TOKYO -- The U.S. unit of home goods chain Muji filed for bankruptcy protection Friday, its Japanese operator said, succumbing to the coronavirus pandemic that forced it to close stores while still having to pay sky-high rents for its prime retail locations.
Muji U.S.A., a subsidiary of Ryohin Keikaku, famous for its simple, no-frills designs and no-brand philosophy, joined a list of ailing retailers feeling the pinch of the pandemic. The company listed a total debt of $64 million at the time of its Chapter 11 protection filing. The unit will produce a restructuring plan within 180 days, which will include store closings.
"Everything starts from here," said Ryohin Keikaku President Satoru Matsuzaki. "I will personally realize the restructure in the U.S."
The filing marked the first time a major Japanese retailer has sought Chapter 11 protection due to the coronavirus. But Muji's problems date back to its ambitious plans to expand in the U.S. -- despite the costs.
Ryohin Keikaku's overseas operations are mostly located in China, which it entered in 2005. Now China is home to 273 Muji locations, or nearly half the global outlets outside Japan.
Muji launched in the U.S. in 2006, but the reach only extended as far as 19 stores as of last year.
The outlets are located in prime locations like New York's Times Square and 5th Avenue -- places that come with exorbitant rent. Taking on the lopsided lease payments was considered a strategic decision in terms of expanding globally.
"The U.S. is the cornerstone in building name recognition," Matsuzaki said.
Although Muji grew sales in the U.S., they were never able to overcome the high rent. The liabilities caused a vicious cycle that ballooned operating losses. Operating revenue in the U.S. grew to 11 billion yen ($102.5 million) for the year ended February, but the business turned in a net loss of 1.8 billion yen.
Last year, Ryohin Keikaku crafted a restructuring plan centered on lowering lease payments, but "we were entirely unable to reach agreements in negotiations with landlords," Matsuzaki said.
When the coronavirus epidemic flared, Muji suspended operations at all U.S. stores from mid-March. Ten outlets have reopened, but the total operating revenue has tumbled to 80% compared with the pre-pandemic figures.
"Even if we open the stores, the customers aren't coming," Matsuzaki said.
With COVID-19 cases surging in the U.S., Muji faces the possibility that it would need to close stores again. Due to the uncertainties of the situation, the Ryohin Keikaku decided to file for bankruptcy in the U.S.
The group plans to first negotiate rent payments, then shut down outlets with no hope of improving earnings.
The collapse of the U.S. "cornerstone" will deal a significant blow to Ryohin Keikaku's growth strategy. The company announced Friday that group operating revenue for the first quarter through May fell 30% on the year to 78.7 billion yen, generating a net loss of 4.1 billion yen.
Ryohin Keikaku's current fiscal year ends in August. For the shortened six-month period, it projects a 3.9 billion-yen loss, down from the 13.2 billion-yen profit recorded in the year-earlier period.
The bankruptcy filing, however, is expected to have little effect on operations in other regions, including Japan. Ryohin Keikaku plans to expand its global network to 1,138 stores by August next year, up from roughly 970 stores at the end of May.
The Japanese business accounts for 60% of operating revenue, but the market back home has matured due in large part to the graying population. Developing overseas operations will be indispensable for growth.
If rent payments are successfully modified, it may still take time for Muji's U.S. operation to get back on its feet because of the product strategy. Goods sold in America are mostly the same size as those sold in Japan, which does not match the local lifestyle.
In addition, U.S. consumers mostly purchase imports from China, making Muji products seem overpriced in comparison. Muji lags behind in developing its digital operations, putting it in a poor position to adapt to purchasing habits that have drastically shifted during the pandemic.
Muji has won a global following among people who value environmentally friendly products with minimalist designs. But in the U.S., many of the products' prices appear too steep, which has kept Muji from building up a legion of regular shoppers.
Muji's misfortunes follow that of Brooks Brothers, the 200-year-old apparel retailer that filed for Chapter 11 protection on Wednesday.