Uniqlo rising?

Uniqlo wants to be No.1 global clothing retailer. Can it challenge the Gap on its home turf?

By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - "We don't intend to stop until we become the world's No. 1 casual apparel company."

That sounds like a direct challenge thrown at you if you're Gap Inc., currently the world's largest specialty apparel retailer with 3,000 stores worldwide and annual sales of $16.2 billion.

By comparison, the company who is throwing down the gauntlet, Tokyo-based public company Fast Retailing, parent of Japan's largest clothier "Uniqlo" operates 684 stores in Japan and just a handful of stores in the U.K., South Korea and Hong Kong.

Last year, it raked in about $3.5 billion in total sales.

Needless to say, Uniqlo has an uphill climb before it's in Gap's league, although that's not stopping founder and chairman Tadashi Yanai from making some bold pronouncements such as the one above to investors in its annual report.

For all its big talk, Uniqlo's avoiding a big splash when it makes its U.S. foray next month.

Unlike other international specialty retail players like H&M, Zara and Mexx, who announced their stateside arrival with flagship stores on New York's uber-chic Fifth Avenue, Uniqlo is almost sneaking into the country with three mall-based stores set to open in New Jersey.

Why the backdoor entry?

Uniqlo's executives say they want the stores "to be your neighbor, where you go regularly for your everyday fashion basics." Isn't that Gap's forte? Then if the three pilot stores are successful, the plan is to rapidly expand nationwide.

Further, Fast Retailing says it aspires to reach $10 billion in total companywide sales by 2010, with Uniqlo USA contributing 10 percent to total revenue, or $1 billion within five years.

According to Mike Kiser, Uniqlo's marketing officer for its U.S. operations, each store will be between 8,000 and 10,000 square feet, and will sell women's, men's and children's merchandise.

"I love that they have such a grand vision but they can't underestimate the complexity of growing in the U.S. market," said David Marra, principal and retail analyst with AT Kearney in Tokyo.

In Japan, Uniqlo is best known for selling well-made clothes for "affordable" prices, explained Kiser. Among its core products categories are fleece, denim, knit T-shirts, cargo pants and cashmere sweaters priced between $20 to $70.

"Uniqlo has a completely different business model compared to say H&M or Zara," said Richard Perks, director of retail research with market research firm Mintel in London. "It sells a very limited range of basic apparel but in a large variety of colors and fabric. This allows it to achieve huge economies of scale."

Gap declined to comment on Uniqlo's arrival into the United States.

Is Euro cheap-chic a fad or here to stay?
Observers say Uniqlo's entry breaks an ongoing trend of mostly European specialty fashion chains that have entered the U.S. market over the past few years and created a growing niche market for "disposable" fashion at value prices.

Those already here are Swedish chain H&M, Spanish retailer Zara, Dutch fashion retailer Mexx which was acquired by Liz Claiborne in 2001. Zara's competitor Mango, a women's specialty clothing chain, will set up shop in the U.S. this November.

Liz Claiborne CEO Paul Charron explains that more and more international chains are coming to America precisely for the same reason that U.S. retailers are targeting their own expansion overseas.

"There's pressure on these companies to maintain growth," Charron said. "These chains are tapping out their own market and they view the U.S. as a much bigger market opportunity where consumers are less than satisfied with their options."

"Any American retailer that doesn't take companies like H&M, Zara and Mexx seriously is making a big mistake," Charron added. "These companies have a potent and competitive business model. You have to admire how they play the price/fashion game."

Industry watchers point out that the competitive advantage H&M and Zara have over their U.S. rivals in the ability to quickly bring new designs and fashions into their stores cheaply, thus keeping their inventory looking fresh and in-step with the fad of the moment.

"H&M represents disposable fashion, Zara stands for global chic for women and Uniqlo's value proposition in its updated basics,' said Tom Julian, a senior trend analyst at Fallon Worldwide.

Sanna Lindberg, president of US operations for H&M, said the retailer changes inventory daily at its stores.

"That way we keep surprising our customers," Lindberg said. H&M currently operates 74 U.S. stores and plans to open 25 new stores a year.

Said Julian, "It goes back to these companies' authentic vertical business model which enables them to keep consumers' appetite alive for their products. Unlike many of the American clothing chains, these European retailers own their own factories, their own fabrics and their own designs."

Mintel's Perks, agreed with Julian.

"American fashion retailers look tired next to these European chains. American consumers perhaps are bored with Gap and other American clothing chains because they sell to a broad marketplace, sort of something for everybody. They're not strong on uniqueness and product differentiation."

Casual is still king in the U.S.
Inditex, parent company of Zara, has 17 stores in the U.S. mostly concentrated in the major cities of New York, Houston, Miami and Las Vegas.

Inditex's chief financial officer Borja Dela Cierva told CNN/Money that the company is targeting a very limited expansion of between 3 to 5 stores a year.

"The U.S. is a great opportunity for us but it is not at the core of our expansion plans. America is a very large and competitive market and it's not easy to grow fast," Cierva said.

Overall, Americans are still more casual in their dressing compared to Europeans, he said. Outside of the big cities, analysts say H&M too has struggled to push its Euro cheap-chic urban clothing on American consumers.

Despite its gung-ho attitude, analysts predict a bumpy road for Uniqlo as well. For one thing, Americans probably have never heard of the brand and it will take a huge marketing effort of the company's part to educate U.S. consumers.

"Uniqlo has failed in Europe and China. It's been successful only in Japan where it's perceived to be a rip-off of the Gap," said AT Kearney's Marra. "The company is innovating with its products, retail and marketing strategy in Japan but the U.S. is a completely different ballgame with too may entrenched players already."

Guess Gap can relax -- for now.