Japanese fashion is unique, and so is the entire Japanese fashion industry. Today I would like to introduce you to a Japanese fashion startup with a genuinely unique business model.

Tsubasa Koseki and his team at Facy, have created a fashion marketplace based on instant messaging and relationship building between shops and consumers. Interestingly, this market is not dominated by major labels or global companies, but by more local, mid-market brands.

Tsubasa and I talk about his plans for Asian expansion, Facy’s chances for global domination in this niche, and the major differences between fashion retailing in Asia and in the West.

It’s a fascinating discussion and a great inside look at fashion retailing.

Show Notes

  • What is the last untapped fashion market
  • The reason behind the recent boom in startup founders from Todai
  • How SNS use differs between Asia and the West
  • Why you may not be able to trust Japanese e-commerce reviews
  • The biggest mistake fashion startups keep making
  • Why the global fashion brands will be at a disadvantage over the next 10 years

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Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for joining me.

Every once in a while, I come across a startup with a business model that only exists in Japan. Now usually, this is because the startup is responding to a market need or a consumer behavior that also only exists in Japan. Occasionally however, only occasionally, I come across a unique startup with a genuinely good idea that has potential to make a global impact, and today, I’d like to introduce you to one of those companies.

Tsubasa Koseki is the CEO and founder of Facy, and Facy has developed a fashion marketplace based on, believe it or not, text messaging. Consumers with questions about fashion can ask for advice, and fashion brands and stores respond to those questions. Yes, yes, I know, messaging is already widely used in the fashion e-commerce industry, but Facy has a wonderful and minimal approach to it that really deserves attention.

Now, I grant you that the fashion industry as a whole is a bit outside of my core competence and in truth, I have a fashion sense that is perfect for podcasting, but Facy’s results really speak for themselves, and Tsubasa and his company have big plans for expansion as well, but you know, Tsubasa tells that story much better than I can, so let’s hear from our sponsor and get right to the interview.

Tim: Okay, so we’re sitting here with Tsubasa Koseki, the CEO and founder of Facy. So thanks for sitting down with us today.

Tsubasa: Yes, thank you, Tim, too. I’m very happy to present our project. I’m a big fan of your podcast.

Tim: Well, thanks. Let’s get right into what Facy does, so you talk about o-to-o means in offline-to-online support services for fashion and apparel stores, so how does this work exactly?

Tsubasa: On our service, user can ask their fashion needs like Quora.

Tim: Quora? Like the Q&A site?

Tsubasa: Yes, yes, yes, yes, yes. User can ask their own fashion needs. For example, I’m looking for sneakers for the office, shop staff can reply to the post by uploading their item in their stores. User can ask additional questions. If it’s okay, they can buy or reserve item.

Tim: I really think you got an interesting approach to e-commerce in general, but fashion in particular where it is this kind of calling response where you got customers texting like just random questions, and how detailed are these questions? Are they simple things like, “I’m looking for a new pair of sneakers for basketball”? Or do you get people saying, “I want a blouse that feels more like spring”?

Tsubasa: We have a lot of customer. They ask unique question. In this year, the most interesting question to me, 14 years old, Junior High School student asked, “I am a fashion beginner. I start to running fashion. What do I have to buy fast?” She asked.

Tim: Okay, and so how did the shops respond?

Tsubasa: So many shops respond to her. One of the shop respond, which is Levi’s 501, branch respond, “Wear sneaker.”

Tim: But I can see that being really interesting. It’s bringing commerce back to a more one-to-one relationship and that’s great, and so the business model is, you take 20%?

Tsubasa: Yes, yes.

Tim: Do the shops ship directly to the customer or do you handle the shipping?

Tsubasa: Yes, we are handling shipping and payment. We ask Yamato, Yamato is the biggest logistic service in Japan, to pick the item directly to customers.

Tim: That makes sense. Tell me about your customers. How many customers do you have and how many stores are a part of this system now?

Tsubasa: We have 500,000 users but one of our unique points is user can find favorite item by just watching fashion communication of our user and shops.

Tim: So the text that customers post if they’re looking for new sneakers or a new fashion, these are public and everyone can see it?

Tsubasa: Yes, the other user can read. Most of the user don’t post.

Tim: Just read?

Tsubasa: Yes, just reading.

Tim: Of that 500,000 users, how many are active? So how many log in, say weekly?

Tsubasa: Weekly, about 100,000 users to 200,000 users.

Tim: Okay, so it’s a very active community?

Tsubasa: Yes.

Tim: Alright, and who are they? Are there more men or women, young, middle-aged? What’s the typical user profile?

Tsubasa: Men and women in same percentage.

Tim: Really, 50/50 split?

Tsubasa: Yes, 50/50. Yes, there age, 25 to 35. They have their job and their salary is increasing but they’re available time is decreasing.

Tim: I can imagine that that 25 to 35 age audience hs incredibly valuable audience to the fashion industry. That’s the age where people are making branded decisions, when you go onto the business world, you kind of have to throw away your style from college.

Tsubasa: They have free cash to buy fashion item.

Tim: And what about on the business side, is there any particular type of story that is popular? Are they like high fashion brands, are they chain stores, are they like outdoor stores?

Tsubasa: Our main clients, in Japan, there are so many middle-priced brand. In US, apparel market is divided, luxury brand or fast fashion, but in Japan, a middle-priced brand is so strong.

Tim: Okay, and it’s these middle price brands that are the most popular stores on the platform?

Tsubasa: Yes. General startup, one of the biggest fashion brand in Japan using our service and the 22% of sales is from Facy.

Tim: Wow, but you know, that does kind of make sense because these mid-market fashion brands in Japan now, in some ways even hurt by the e-commerce revolutions. The major fashion brands, the Chanels and the Louis Vuittons, they have huge marketing budget. The fast fashion retailers have –

Tsubasa: Huge marketing budget.

Tim: Yes, they’ve got this special system, but yes, these mid-market brands are sort of stuck in the middle. They can’t steak out a brand for themselves so this ability to communicate and have a conversation is really interesting.

Tsubasa: Yes, and I think in Asia, they have a big opportunity because people get more money, so people want to buy better product.

Tim: Yes, I think so. I mean, there’s two things. If you look at a lot of the markets in Asia, there are two things that could work in your favor. First is you mentioned, there’s this growing middle-class of consumers who have money to spend on fashion, and second, there’s a lot of Asian economies where there’s a much larger younger demographic in that 24 to 34 year-old range. But before we talk about that, let’s back up a little bit and talk about you.

So you graduated from Todai and you worked in banking, Mitsubishi, and Lloyds as well?

Tsubasa: Yes, after graduating from Todai, the University of Tokyo, I studied in the University role on the Internet Technology, and therefore, I like to launch a financial service, utilizing internet technology in Mitsubishi Tokyo UFJ, but you know, in most of Japanese company, I think the best way to success to the business development or marketing for huge company.

Tim: Well, yes, I think all companies value sales, so you went into Mitsubishi with an idea that you were going to launch a new product for Mitsubishi?

Tsubasa: Yes.

Tim: Oh, you poor thing.

Tsubasa: Yes, but later, internet is not a good career, so I decided to work as a relationship manager for a huge automotive company, and do you know Suzuki?

Tim: Of course.

Tsubasa: Yes.

Tim: Were you just trying to find a career and a job that you enjoyed, or was this part of kind of a long-term goal of starting your own company?

Tsubasa: Of course, working in financial industry, I think it’s easy to make more money but I would like to launch our service, so there, I became 30 years old. I decided to quit job.

Tim: So why fashion? I’ve never really followed fashion – I mean, you can tell by the way I’m dressed – but you mentioned in an earlier interview that you’ve always been interested in fashion. If you’re always interested in fashion, why the big detour into banking?

Tsubasa: Fashion market is very interesting because users wearing items more frequently in the other market. This reason is same to Amazon. In US. there is frequency of user are using Amazon. I think 14 times per year, so fashion is very important. User buy item more frequently than there is a market.

Tim: I guess it’s an interesting point. The business of selling fashion, selling apparel is a very, very different business then the business of creating fashion.

Tsubasa: And very different from Finance.

Tim: Yes. Well, let me ask you this. I’ve noticed, over the last few years in Japan, that there are a lot of startup founders that are coming out of Todai, so 15 years ago, for example, Keio University has always traditionally –

Tsubasa: Especially Keio SFC.

Tim: Yes, SFC. They’ve been very entrepreneurial. They’ve produce a lot of startups and Todai traditionally didn’t. Graduates went into government or went into banking.

Tsubasa: Banking industry or the government.

Tim: But over the last five years, there’s been so many people from Todai starting companies, so what’s changing? What’s driving that change?

Tsubasa: I think startup environment is growing, especially China’s market is expanding.

Tim: So do you mean the environment, the overall Japan startup ecosystem or within Todai?

Tsubasa: Before 2010, there is less funding environment so there is people, like Todai can’t run their service because of risk, but after 2010, they can launch their business.

Tim: So it’s just you think simply because there’s more funding available, it’s easier?

Tsubasa: Yes, same as US. Before 2000, funding environment is not bigger as today.

Tim: Yes, I think that’s true. During the dotcom bubble in Japan, there was a lot of financing available, but there’s far, far more available now.

Tsubasa: Yes.

Tim: I think the last five years, there has been a greater social acceptance of starting a company, and I think your typical Todai student and their parents are very concerned about that kind of social acceptance.

Tsubasa: Yes, fortunately, my parents and grandparents owned their business. So they didn’t worry about my career.

Tim: A very large percentage of the entrepreneurs I interview in Japan have a role model in their family who either started their own company –

Tsubasa: Yes, parents of them own family business.

Tim: Or did something different with their life, right? So I think those role models are so important.

Getting back to Facy, let’s go back to the early days, because I think the idea of this kind of text interaction between customers and shops is a great one, but how did you get your original group of customers in shops because you always have that kind of chicken and egg problem?

Tsubasa: First shops group, I did sales activity by myself.

Tim: Okay, so the first thing you did is you got the retail shops on the platform, and then how did you get your customers? Was it content marketing or what was your strategy?

Tsubasa: Yes, contents marketing is very important for me because we are creating fashion article by our customers’ communication between users and shops. I think this is an essential strength of fashion media, so a lot of fashion media, news portal, and fashion application want to publish our article because our article are based on that. We are fashion needs.

Tim: It makes perfect sense because you got real customers asking for advice and you can see if it works or not right there. It’s real.

Tsubasa: Yes, so we are providing our fashion article to them, and them providing us our customers. Yes, good deal.

Tim: That’s a good deal. So when your customers came in, has it been a pretty steady increase from the time you launched to now or was there a certain campaign or a certain event which brought a lot of customers in at once?

Tsubasa: They are joining our campaign. For example, Christmas, summer sale, or spring sale.

Tim: Okay, so there are seasonal campaigns that bring in more?

Tsubasa: Yes.

Tim: That makes sense, the whole fashion industry revolves around that, doesn’t it?

Tsubasa: Yes.

Tim: How important is print media to fashion industry in Japan?

Tsubasa: Print media’s existence is decreasing and decreasing. Also in Japan, I think we can replace published media with our Facy because we are providing fashion article to user.

Tim: One of your major investors is Transcosmos, right? So they’ve invested in a lot of e-commerce startups throughout Asia. Are they involved in day-to-day operations in terms of logistics or advice, or are they simply an investor?

Tsubasa: Transcosmos invested a lot over EC, especially in Asia. They know conversational trend. In Asia, of course, countries is developing for now. I think there are better service created by smart phone and SNS. People in Asia usually use SNS or a message application to purchase item.

Tim: So you think it’s more just you fit into their portfolio and their vision? Okay. Getting back to Facy and the future of Facy, these individual chats between consumers and brands, do they turn into kind of trusted relationships and people building communities around specific brands, or do you try to keep it more open and fluid? I guess I’m saying, is the conversation more like Twitter or more like Facebook?

Tsubasa: Firstly, user ask their fashion needs openly to many brands but after connecting directly to a shop, they usually use messaging app, one-to-one.

Tim: So they move off your platform?

Tsubasa: Inside our platform.

Tim: Okay, okay, so you have the ability to maintain and manage those personal relationships within the platform? I guess that’s really ideal for both the brand and your platform.

Tsubasa: Yes, we have applied to one CRM platform to fashion brand because fashion brand to have their needs to manage customer relationship by our platform.

Tim: Right, right, right.

Tsubasa: Like Salesforce.

Tim: Well, I think it’s a natural transition from – so brands that have tried to establish presence on, say Facebook, for example where Facebook’s business model is the brands have to pay more and more to reach the same audience, so there’s no guarantee that you can connect with your audience on Facebook, and that’s not appealing to brands.

Tsubasa: Especially in Japan, people use Facebook by business.

Tim: Yes, that’s true. What about pictures? So everything now is text-based but are you thinking of allowing people to say upload pictures and say, “Okay, I need a pair of jeans that will go with this blouse and these shoes? Give me advice.”

Tsubasa: In our beta test, user can upload a picture, yes, but little amount of our user use uploading pictures.

Tim: So most of the users aren’t using that function yet?

Tsubasa: Yes.

Tim: Why is that? It seems like such a natural – I mean, it’s fashion. It’s visual.

Tsubasa: Yes, I think if they have picture, they can find with picture with Google.

Tim: I suppose. I mean, if they know what they’re looking for, but I think another case might be, “Here are the shoes I have and here’s the blouse. Find me a pair of pants or a pair of jeans that match it, that go with this.”

Tsubasa: I see, I see. I think communication is more important. Goal is to find a good fashion item. In some cases, communication is goal. User enjoyed communication with shop staff or other users.

Tim: So you think just the users prefer the text interface rather than uploading pictures?

Tsubasa: Most of our user don’t upload in our beta test period, but I would like to examine that.

Tim: Yes, it will be interesting to watch how people use this new function, and it may be the case as with so much new technology that a small group of people will start using it, then everyone will see it and say, “Oh, that’s how you do it,” and start copying it. What I look at this platform, today, it’s very manual. Shop owners or shop employees are reading the text and replying, they’re answering, but obviously, in the very near future, this is going to transition into – if it’s successful, it’s going to transition into chatbots and AI. Are you guys experimenting with that already or is that something you’re kind of putting off for the future?

Tsubasa: We are trying to provide our chatbot and AI sites, for example, it’s very useful to provide information what customer want to buy.

Tim: Okay. But it seems like once shops begin to use AI and chatbots, I think that’s going to change the nature of the platform. What I mean by that is, right now, the small and mid-sized stores have an advantage because they’ve got individual staff that can answer questions and are engaged, but once it becomes a matter of AI and chatbots, the companies that have the most money have to invest in the technologies. It will be interesting to see how that changes the nature of your platform.

Let’s talk a bit about Japan in general and e-commerce here. Now, one of the biggest differences I’ve noticed in Japanese e-commerce compared to the US e-commerce is, reviews are important everywhere, but I’ve noticed Japanese users are much less likely to leave reviews than are US users.

Tsubasa: In US, user can return item for free, but in Japan, users cannot return item for free. So they have to check in detail.

Tim: Okay, well, I guess that also explains why that building up of trust and the direct communication becomes so much more important to Japan.

Tsubasa: Yes. In Asia, communication is more important than Japan because information environment is not good as Japan.

Tim: Looking ahead, I think the fashion industry is fascinating to watch, at least from the sales side. What kind of innovations in the business model do you think are most interesting right now? Because I think what you’re doing is really interesting and new to the fashion space. Four or five years ago, there was a huge trend in fashion boxes and subscription services and those are mostly going away now.

Tsubasa: … and StichFix.

Tim: What other new and interesting innovations do you see in fashion retailing?

Tsubasa: I run a lot from Asia because Asian market is so huge, 50% of our fashion commerce is in Asia. In Asia, there are a lot of good service adapting to new information environment. In this era, people don’t have PC or television, or radio, but people have smart phone, and using SNS or message app everyday.

Tim: Well, it’s interesting, so what you’re saying is there’s kind of a trend towards smallness. So the big brands from the 60s who are all about creating global brands and giant showcase stores, and during the e-commerce era, it was glossy websites and lots of pretty pictures, and you’re saying maybe it’s moving more towards individual text messaging and simple interfaces?

Tsubasa: Yes. Of course, big brand like Prada or Louis Vuitton, and Uniqlo…

Tim: Uniqlo, absolutely.

Tsubasa: In China, their shop staff or their chat center to use message app, consumer can ask their own question via message app.

Tim: Looking at all of the different fashion retailers in fashion startups in Japan and Asia, and the world in general, what mistake do you see fashion startups in making the most often?

Tsubasa: In fashion market, there are big asymmetric information between users and the sellers. Most of the fashion startup fail because of this information gap.

Tim” So do you mean the brands don’t know what the customers want, or what type of information is lacking?

Tsubasa: There are not a lot of – their fashion item, five color and so on, but users don’t know. In Japan, it’s very uncommon to fault a business issue with social science. Most of Japanese company like fake science. For example, they thought Japanese apparel market is shrinking because of diversification of lifestyle or visualization. However, except for Japan, the market size is expanding although there are bigger diversification and visualization.

Tim: But you mentioned that there’s another trend that seems to be going on and maybe this is why so many brands are having trouble in the digital age, is that the fashion industry, the modern fashion industry, has always been kind of top-down. It’s been a handful of designers say, “We are setting the trends.”

Tsubasa: You are right, I totally agree with you. I think traditional brand, their business design, top-down. Their business is not designed from fashion needs of users.

Tim: Yes, I think the market itself is changing. The brands in a sense, in the global communication structure we had in the 60s up until 2000, it was a matter of setting trends and being leaders, but now, it seems the brands almost have to be followers or at least advisors, and that’s a hard transition to make.

Tsubasa: I think so too.

Tim: Alright. Well, listen, before we wrap up, I want to ask you what I called my Magic Wand question, and that is, if I give you a magic wand and I told you that you could change one thing about Japan, anything at all: the education system, the way people think about risk, the legal system, anything you wanted to, to make things better for startups in Japan. What would you change?

Tsubasa: You know, in Japan, there is a huge money market but amount of financial market to startup is limited, about 200 billion yen. Very, very small as US and China. In US, 6000 billion yen. In China, 4000 billion yen.

Tim: So you would use the magic wand just to increase the capital of available to startups?

Tsubasa: Yes.

Tim: But even if we do this, so right now the venture investments in the United States is about 75 times as large as Japan, but if we said we doubled the amount of capital available in Japan, is there enough quality startups to use that money here?

Tsubasa: I think it helps. Established people in Japan decided to take risk, decided to go startup industry. Thanks to increasing startup environment, more people decided to join startup as before, but it’s very small than US and China.

Tim: So do you think that money is needed in the early stage, the seed stage, where we just need to get more people out there starting companies or do you think that money would be better used in sort of series B, series C stage where Japanese companies need to expand their sales, maybe go internationally. Where is the biggest need now for that money?

Tsubasa: I think around IPO. Most of startups in Japan decided to IPO to –

Tim: Japanese companies do IPO way too early, I think.

Tsubasa: Yes, size of startups use about around C or D compared with US startup.

Tim: Yes, yes, a Japanese IPO is an American series B or series C.

Tsubasa: It’s not good for startups. They have a big front to expand their service toward, especially to Asia, but this financial environment is not good for their front.

Tim: Yes, I agree. I mean, it’s much easier to take big risks and make big bets as a private startup company than as a public company.

Tsubasa: Yes, and some venture capital thought their portfolio should expand into Asia but they make the example for you to do after IPO.

Tim: Yes, that actually –

Tsubasa: Before going to Asia.

Tim: That is a really interesting point and I do think that a lot of Japanese investors, particularly the traditional ones, their exit is IPO and their goal is to get the company to IPO as quickly as possible, sell their shares, and then growth comes after IPO which is kind of an odd –

Tsubasa: Yes. My friend working for a startup create their way to expand their business to Asia or world, yes, because of this program.

Tim: Oh, man.

Tsubasa: Yes, financing environment isn’t a big program to startups in Japan.

Tim: So recently there’s been a lot of foreign money coming in to Japan, both as foreign funds and foreign capital investing in Japanese funds. Is that changing things that all?

Tsubasa:  think so too but in Japan, CEO of startup can’t speak in English, it’s okay. But…

Tim: So it makes it harder to raise that kind of money from foreign investors?

Tsubasa: That makes sense because investment – I mean, there’s a lot of math behind it but a lot of it is personal. It’s a lot of trust between the founder and the investor.

Tsubasa: Yes, I think capital from abroad investing more money to Japan, I think established people comes to startup market who can speak English.

Tim: Yes. Well, I think it’s definitely a force for good. It’s changing things for the better.

Tsubasa: Yes, yes, yes.

Tim: Okay. Well, listen, I want to thank you so much for sitting down with me today. I really appreciate it.

Tsubasa: Yes, thank you so much.

And we’re back.

The fashion markets in Asia are different from those in the west. It’s possible that the reason we have not seen startups similar to Facy coming out of Europe or the US is a lack of the mid-market fashion retailers. Nearly every segment of those fashion markets are dominated by large major brands, and large companies are unlikely to experiment with unproven labor-intensive sales methods. Mid-sized companies in mid-market brands, however, are more likely to be feeling the squeeze between the large high fashion brands, the large fast fashion brands, and the large discount brands. They are the ones that are most likely and most desperate to take the financial and brand risk of letting their staff talk to customers in a new public and open forum. Of course, as chatbots and AI improve, the advantage will once again return to the large companies, but scrappy, mid-sized fashioned brands and even tiny niche brands should have a few years to really develop and thrive in this kind of platform.

The other thing that Tsubasa pointed out is something that bears repeating because it’s something that is really holding Japanese startups back, and that’s the undue focus so many Japanese startups, and more importantly, their investors tend to put on the IPO. Now, neither Tsubasa and I wanted to name names, but we both know a number of founders who were growing fast and could have easily raised another round of private funding to accelerate that growth, but because of pressure from early investors were all but forced to do an IPO.

So why would this be bad for a startup? Well, IPOs are hard. They consume a lot of the company’s time and financial resources, and they require a great deal of preparation, formal procedures, and they always place an emphasis on safe, steady revenues. Everything about the IPO process slows down a startup, and being a public company after the IPO usually greatly limits the flexibility and risk-taking of that company.

Japanese investors need to be more flexible with their portfolio companies. A Japanese IPO might provide a safe medium-term gain but there are a handful of Japanese startups that have the potential to be multibillion-dollar global players. In those cases, investors need to be willing to double down and roll the dice again.

If you’ve got an idea about selling fashion or even wearing fashion, I suppose, Tsubasa and I would love to hear from you, so come by disruptingjapan.com/show108 and let us know what you think, and when you drop by the site, you’ll see all the links and notes that Tsubasa and I talked about and much, much more in the resources section of the post, and most of all, thanks for listening, and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.