In Markets

Zozo: A ¥700 billion business in three years?

zozo cover

Start Today, Japan’s biggest dedicated fashion online mall Zozotown (zozo.jp), will soon be called Zozo, reflecting the growing power of the brand. It will expand its private label business, expecting to hit ¥200 billion in sales in three years, and underpinning an ambitious target for group transactions of ¥715 billion in the same time frame. This, however, is just the next step in CEO Yusaku Maezawas aim to become a ¥5 trillion retailer within a decade and one of the top 10 apparel retailers in the world.

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Start Today will change its name to Zozo in October, perhaps not a surprise given that recent research showed 93% of the population had heard of its main online site, Zozotown (zozo.jp), but only 19% knew Start Today. As well as the new name (short for the Japanese words for imagination and creation), Zozo is aiming for gross transaction values (GTVs) of ¥508 billion by March 2020, an increase of almost 90% on the ¥270.5 billion recorded in FY2017 to March. GTVs were up 28.8% last year, producing operating profit of ¥32.6 billion, up 24.3%.

While 99% of Zozotown’s sales come from other brands – of which 92% is fulfilled from Zozo warehouses – Zozo says much of the new growth will come from its recently launched private label business, which it expects to be a ¥200 billion division in just three years. Tightly bound with the private label is the Zozosuit to build a hyper-accurate database of customer measurements, providing a clear USP over rivals like Fast Retailing. The Zozosuit makes it easy to create an accurate measure of a customer’s body using a smartphone and body suit, and the data is held in the Zozo customer account.

Zozo says detailed measuring will transform online apparel retailing but that the Zozosuit is just a stop gap before it unveils new measuring technologies using smartphones that won’t require a suit at all. Whatever the measuring method, Zozo cited its recent experience with orders of its new private brand denims and t-shirts in the last few months as a reason to be optimistic. 50% of existing Zozosuit owners bought private label products, buying an average of 2.5 items for a cost of ¥7,500, and, crucially, to date, there have been zero returns.  Zozo claims this is because customers can order precise measurements of the products for length, waste, sleeve, collar and so on, meaning fit is extremely precise.

This year Zozo expects private brand sales of between ¥14 billion and ¥23 billion (which assumes between 1.8 million and 3 million users buying into the brand) so there is a long way to go to reach ¥200 billion in three years.

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Source : Japan Consuming

To accelerate growth, the collection will widen beyond denims and t-shirts in the next few months to include casual shirts, business suits, and dresses – and it is with these higher ticket, fitted and formal items where the Zozosuit will come into its own. Just last week, Zozo added button-down shirts to the range, with the usual assurances on fit, and even customised collar heights and pocket placement.

What is significant about the move is Zozo’s plans to use the private brand as a launch pad for global expansion. From July it will make the Zozosuit and private branded apparel available for sale in 72 countries, and expects total overseas sales (including other brands) to hit ¥80 billion in two years, and then jump to ¥200 billion in year three – in a decade Maezawa believes 80% of private label sales will be generated overseas.

Zozo is betting heavily on a break out year in FY2019. Its forecast for GTVs to March 2019 is “just” 33% growth to ¥360 billion, and net revenue growth of 49% to ¥147 billion. Even then, Maezawa is targeting another high jump year in 2020 with GTVs of ¥715 billion, up 40% – almost as much as Uniqlo’s domestic sales – and he then sees Zozo becoming a global top 10 apparel retailer within the next 10 years, reaching ¥5 trillion in sales.

Zozo
Source : Japan Consuming

Zozo certainly has the ambition and momentum to make a try at this. In terms of overseas potential, it currently only owns the used accessories site Materialwrld.com in the US, and Fashionvalet.com which operates in Malaysia and Singapore, so it will still need to build significant marketing and logistical infrastructure in major markets to reach its goals.

Domestically, Zozotown itself is an increasingly price-driven mass-market mall, which is not a bad thing for a business that has such massive targets, and inevitable for a mall which increased merchant numbers by 16.5% last year to 1,111, brands to more than 6,000, and customers to 7.22 million, up 14% – women customers average 33-years old and men 31. Going forward, Zozo is likely to continue to widen its range of price points, both up and down, but avoid the bottom end fast fashion elements of the likes of Shop-list.com.

The biggest concern is that, while Zozotown grew in a competitive vacuum, today it faces much more competition from numerous small malls, as well as pressure from the likes of Amazon Japan. While overseas many observers are still sceptical about Amazon as a fashion retailer, in Japan Amazon is investing heavily in building its fashion business here – the opening of Amazon’s biggest photo studio worldwide in Tokyo in April is testament to its fashion ambitions in Japan, as is its sponsorship of Tokyo Fashion Week. It is also likely to bring many of its US private label brands to Japan – it has around 60.

At the same time, many brands and retailers, wary of their dependence on Zozotown, are now trying to pull some of the online custom to their own sites – all the more so given Zozo’s plans for value-driven private brand merchandise of its own. Longer-term this is likely to mean less sales going through Zozo for many of its key merchants such as Urban Research, Baycrews, United Arrows and Adastria.

The Zozo private brand has the potential to scale quickly if, and it is a big if, Zozo can execute on design and price. It has limited experience in product sourcing, and while it is using trading companies to help, and hiring this skill in, integrating these hires is another matter. If it is going to fail, it will most likely be because of poor supply chain management and production control – just as happened with the original Zozosuit.

The casual apparel market will provide the strongest competition from supply chain masters like Uniqlo, sister chain GU, and to some extent smaller retailers like Adastria, and even the better merchandise at Shimamura. Having said that, Japan suffers from Uniqlo saturation, GU is focused on casual fashions, and Shimamura is more downmarket than the smart casual basics positioning Zozo is aiming at, so the potential is there.

Where Zozo could well clean up is in workwear essentials like suits and shirts – despite the endless Coolbiz campaigns, most Japanese still wear suits to work even in the sultry summers. Currently, the market is dominated by the big four suits retailers (Aoyama Shoji, Aoki, Konaka and Haruyama Shoji) but these chains are burdened with ageing brands, legacy store networks and, even today, expensive supply chains (and thus poor cost performance), all of which put off younger customers.

This is especially the case with women; despite a decade of trying, none of the big four have succeeded in capturing a significant share in women’s work clothing. Granted there are moves to fix this, notably Konaka’s successful Difference chain, which is determinedly modern, unisex and, like Zozo, uses technology to improve fit – but these are still retail-based chains with all the expense and slower speed of expansion that implies. This is a huge opportunity for Zozo, or any company that can crack this, given the rapid increase in women’s participation in the workforce.

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The real value of Zozo though, other than its growth, is its brand. Zozo has serious fashion credibility, but since it doesn’t yet sell much of its own product, none of the limitations of its competitors – it can create a new positioning all of its own. As long as this brand value is not diluted by the kind of hasty missteps apparent in the Zozosuit debacle, and by the increasingly price-driven nature of Zozotown itself, it might be unwise to bet against Yusaku Maezawa and his growing collection of impressive deputies.

Michael CaustonMichael Causton is the co-founder and partner at JapanConsuming, a specialist research firm on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market to help subscribers keep up to date with the latest trends and data. JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and consulting on market strategies and future trends.

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