A business built on refunds

Chen: dressed for success

Zappos, the American online shoe retailer, grabbed headlines in 2009 when it was sold to Amazon.com for $847 million in cash and stock. Jeff Bezos, Amazon’s chief executive, said at the time: “I get all weak-kneed when I see a customer-obsessed company.”

Perhaps that explains why Bezos had previously bought Joyo, a Chinese internet book retailer, from Chen Nian in 2004.

Chen also has a reputation for focusing on customer service. At the time Joyo was the only internet retailer to deliver its packages in protective cardboard containers, to prevent items being damaged in transit. It was also the first to introduce free shipping in Beijing for orders over Rmb30 ($4.5).

But why did Chen sell Joyo to Amazon? According to Sherman So, the author of Red Wired: China’s Internet Revolution, Chen wanted out of online bookselling because the margin was too low.

“When I was at Joyo, our gross margin [for selling books] was only 5-10%,” says Chen. “And we needed about 30% to cover the cost of marketing, logistics and administration overheads. So, it was very hard for us to break even, although we were already the largest online book retailer in China.”

So in 2007, Chen tried something different, founding Vancl, an online clothing retailer. The plan was to seize business from catalogue shopping and traditional retail outlets, especially in more rural areas. The company, which sells inexpensive casual wear, has grown quickly, with sales jumping to Rmb2 billion in just three years. It now ranks fifth behind Taobao Mall, 360buy, Joyo Amazon (renamed after Amazon bought Joyo) and Dangdang in online transaction volumes, says iResearch, an internet research firm.

And it’s about to get bigger. Vancl announced last week that it is planning what could become China’s largest internet IPO to date, aiming to raise up to $1 billion in a US listing in the fourth quarter of this year. That would top social networking site Renren, which raised $855 million in May.

Vancl also has a reputation for customer service, most famously its “live try on” offer which allows customers to check newly-arrived purchases for fit. If they’re not sure, customers can simply hand the items back to the delivery man.

There’s also the no-questions-asked returns policy in which customers are given the right to return clothing long after initial purchase. This unconditional return is a bold move, as it has required a reworking of the supply chain to accept clothes that may have been previously worn, as well as to process the associated refunds.

It also sounds like something of a teenage girl’s dream – an invitation to establish a wear-once-and-return wardrobe.

Chen admits the commitment increases Vancl’s operating costs by at least 7% but believes that it has helped the company to win over loyal shoppers and build brand recognition.

Speaking to author Jin Cuodal, Chen also expressed confidence that most of Vancl’s customers won’t take advantage of the returns policy. “Customers purchase our products because they like them,” he said. “And if they like them why would they return the items for no reason? They will only return the products because they are not satisfied with the quality. So I think if you are confident about the quality of the products you are selling then you don’t have to worry about a flood of returns.”

Chen says he expects Vancl sales to triple this year, reaching Rmb6 billion, and he’s hopeful that this will mean the company is turning a profit by 2012.

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