Japan’s Pal Building ‘IKEA of Fashion’

Japanese retail group Pal is investing in growth-focused, large-format stores, seeing a market for what it calls an “IKEA of fashion.” JapanConsuming reports.

Campaigns from Pal Group's Capricieux Lémage (l) and Gallarda Galante Beardsley (r) lines | Source: Pal Group

TOKYO, Japan — Pal Group is radically different from other fast-growing Japanese fashion and lifestyle retailers like United Arrows and Point. While its peers garner most of their sales from two or three key chains, Pal is a thoroughly, and deliberately, diversified retail group, which includes a strong homeware business. This approach has delivered solid results, but the company is now investing in growth-focused, large format stores, seeing a market for what it calls an “IKEA of fashion.”

Pal Group looks set to announce sales in excess of ¥100 billion (about $960 million) for the first time in FY2013, joining United Arrows and Point in an elite group of Japanese fashion retailers. The path to these results has been remarkable. Store expansion and diversification have lifted sales from ¥55 billion in FY2006 to ¥91.2 billion in FY2012, with a forecast of ¥150 billion by FY2018 and ¥200 billion by 2023.

Pal Group was one of the original counterculture Osaka apparel traders, emerging in the 1970s as a distributor and small-time retailer of a diversified mix of own-brands, franchises and Italian labels. It became a useful partner for distributing fashion brands, both domestic and foreign, in the Kansai market (an area of Western Japan centred around Osaka). But in 2000, Pal Group acquired Nice Claup, a fading, vertically integrated chain and leveraged its expertise to become a retail-led business, serving the premium end of the mass apparel market.

Unlike the more expansive, but narrowly positioned Point (now Adastria Holdings), its closest rival, whose success rests almost exclusively on three chains, Pal chose to hedge its bets through a more diversified portfolio of brands. While Pal hasn’t quite matched Point in terms of growth, in theory, it is also less exposed to changing consumer demand and brand ennui.

Today, Pal’s biggest chain still only accounts for around 12 percent of group sales and it isn’t in the fashion business. Home variety store 3Coins is an established rival to newer entrants like Tiger from Denmark and Asoko, and reflects Pal’s willingness to explore new formats backed by support from trading firms.

One of Pal’s abiding concerns has been the similarity of fashion merchandise across competing chains and it has attempted to address this with a large variety of stores and brands, currently some 40 in total, aiming to target early trend adopters with fresh merchandise. Leading chains in the group, all with just ¥5 billion to ¥6 billion in sales, include Ciaopanic (a hit in both shopping centres and department stores), Mystic, Gallarda Galante, Papillonner and bag chain Russet. It also operates fashion jewellery and accessories stores like Les Signes and Lattice.

By creating stores to fit different market segments, Pal aims to hedge against downturns and shifting trends; so while sales at casual apparel chains like Ciaopanic fell in 2012, its dressier fashion stores like Russet, and its homeware chains, made up for the loss.

Its biggest diversification has been into home variety retailing through the successful 3Coins format, as well as smaller chains like Smart Life Market, Salut! and Colle. Fashion stores are Pal’s core, but its home variety chains could potentially deliver significant growth as consumers in Japan take an increasing interest in home decoration, especially trend-leaders. The Japanese have already dressed and accessorised themselves and their gadgets to the nth degree, but the Japanese home is a blank canvas primed for decoration, even if for many young singles this is a 25-square-metre studio. Indeed, the small size of homes in major cities precludes decoration through big pieces of furniture, making small accessories the only form of fun available.

Such a diverse portfolio inherently means less efficiency — and Pal does not match its rivals’ profitability. However, by introducing fast cycle merchandising and sophisticated IT systems, it has managed to improve profitability as sales have grown. In the first half of 2013, pretax profit jumped 82 percent. While profit may never be Pal’s main KPI (key performance indicator), its real skill as a retailer — bringing to market new concepts to which consumers respond — is proven and should lead to consistent growth.

Pal now aims to have the best of both worlds, building on its diverse base by creating one or two chains designed for more serious volume, with sales of at least ¥50 billion each within a few years. The first chain is due for launch in the next six months or so, and although still under wraps, Pal says it sees a market for what it mysteriously calls an “IKEA of fashion.”

If it can pull this off, higher profits may well follow.

JapanConsuming is a leading provider of intelligence on Japanese retail and consumer markets.