Uniqlo Shuts Its JD.com Flagship Store and Leaves 13 Questions Behind

This is bad news for Uniqlo and JD.com alike.

On April 8, Liu Qiangdong turned up in person to welcome Uniqlo to JD.com.

Just over three months later, at midnight on July 20, Uniqlo's flagship store on JD.com officially closed.

"During this period of operation, we found that many aspects of this cooperation still need further discussion and improvement. In line with Fast Retailing's strategic adjustment of its China EC (e-commerce) business, and with JD.com's consent, we have decided to end the current cooperation early. The partnership will formally end at the end of July." That was Uniqlo China's answer to almost every question QDaily put to it.

Work on Uniqlo's JD.com flagship store began at the end of January 2015, and the store opened in April, so preparation also took three months. In that time the two sides customized and modified everything from software to hardware to suit the warehousing arrangement and business needs. JD.com gave Uniqlo warehousing and delivery support and set aside a dedicated 10,000-square-meter warehouse. At the time, both sides said they would soon extend the warehouse arrangement nationwide. Uniqlo became the first international apparel brand on JD.com to use JD.com's own warehousing and delivery.

Had this been a physical store, the contrast would be starker still. Picture watching a shop go from signing the lease through fitting-out, three months of work, finally open its doors, and then close them three months later.

JD.com had high hopes for Uniqlo: building up apparel is one of its key strategies this year. Uniqlo's exit leaves these puzzling questions behind:

Was the store open for one month or three?

The two sides disagree on how long the store actually traded. Uniqlo told QDaily that its official JD.com flagship store operated for one month. JD.com says three: "What we can confirm is that, right up to the closure, products on sale in the store could be bought and delivered normally."

Why don't the two sides agree on sales either?

On Uniqlo's performance during its three months on JD.com, JD.com says that "sales in the first month after opening reached twice the target."

But a spokeswoman for Japan's Fast Retailing told Reuters: "After a three-month trial, Uniqlo concluded that a store on JD.com does not fit Uniqlo's overall e-commerce strategy in China. During the trial, Uniqlo realized that taking a step back was the best option." She declined to describe Uniqlo's e-commerce strategy or say how it had actually done on JD.com.

Was the JD.com store under-stocked from the start?

Some shoppers say stockouts at Uniqlo's JD.com flagship store were severe: "Always out of stock. Whatever you want, they don't have it." If JD.com did deliver the warehousing and logistics it had promised, one possible explanation is that Uniqlo never stocked the store properly, or cut back stock after the first month.

In fact, true to a long Japanese corporate tradition, Uniqlo has always run its online business with careful arithmetic. There is a precedent: Uniqlo also ran short of stock during Tmall's "Double 11" sale. "In the Double 11 campaign, Uniqlo was the fastest apparel brand to reach 10 million in sales. So why did it run out of steam? Because it didn't have enough stock. Why not enough stock? Because there were never many products that both met the campaign's discount requirements and didn't badly hurt gross margin. No company wants to sell at a negative gross margin." So said Hu Guoxun, head of Uniqlo's EC (e-commerce) division, in an interview last year.

For a Japanese company that counts every yen, cutting losses quickly when revenue misses expectations is only sensible. Uniqlo treats its physical stores the same way: "If a store isn't run well, we deal with it decisively, and closing it is one of the options."

JD.com gave Uniqlo its own warehouse and logistics. Why couldn't it keep Uniqlo?

JD.com supported Uniqlo's official JD.com flagship store from warehousing to delivery and set aside a dedicated warehouse in Shanghai. The 10,000-square-meter facility could hold up to 1 million garments.

Uniqlo became the first international apparel brand on JD.com to use JD.com's own warehousing and delivery. The JD.com executive in charge of apparel told QDaily at the time that Uniqlo used the FBP model (goods stored in JD.com's warehouse and delivered by JD.com). Brands that had joined JD.com earlier, such as Gap, used the SOP+COD model instead: merchants handle their own warehousing and delivery, and shoppers who want to pay cash on delivery can choose JD.com's courier service themselves.

JD.com's terms for Uniqlo were plainly generous. Logistics is also JD.com's greatest strength, but apparel is a category where delivery speed matters relatively little. And compared with other brands, Uniqlo's offline stores put special weight on selling stock fast: it marks down current-season products sooner than comparable brands, and a little more steeply. Uniqlo turns over its inventory in 83.72 days on average, more than 50% faster than domestic apparel companies. A huge warehouse may matter less to Uniqlo than one might think.

What support did Tmall once give Uniqlo's flagship store?

When Uniqlo joined Tmall in 2009 (then still called Taobao Mall), Taobao also backed it heavily. Many of Uniqlo's requirements could not be met by Taobao's systems at the time, so Taobao assembled a team of engineers to write the code and build the back end directly. It also gave Uniqlo a very high account tier.

Apparel is Tmall's strongest category. The consumer data Tmall has accumulated once guided how Uniqlo ran its China website and shaped its entire investment and operating plan in China, including where to open stores and how to upgrade its supply chain. JD.com cannot yet offer this kind of basic consumer data.

Did Tmall lean on Uniqlo?

JD.com delivers faster and had cut its free-shipping threshold to 79 yuan, so many people could not see why Uniqlo would pull out. "Uniqlo's exit from JD.com was settled the moment the store opened in April. The reason is simple: apparel is Tmall's strongest category, and Uniqlo is one of the most successful merchants on the platform. Losing it to JD.com would cost Tmall face and have plenty of knock-on effects. From then until now, Tmall has kept pressing brands to sign exclusive deals." So wrote an anonymous user on Zhihu.

Many people probably suspect the same. When QDaily contacted Tmall about it, the company seemed far from relaxed about the matter; if anything, a little tense. A brand with Uniqlo's pull could quite plausibly go it alone.

Have brands ever just dabbled on Tmall?

Tmall told QDaily that brands have dabbled on Tmall too, running trial stores. Many international brands entering Chinese e-commerce platforms first want to see data on the Chinese market and need to test the waters. "When Coach came to Tmall, for example, it saw how many people were buying on Taobao, thought the cake was huge, and wanted to take a bite." Coach then opened a store with Tmall, found its pricing strategy and operating approach weren't ready, and ended the cooperation after the trial.

Uniqlo had no need to use JD.com to test the waters. More likely it wanted to see whether its Tmall operation could be copied onto other e-commerce platforms.

What is Uniqlo's e-commerce strategy in China?

Uniqlo has been in China for 13 years. In the third quarter of fiscal 2015, its Greater China revenue rose 42.5% year on year and operating profit rose 25.2%. For the first nine months, revenue was 481.8 billion yen, up 47.0% year on year, and operating profit rose 55.0% to 51.9 billion yen. Both beat the group's expectations.

Uniqlo now has 814 stores in Japan and 767 abroad, 442 of them in Greater China. The Chinese market is vital to Uniqlo.

Unlike many brands that spend heavily on online marketing, Uniqlo keeps a tight lid on it. Hu Guoxun, head of Uniqlo's EC (e-commerce) division, has said that Uniqlo's daily spending on Zhitongche (Taobao's search ads) may not exceed 1,000 yuan, and that monthly spending including Zuanzhan (Taobao's display ads) may not exceed 100,000 yuan.

Uniqlo has also always kept a low profile on e-commerce platforms. On Tmall, for instance, it joins no promotion except "Double 11," and it only started taking part in that in 2012 (Uniqlo joined Tmall in 2009, the same year "Double 11" began). In the very week its arrival on JD.com was announced, Uniqlo asked JD.com to tone down the publicity to keep its sales channels in balance.

Pan Ning, Fast Retailing's global senior executive vice president and CEO of Uniqlo Greater China, said in an interview in March 2014 that online sales made up about 6% of Uniqlo's total sales in China, but that the share could rise to 20%-30%, and that Uniqlo had not ruled out building its own e-commerce platform.

Uniqlo says this adjustment will not affect its commitment to, or confidence in, online sales.

Will Uniqlo leave Tmall and build its own e-commerce platform?

Every brand wants its eggs in its own basket; every brand naturally wants to control its customers' purchase data and traffic. So might Uniqlo one day leave Tmall and strike out on its own?

For now, that looks very hard, because Uniqlo has been tied to Tmall ever since it entered China. Before JD.com, Tmall was always Uniqlo's main online battleground. Even Uniqlo's official website was built by Alibaba and is linked directly to the Tmall flagship store. Customers who order on the website must first log in with a Taobao ID, and the website and the Tmall store share Taobao's back end. The Uniqlo app, too, sends its traffic to the Tmall store and to physical stores.

Building its own website would cost too much by comparison. Nor does Uniqlo have any reason to leave Tmall, the biggest source of traffic and the place where Chinese consumers' shopping habits are formed.

Why might Uniqlo have left JD.com?

JD.com's first-quarter 2015 results show that of the 87.8 billion yuan in gross merchandise volume (GMV) for the quarter, the share of non-3C goods (everyday goods and other categories) rose from 39.1% a year earlier to 49.4%, roughly level with 3C goods (computers, communications and consumer electronics).

As JD.com moves from 3C toward becoming an all-category e-commerce platform, apparel is one of the areas it is pushing hardest. In the first quarter of this year, JD.com's apparel business grew more than 180% year on year.

But fashion may be harder than JD.com expected. A company that started in 3C has no apparel in its DNA. Many people also habitually think that "JD.com is not where you buy clothes," just as most people are not used to buying home appliances on Tmall.

Xin Lijun, head of JD.com's open platform, trained as an engineer and spent years at hardware companies. Even Liu Qiangdong and "Milk Tea Girl" are often said to "dress badly." Whether this has anything to do with JD.com's apparel push is hard to say, but in brand image, JD.com is a long way from fashion.

On top of that, having started with 3C products, JD.com built up a mostly male user base. That has changed somewhat since it broadened into an all-category platform, but most men still buy clothes less often than women do.

What does this mean for JD.com?

JD.com had high hopes for Uniqlo, as the dedicated warehouse and Liu Qiangdong's personal appearance at the launch both show.

More than 38,000 merchants have now joined "JD.com Fashion City," and flagship stores of well-known apparel brands make up more than 60% of them. Hundreds of international brands, including GAP, New Balance, Levi's, Samsonite, Hugo Boss and Sephora, have joined JD.com over the past year, but Uniqlo was still one of the heavyweights. Losing a brand with that kind of pull may make future negotiations harder.

What does this mean for Uniqlo?

For Uniqlo, an about-face so soon is no good news either. This was, after all, a flagship store on a major e-commerce platform, which amounts to a promise to consumers. Stockouts and a closed store leave shoppers with a poor impression of the brand. Uniqlo says it will do everything it can to sort out after-sales problems caused by its exit from JD.com. But the problem may not be that simple.

Finally, does this have anything to do with the "fitting room" incident?

No.