Vipshop Sputters, But Stays Focused on Brand-Name Discounts

Key takeaways:

• After years of steady growth, Vipshop posted a rare 5% revenue decline in its latest quarter, with profit down by an even sharper 42%
• The discount e-commerce company has rolled out a series of initiatives to jumpstart growth, including trying to convert more users into VIP members

By Trevor MO

The word “focus” might best describe e-commerce stalwart Vipshop Holdings Ltd. VIPS, which has survived for 14 years in the cutthroat sector despite being far less well-known than giants like Alibaba BABA and JD.com JD. Its early strategic focus on the discount market has allowed it to find a comfortable – and even profitable – niche in China’s rapidly changing Chinese e-commerce landscape.

But it hasn’t been easy, and the company’s latest quarterly results show its strong momentum of the past may be losing steam.

Vipshop has managed to not only survive but also thrive, even as dozens of peers have come and gone over the past decade, by staying laser focused on discounted branded goods. The company is also notable for earning profits in every quarter since 2013, a year after its New York IPO, setting it apart from many other players in an industry that is notoriously profit-challenged.   

It easily continued its profit streak in the three months through December, posting net income of 1.4 billion yuan ($222 million). But the figure was down by 42% from the same period a year earlier. The company’s revenue for the quarter also fell, though by a milder 5% year-on-year, to 34.1 billion yuan, the report released last week showed.

In another troublesome sign, the company’s number of active users – defined as those completing at least one purchase on its platform in the reporting period – also fell by 3.8 million to 49.2 million during the quarter.

The slowdown sent Vipshop investors scurrying for the door, sending the stock down by about 12% to close at $8.48 on Wednesday after the earnings were released. The shares edged up slightly in the next two trading days, closing at $9.05 on Friday.

We’ll examine the reasons behind the company’s recent business slump in more detail shortly, as well as what it is doing to try to turn the situation around. But first we’ll take a closer look at the company’s history and its business model, as well as some of its direct competitors.

As one of China’s oldest discount retailing specialists, Vipshop buys excess inventory from brands and sells it at a discount, similar to the “outlets” model used by traditional brick-and-mortar retailers. At the time of its founding in 2008, the company was the first to use such a business model to connect consumers with brands looking to unload excess inventory.

The company found quick success in that model, and listed in the U.S. just four years after its inception. As investors discovered the company, its stock surged more than 40-fold from their IPO price in their first three years. They’ve given back much of that in the last year, though they still remain about 14 times their IPO price, giving the company a $6 billion market cap.

In terms of valuation, Vipshop currently trades at a relatively low price-to-earnings(P/E) ratio of 8.5 based on its earnings for the past year. That’s far less than the 28 P/E ratio for both Alibaba and JD.com, whose shares, like Vipshop’s, are all down dramatically over the last 52 weeks.

Steady stream of rivals

In the earlier years after its initial success, a steady series of imitators sprung up attempting to imitate Vipshop, including names such as Fclub, Jumei, Mogujie and Juanpi. Most of those have either vanished or are struggling now, highlighting the intense competition.

Vipshop remained the leader in its space, though it faces more competition from a newer generation of rivals including Shanghai-based Aikucun and Hangzhou-based Haoyiku. It also competes directly with titans Alibaba, JD.com and Pinduoduo PDD, which have all plowed resources into the area in a bid for a slice of pie.

The company’s latest sluggishness owed to two major factors, according to Vipshop co-founder Shen Ya, who also uses the name Eric Shen. One was outbreaks of Covid-19 in cities such as Beijing, Shanghai and Hangzhou, which led to the imposition of anti-pandemic restrictions that disrupted logistic services. The other was warmer weather that dampened demand for winter clothing, Shen said on the company’s latest earnings call.

Executives at Vipshop have laid out plans on multiple fronts to try to jumpstart its growth. Those reflect a relatively cautious company at a more mature level of development. 

That cautiousness is playing out in Vipshop’s user acquisition strategy, which now centers on retaining current users rather than spending heavily to acquire new ones. “In the past, we tend to see it takes longer time for us to recover the spend on new customers, so we do less,” Shen said.

Instead of trying to expand its user base, the company is emphasizing squeezing more money out of existing users by turning them into “super VIP” members, which totaled 6 million at the end of last year. Those users enjoy benefits such as free return shipping with an annual payment. They usually spend more on its platform, with an annual average revenue per user (ARPU) eight times non-VIP members, according to the company.

Vipshop is also trying to increase the variety of products on its platform. The company, which has long focused on apparel and related products, is set to introduce new categories, especially cosmetics, according to Shen.

Apparel-related products usually carry higher margins than other consumer goods, and Vipshop’s longtime focus on that category explains its ability to maintain gross profit margin at a relatively high level of around 20%. Its expansion into lower-margin categories runs the risk of dragging down its overall gross profit margin, a negative the company hopes to offset by improving customer “stickiness” on its platform.

Finally, Vipshop will continue its strategy of expanding its offline footprint. That tactic saw it pay 2.9 billion yuan in 2019 for Shan Shan Outlets, a leading operator of brick-and-mortar outlet stores based in east China’s Zhejiang province.

Vipshop currently operates at least 10 offline outlets under the independent Shan Shan brand, according to the corporation information registration site Tianyancha. It plans to add two to three offline outlets each year “to capture the increasing consumer demand offline,” according to Shen.

At the end of day, Vipshop’s strategic focus on discount e-commerce may still be its secret sauce for continued success, despite its recent slowdown. That market is still quite large and growing, with market research firm iResearch estimating sales exceeded 1.6 trillion yuan in 2021.

Vipshop’s myriad initiatives all appear to be in line with its focus on discounted brand-name merchandise. That shows it understands the importance of doing what it knows best, and avoiding the kind of excessive expansion without boundaries that is common in China and often ends up relegating companies out of existence.