The US unit of homewares chain Muji filed for bankruptcy protection on July 10, its Japanese operator said, succumbing to the coronavirus pandemic which forced it to close stores while facing paying exorbitant rents for its main retail locations.
Muji USA, a subsidiary of Ryohin Keikaku famous for its simple, no-frills designs and no-brand philosophy, has joined a list of struggling retailers feeling the pinch of the pandemic. The company listed $64 million in total debt at the time of its Chapter 11 protection filing. The unit will produce a restructuring plan within 180 days, which will include store closures.
“It all starts from here,” said Satoru Matsuzaki, President of Ryohin Keikaku. “I will personally carry out the restructuring in the United States.”
The filing marked the first time a major Japanese retailer has sought Chapter 11 protection due to the coronavirus crisis. But Muji’s problems go back to its ambitious plans to expand into the United States, despite the costs.
Ryohin Keikaku’s overseas operations are primarily located in China, which it entered in 2005. China is now home to 273 Muji locations, nearly half of its global outlets outside of Japan.
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Muji was launched in the United States in 2006, but the reach only expanded to 19 stores last year.
The outlets are located in prime locations such as Times Square and Fifth Avenue in New York City, locations that come with exorbitant rents. Supporting imbalanced lease payments was seen as a strategic move in terms of global expansion.
“The United States is the cornerstone of name recognition,” Mr. Matsuzaki said.
Although Muji’s sales in the United States increased, they were never able to overcome the high rent, fueling a vicious circle of soaring operating losses. Revenue from operations in the United States reached 11 billion yen ($102 million) for the fiscal year ended in February, but the company posted a net loss of 1.8 billion yen.
Last year, Ryohin Keikaku drew up a restructuring plan focused on reducing lease payments, but “we were absolutely unable to reach any agreements during negotiations with landlords,” Mr. Matsuzaki.
When the coronavirus outbreak broke out, Muji suspended operations in all US stores from mid-March. Ten outlets have reopened, but total operating revenue has fallen 80% from pre-pandemic figures.
“Even though we open the stores, the customers don’t come,” Mr. Matsuzaki said.
With the rise in Covid-19 cases in the United States, Muji faces the possibility of having to close stores again. Due to the uncertainties of the situation, Ryohin Keikaku decided to file for bankruptcy in the United States.
The group plans to first negotiate rent payments and then close these outlets with no hope of improving its income.
The collapse of the American “cornerstone” will deal a severe blow to Ryohin Keikaku’s growth strategy. The group’s operating revenue for the first quarter to May fell 30% on the year to 78.7 billion yen, resulting in a net loss of 4.1 billion yen.
Ryohin Keikaku’s current fiscal year ends in August. For the shortened six-month period, it forecast a loss of 3.9 billion yen, after a profit of 13.2 billion yen in the year-ago period.
The bankruptcy filing 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 around 970 stores at the end of May.
Japanese business accounts for 60% of operating revenue, but the domestic market has matured, largely due to Japan’s aging population. The development of operations abroad will be essential for growth.
Even if rents are reduced, it may still take time for Muji’s US operations to get back on their feet due to the product strategy. The goods sold in the United States are mostly the same size as those sold in Japan, which does not correspond to the local lifestyle.
Additionally, US consumers buy mostly imports from China, which makes Muji products seem overpriced in comparison. Muji is lagging in the development of its digital operations, which puts it in a bad position to adapt to shopping habits that have changed dramatically during the pandemic.
Muji has gained a global following among people who appreciate eco-friendly products with minimalist designs. But in the United States, the prices of many products seem too high, which has prevented Muji from building up a legion of regular buyers.
Muji’s woes follow those of Brooks Brothers, the 200-year-old clothing retailer that filed for Chapter 11 protection on July 8.
A version of this article was first published by Nikkei Asian Review on July 10, 2020. ©2019 Nikkei Inc. All Rights Reserved.