Introduction
Vipshop is a leading discount retailer that follows the discount e-commerce model. The business shows decent financial performance indicators in the third quarter of 2021 because the total net revenue has increased by 7.5% (Vipshop Reports, 2021). However, this information does not mean that Vipshop does not face any fundamental challenges or problems that prevent the organization from witnessing current or further development, overcoming competitors, and obtaining more profits.
The purpose of the paper is to overview Vipshop’s current position in the market to identify what barriers and opportunities are available. It is possible to achieve this task by covering different aspects of the business activity. That is why the given report addresses a comprehensive and multi-faceted scope. In particular, the focus is placed on market challenges, financial performance, innovation opportunities, and suitable recommendations that Vipshop can use to develop in the future.
An appropriate methodological approach is required to ensure that the report produces valuable information. A qualitative method is utilized, and the report analyzes multiple sources. Data comes from Vipshop’s official website, writing pieces created by other organizations, and scholarly papers. This fact denotes that the given report deals with credible and reliable data, while the absence of outdated sources demonstrates that the findings are timely.
The report has found a few essential conclusions and offered some practical recommendations. For example, the challenges for Vipshop are the decreased attractiveness of the products, vertical e-commerce limitations, increased competition, and insufficient innovation. However, the organization has some resources to address and overcome the identified issues. In particular, Vipshop should draw sufficient attention toward introducing technology innovations, and the efforts to offer social media promotion, improve the SEM effectiveness, optimize APP interface, and introduce VR/AR options seem appropriate. In addition to that, the grounded recommendations are to enter the U.S. market, cooperate with fashion stores, and offer luxury brands to customers. It is possible to expect that these steps can contribute to the future growth of Vipshop.
Strategic Future
Vipshop has pioneered the discount e-commerce model with “brand discount + flash sale + guarantee of genuine products” in China (vip.com). In Nov.18th 2021, the CEO Eric Shen mentioned that the Vipshop will continue to strengthen their position as leading discount retailer for brands and keep driving a solid and sustainable business growth. (Bloomberg.com) According to Vipshop’s third quarter financial statement, the total net revenue has increased by 7.5% from RMB 23.2 billion (US $3.6 billion) to RMB 24.9 billion (US $3.9 billion). (Vipshop Reports, 2021) Based on sustainable business growth, Vipshop needs to have a strong forward-looking future strategy to keep on top. David Cui, the CFO of Vipshop mentioned that the top-line growth is primarily driven by the high-value customers and improved operating efficiencies. (Vipshop Reports 2021) Therefore we summarize the future strategy of Vipshop as a word “Focused”. There are two kinds of “Focused” of Vipshop’s future strategy:
- Focused on the leading brands
- Focused on high-value and high potential core users
For the first “focused”, focused on the leading brands which means focused on high value brands to further highlight the core competitiveness of flash sale e-commerce model. According to Gao’s article, he finds out the one type of consumer on Vipshop is keen on the pursuit of the brand, consumers think that the brand can represent their own quality of life, so when shopping more inclined to choose brand goods to highlight their own identity and status (Gao, S. 2017) Vipshop will ensure the continuous supply of high quality products, and focuses on the collaborate and operation of core head brands and establishes a high quality supply system with the leading brands. Through the shortest leading brand authorization chain to ensure the quality of goods, relying on the professional fashion buyer team, supply chain ability and special sales activities to create the low-price and high-quality products.
On the other hand, the second “focused”, focused on high-value and high potential core users. Eric Shen mentioned in the third quarter conference call that they are committed to driving new customers close and have put great emphasis on recapturing active customers and more importantly become better engaged with their Super VIP members. (fool.com 2021) One of the competitive advantages of Vipshop is high adhesiveness of users, thus, Vipshop needs to continuously expand the scale of high-value and high adhesiveness users.
Challenges
As the first “flash sale” e-commerce model company in China, the total revenue of Vipshop is sustainable growth, it is a great growth in the e-commerce market in China, compare to the financial statement in 2019 to 2020, we could find that 2020 increased by 9.5% year over year to RMB101.9 billion (US$15.6 billion) from RMB93.0 billion (US $14.7 billion) in the prior year. (Vipshop reports, 2020) However, the growth of users is slow in the Vipshop. The annual active customers in JD.com has increased 29% in 2020 from the previous year (JD.com Report) and Vipshop only has 22% (Vipshop reports, 2020). The lower growth rate exposure the following challenges Vipshop is facing:
- Lower attractiveness in the product
- Limitations of vertical e-commerce
- Increased in competitors
- Less technology innovation
Lower Attractiveness in the Product
In Zhuo’s article, they mentioned the goods sold in Vipshop are difficult to meet the aesthetic taste of young people in tier one or tier two cities. (Zhuo, 2017) Although Vipshop has its own fashion buyer teams, it only could choose the style with the brand they collaborate, which caused limited style, limited new, limited demand for the users. Some products in Vipshop are the old-fashion style because the flash sale model will decrease the brand profit of the products. The target customers in Vipshop are young, and keen on fashionable females, which means they have high demand on variable, fashion, and newest clothing. The younger the girl, the higher demand for fashion. The new customers that Vipshop is willing to attract are the post-90s and post-95s and the customers from the tier one or tier two cities. However, because the products in Vipshop could not fit in their requirements, the users will shop on Vipshop at the first time and then go back to Tmall instead. That also implies the problem of high adhesiveness but a smaller number of users, the less attractiveness in the products.
Limitations of vertical e-commerce
Vipshop is a typically vertical e-commerce company, which means it only focuses on one or few product categories. Unlike JD.com and Tmall, Vipshop only focuses on clothing and cosmetics. As a vertical e-commerce business, the users are only concentrated in a very narrow product species. When people mentioned Vipshop, they could only remember the advertisement of buying clothing with a discount price rather than the other product species. This situation will bring a phenomenon that if the users have many other shopping demands, they will choose to use another e-commerce company which can satisfy their whole needs. The vertical e-commerce mode could be a huge challenge for Vipshop because users will only buy one product category in Vipshop and the other product categories will be carved up by other companies. That is the reason there is high adhesion of Vipshop users but lower rate of new users because the clothing and cosmetics is the lifelong needs of people.
Increased in Competitors
Two major competitors for Vipshop are Tmall and JD.com, and they have successfully shown why they have larger market share than Vipshop. First of all, Tmall is based under Alibaba Group, and shoppers are able to browse it via Taobao.com. One of its advantages compared to Vipshop is that Tmall has already had tremendous users from Taobao.com. Therefore, it is easy to guide existing users into differ channels like Tmall. Moreover, Tmall uses live-streaming e-commerce techniques to expose products and sales. Meanwhile, Vipshop just began to think about doing live-streaming and is a lag behind its main competitors.
Secondly, what JD.com has surpassed Vipshop is building its own logistics system and has been successful so far. Like most e-commerce companies, they prefer to integrate all the value chain together, including logistics and payment. JD.com aims to adapt Amazon’s way in logistics. That is to say, merchants under the scope of JD.com need to deliver the products to the warehouse first. Once the customers place the orders via e-commerce platform, the operators in the warehouse will package the products and go delivery immediately. Vipshop tried to do its own logistics but terminated the delivery service in November 2019. (10-K 2020) Nowadays, it relies on third parties to handle all the logistics service. However, some users criticize the delivery service as not fast enough, and the return or replacement of products is not convenient.
People nowadays always share their thoughts or opinions through social networks. Vipshop has lagged behind to do live streaming selling and those unsatisfactory experiences of shopping may hinder potential customers from shopping on Vipshop.
Less Technology Innovation
Nowadays, Vipshop still sticks to its original business model which is flash sales. However, users’ or customers’ taste has changed in the past few years, and Vipshop is too slow to react. At first, the motto of Vipshop is: deep discount, flash sales, and authenticity guarantee. This makes Vipshop pioneer into the online retailer market in China instantly and has had a positive growth rate in user base for years. However, the younger generation, or Z generation, began to be the revenue driven for the Chinese e-commerce market.
Financials
For the latest financial statements as of third quarter 2021, the gross merchandise values remain upside growth for 5% year-over-year compared to the prior period. (Vipshop’s unaudited reports, third quarter of 2021) This is because Vipshop has put more emphasis on promoting the special sales to those people doing quarantine or remote working at home. No doubt, this increases the overall gross merchandise value.
However, gross profit decreases slightly and total orders remain flat for the third quarter. Since the business model of Vipshop is a discount e-commerce retailer, the gross profit stays at a reasonable range. That means Vipshop uses the penetration pricing strategy to assail e-commerce market share in China. If the product price increases, then there is no incentive for customers to shop. The only way to boost profit is to enhance total orders. Nevertheless, the total orders stay flat as of third quarter 2021. This tells something the management team should be aware of.
Vipshop may spend too much in marketing expense, and this may be an indistinct problem. As of the third quarter of 2021, the number of total orders is 172.9 million that remains flat to 172.8 million in the prior year period. (Vipshop’s unaudited reports, third quarter 2021) As a percentage of total revenue, the marketing expense accounts for 5% in 3Q21. However, the percentage of marketing expense to total revenue was just 4.5% for the second quarter of 2021, and the numbers of total orders increased 30 percent at the same time. That is to say, Vipshop has been spending even more money in marketing, but the consequence does not meet the expectation.
Changes for Vipshop are needed urgently. Current capital structure, 9.83 times, is solid and stable although operating cash flow generated from operating activities for third quarter is negative $261 million. The stock price has plunged from $45 per share this March to $9 per share now. No doubt, the analysts do not buy Vipshop’s model anymore, and they have already downgraded its target price. Therefore, we expect team management may do something different related to just being a discount retailer.
Likelihood of long-term success
On November 18, Vipshop announced its third-quarter 2021 financial results. According to its report, total net revenue for the third quarter of 2021 increased by 7.5% year over year to RMB24.9 billion (US$3.9 billion) from RMB23.2 billion in the prior-year period(Vip.com, 2021). It is worth noting that this is the 36th consecutive quarter that Vipshop has been profitable.
In recent years, China’s e-commerce market has entered a period of rapid development, with the competitive landscape of e-commerce becoming more complex. Therefore, Vipshop can maintain such achievements, on the one hand, demonstrating that it has potential for long-term success. On the other hand, it shows that Vipshop has substantial business competitive advantages in the special sales e-commerce field.
First, the number of Vipshop’s users is growing faster, and it has a high repurchase rate of users. The company’s annual report for 2020 shows that the number of active users of Vipshop reached 83.9 million, a significant increase from 2018 and 2019. In addition, the number of repurchased users reached 68.2 million in 2020, accounting for 81.3% of total active users. The percentage of repeat orders also reached 97.7%. (Vip.com, 2020) The high user stickiness ensures the sustainability and stability of Vipshop’s traffic. This feature is also a guarantee of the company’s profitability.
Second, Vipshop continues to improve the stickiness of its stock of users and activate the growth of new users. For super VIP customers, Vipshop will not only provide discounts within its platform but also join hands with other platforms such as Tencent, Aiqiyi, and other top video sites to carry out activities so that VIP members can further feel the consumption bonus. In addition, Vipshop also actively introduces new marketing methods such as new customer coupons to effectively activate new customer growth.
Third, Vipshop adjusted its operation strategy and strengthened in-depth cooperation with brands. Vipshop makes full use of its platform advantages, achieving rapid flow of goods and significantly improving the sales efficiency of brand goods by tilting traffic and providing high exposure of operation resources. For example, on the eve of the National Day in 2021, Vipshop found through analysis that users’ demand for outdoor apparel brands had increased significantly. Therefore, it quickly strengthened the special sale cooperation with famous outdoor professional brands such as TOREAD, PELLIOT, and Marmot, which led to a 75%, 106%, and 94% jump in sales for the brands, respectively. (Chen, 2021) Such a strategy not only met the needs of the majority of users, but also created higher sales performance and efficiency in the flow of goods for well-known brands.
In summary, as the e-commerce industry ushers in a period of high-quality development, if Vipshop can fully integrate its branding strategy with its special sale model and maintain its steady user growth, it will further enhance its dominance in the special sale market and continue to consolidate its leadership position.
Technology Innovations
Technology and data have become a hot resource for all industries to pursue in today’s world. How to use technological innovation to improve product appeal and optimize user shopping experience is especially important for Vipshop to explore at present.
Enhance the Promotion Efforts of Social Media
Currently, Vipshop has a single way to present its products, and although it has live-streaming, it is mostly set up by the brands themselves, displaying a single range of products and lacking fluency in user browsing experience. Therefore, Vipshop can strengthen its marketing efforts in social media, for example, establishing a strategic partnership with Weibo and using its resources to accelerate the construction of social e-commerce channels. Meanwhile, Vipshop can increase the live broadcast of celebrities or influencers who can introduce the information of products in a comprehensive manner and attract users with dress-up or make-up display. This way can improve product recommendation ability and increase website traffic.
Improve the Effectiveness of SEM
In order to further improve the effectiveness of Vipshop’s search engine marketing, the SEM effect of Vipshop should be enhanced through a combination of search engine optimization (SEO) and paid ranking. First of all, we should optimize the whole website and select some common keywords in the current period according to brand data, product data, and user data. These keywords can appear in the top positions of major search engine websites. Then we develop precise keywords and excellent creative content to bring more potential users’ clicks and attention to Vipshop and enhance the brand awareness.
APP Interface Optimization
With the expansion of APP, Vipshop should pay more attention to the design of the APP interface. In the design of the page sorting and filtering interface, it can be combined with big data to automatically generate the respective brand sorting for users, prompting them to find their favorite brands in the first place. Besides, the sorting options of collection, the number of comments, and reputation can also be added to enhance the possibility of users buying products. As a result, the design of APP will become more user-friendly and get more customers’ love.
Introducing VR/AR to APP
Vipshop can increase its investment in VR and AR to bring a new shopping experience to users. When users want to buy products such as home appliances, the application of VR/AR shows the products directly in real space, making customers have a more intuitive understanding of the products. Also, VR/AR technology allows consumers to visualize wear. For example, when consumers see the virtual clothes on their body, the authenticity of shopping will be significantly increased, and they will also understand Whether the product is suitable, which will also improve its products’ attractiveness.
Feasible Proposal
Entering the U.S. Market
According to Vipshop’s financial report, Vipshop is in a good position to penetrate the American market. To begin with, no one is uninterested in the things they enjoy that are on sale. And the United States has outlet stores, a large discount mall, years earlier than China, which means that most Americans like to go to outlet stores for shopping, and that’s the reason why outlet stores are so hot still today. Therefore, if we apply the offline outlet model to the online App model and bring Vipshop, an online outlet, to the American group, the result is bound to be unprecedentedly good. Second, Vipshop’s primary target brands are not high-end labels. Most of them focus on the second and third-tier brands for sale. The equivalent of American brands is Gap, American Eagle, Hollister, Columbia, etc. Despite the fact that these brands will be sold during the holidays, Vipshop can obtain discounts for these brands everyday thanks to a huge number of specials and will get even greater discounts if you buy at specified periods. This is a convenient thing for the American group obviously. As a result, as long as Vipshop HQ is confident and advertises locally in the United States, the Vipshop App will be able to attract a large number of US users and reach the second financial peak.
Cooperate with Fashion Stores to attract Chinese Top Tier Cities Market
We also know that Vipshop will mostly sell second- and third-tier brands, but this does not appeal to first-tier city residents. Young people in first-tier cities are constantly on the lookout for new and trendy things. Simultaneously, this young group is quite substantial. As a result, significant product changes are required to entice this youthful demographic to utilize Vipshop. For example, we can cooperate with fashion stores to market hot products from their stores to young people. Many distinct original brands and retro things are sold in the so-called fashion stores here. Because young people enjoy going shopping and looking for things that match their personal style. As a result, if Vipshop collaborates with the fashion store, a big number of young people will be attracted to purchase, and their information transmission speed will be considerably faster than that of middle-aged individuals. They will utilize social media to publish information about what to wear today, tag brands, and where to buy, accelerating Vipshop’s brand penetration and allowing the company to establish a presence in first-tier cities.
Bring in Luxury Brands
From the current products, Vipshop has been very comprehensive, including men’s clothing, women’s clothing, beauty makeup, shoes and bags, sports, home appliances, food, accessories, home furnishings, moms and babies, and so on. The entry of premium labels such as Gucci, Prada, Loewe, and others is the only thing that can be improved. It is vital to suitably widen an e-commerce platform’s own channels in order for it to develop. Although expanding high-end brands will be difficult, it will attract more consumer groups and enhance Vipshop’s image.
Conclusion
In general, Vipshop is focused on long-term strategic planning, such as creating a leading brand and identifying high-sticky core users. Even now, there are numerous obstacles to overcome: a lack of technological innovation, the recent rise of competitive enterprises, and insufficient product activity. Of course, we’ve seen that Vipshop’s total revenue continues to be profitable. As a result, we predict that Vipshop will make technological advancements such as forming strategic partnerships with other social platforms, updating search engines and app optimization, and improving VR/AR delivery. Furthermore, we recommend that Vipshop penetrate the US market, grow its user base, and raise brand recognition; collaborate with local fashion businesses to attract the first-tier Chinese market; and bring luxury products to appeal to a wider range of consumers. At last, we hope Vipshop can beat all the challenges and succeed globally.
Reference
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