10%, or 72, of its total locations as of August. Coronavirus-induced store shutdowns drove Muji U.S.A. to file for bankruptcy protection in July.

"For many stores, conditions had not recovered to the point where we could resume normal business," Ryohin Keikaku President Satoru Matsuzaki said Thursday, referring to North American locations.

In Europe, "the rebound in store traffic was sluggish as many customers had social distancing on their minds," Matsuzaki said.

The stationery section in Muji's 59th Street store in New York. Although Muji offers minimalist products, American consumers could see them as expensive compared with Chinese-made housewares found at big-box retailers. (Photo by Ken Moriyasu)

The operating loss in the Europe and Americas segment widened to 3.3 billion yen in the June-August quarter from 41 million yen a year earlier.

For U.S. consumers, Muji products can seem overpriced in comparison with the mostly Chinese-made housewares found at mass-market retailers. The brand has won a global following among people who value environmentally friendly products with minimalist designs. But the price factor has limited its American fan base.

Muji has also been slow to develop its online presence, putting it in a poor position to adapt to purchasing habits that have drastically shifted during the pandemic.

Japanese retailers aiming to expand globally find the U.S. a difficult market compared with Asian countries. To make it in America, a Japanese brand would have to communicate its distinctiveness while being hampered by marginal name recognition. The new entrant would also be going up against better-established Western brands.

Japanese automakers succeeded in the U.S. by weaponizing their product quality, and from there grew into global brands. In retailing and restaurants, their compatriots will be tested on whether they can overcome cultural differences to provide products and services.

Fast Retailing, parent of the Uniqlo casualwear chain, arrived in America in 2005 and opened a flagship store in New York City's fashion-forward SoHo neighborhood in 2006. Another Uniqlo flagship later opened on Fifth Avenue, home to luxury-brand boutiques. The choice of locations was part of Fast Retailing's strategy to amplify Uniqlo as a global brand.

Shoppers line up at Uniqlo's Fifth Avenue store in New York. The choice of location, near the world's most luxurious boutiques, was part of Fast Retailing's strategy to amplify Uniqlo as a global brand.   © Reuters

But Fast Retailing's North American business has consistently lost money since the entry into the U.S. Plans to bring the segment into the black for the first time through such steps as curtailing discounts were upended by COVID-19.

All 50 Uniqlos in the U.S. were shut down, starting in mid-March. Although most reopened by July, the company has warned of tough times ahead.

Restaurant operator Yoshinoya Holdings opened its first U.S. eatery in 1975. But the practice of eating at the counter failed to take off, and the American unit filed for bankruptcy. Yoshinoya tried again with table dining and ended up opening roughly 100 restaurants by 2014, mainly in California. The business has since more or less hit a ceiling.

Muji's earnings are showing signs of improvement. Ryohin Keikaku reported an overall operating profit of 3.8 billion yen for the June-August quarter, swinging from a 2.9 billion yen loss in the preceding three months. The latest quarterly result topped the 2.1 billion yen forecast by analysts in the QUICK Consensus survey.

Japanese Muji stores drove these gains. Sales of food, such as heat-and-eat curry, jumped about 40% as Japanese hunkered down at home during the pandemic summer. Housewares like kitchen and storage products also sold well.

Operating profit in the Japan segment rose 9% on the year to 5 billion yen, with an 8% rise in same-store sales at directly run Muji locations.

For the fiscal year ending August 2021, the company projects a 34.8 billion yen net profit, its highest full-year result ever. The just-ended fiscal year -- abbreviated to six months as the company changed its book-closing to August -- saw a net loss of 16.9 billion yen.

Excess inventory had been a concern but has shown improvement. Lighter inventory reduces the need for profit-sapping discounts.

"Normalizing of inventory is likely to finish in the year ending August 2021," said Dairo Murata, an analyst at JPMorgan Securities Japan.

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