As Pandemic Cannibalizes Revenue, Muji Faces Price Cut Dilemma, Says Nikkei

23 Apr

As the COVID-19 pandemic wreaks havoc on the physical retail industry, different retail companies have seen various degrees of impact. An extreme example of this concerns Japan-based Muji, which had previously been suffering from inventory issues. Pursuant to the pandemic’s prompt proliferation, many Muji stores across the globe have closed down, exacerbating the company’s excess stock. Muji now faces the dilemma of engaging in massive discounts or protecting its brand image.

As reported in the Nikkei Asian Review, 90% of Muji’s retail stores in Japan have either gone out of business or adopted reduced hours. As well, most Muji stores in the U.S. and Europe have temporarily suspended operations, causing an excess inventory buildup of Muji’s spring and summer apparels.

Some analysts have pointed out that if Muji’s revenues for the first six months of the fiscal year were to drop by 25-30%, then the company would most likely find its operating profits in the red. On the other hand, inventory-clearing sales come with the unfortunate side effect of raising Muji’s break-even point, in turn slashing its profitability.

The Nikkei report also finds that Muji’s inventory problems have long been in the making. Muji was unable to accurately model customer demand for the past fiscal year because of the South Korean public’s boycott of Japanese-owned companies, the protests in Hong Kong, increased consumption taxes in Japan, and an abnormally warm winter, in turn leading to the company’s second consecutive year of declines in income and operating profits.

Muji’s net operating profits this year dropped by 31% up until February. Satoru Matsuzaki, president of Muji’s parent company Ryohin Keikaku, forecasts potentially declining consumption even if the pandemic can be resolved.

In spite of Muji’s plans to reduce orders in fall and winter, the risk of excess inventory will persist unless the pandemic is resolved. Some analysts think Muji has now placed itself in an even worse position by failing to address its inventory issues in time.

Analysts from JP Morgan’s Japanese offices state that the COVID-19 pandemic has had a larger than expected impact on Muji’s inventory levels, and the retailer may be forced to destock via discounts or price cuts. However, Muji’s CEO emphasizes that the company has generally eschewed such measures regarding non-seasonal goods, in an effort to better control its gross margins.

Yet another consideration is that pricing discounts will likely damage Muji’s brand image. Once the public perceives a brand as cheap, the brand will face an uphill battle in recovering its once-prestigious image – and prices to match. Goldman Sachs believes that brands run the risk of further damages in the face of COVID-19 if they were to run discounts during the pandemic.

Muji’s loss considerably surpassed that of fashion retailer Uniqlo, which operates under a low-cost model across the board, from factories to stores. M2C (manufacturer-to-consumer) companies, such as Uniqlo, are able to easily adapt to market fluctuations and cut losses.

Muji saw its share price fall from ¥4,120 in summer 2018 to just under ¥1,000 last month. Since COVID-19 was declared a pandemic in March, Muji’s share price has dropped 19%, while Uniqlo’s parent company Fast Retailing saw a mere 7% dip. Nitori Holdings, Muji’s competitor in the furniture industry, conversely saw its share price growing by 10% in the same period.

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