What was the best performing foreign company to go public in the US last year? You may be surprised to learn it was Vipshop. More eye-opening still: it achieved this feat even though its share price actually dropped 15% on its first day of trading in New York last March.
After that shaky start, its stock went on a rip. The Chinese company, which only raised $71.5 million in its IPO out of a hoped-for $117 million, saw its shares surge 174% to $17.84 by the end of last year, leading Bloomberg to declare it the best IPO rally of 2012.
And there’s seemingly no stopping it this year, either. It was trading at $25.19 as of this Tuesday, almost quadrupling its IPO price. That gives it a market capitalisation almost four times that of better-known Dangdang, the internet bookseller that went public in 2010.
Based in Guangzhou, Vipshop bills itself as China’s leading online discount retailer. It offers brand name fashion goods via online “flash sales” or deeply discounted offers valid for only a limited period (often stretching across several days). It’s a business model made popular by Gilt, the US flash sale site, but Vipshop says it now carries more than 5,000 labels, ranging from Nike to Calvin Klein.
At the time of its IPO analysts were worried that Vipshop, like many internet start-ups, was strong on growth but weak on profit. Indeed, there were reasons to be concerned. While revenues surged sevenfold in 2011 to $227.1 million, net losses widened to $107.3 million from $8.4 million in 2010.
But the company narrowed the gap quickly last year, doubling sales to $630 million and showing positive adjusted net income in the third quarter for the first time since the business started in 2008.
That’s no small feat given that Dangdang recorded Rmb320 million ($51.3 million) in losses in the same period. Similarly, 360buy, one of the most successful e-commerce stories in China, is reckoned to have lost Rmb2 billion in 2012, according to Money Week (360buy isn’t listed).
When a reporter at Money Week asked Vipshop’s chief executive Shen Ya if he felt vindicated about the surge in the company stock, Shen was nonchalance personified: “This is only normal. When we went public our stock was being underestimated. Up or down it’s just a number, I’m not too hung up about that.”
The road to profitability was hardly straightforward. Initially Vipshop adopted a business model similar to Gilt, which sells primarily luxury designer products. But it quickly found out that the luxury goods market in China was not mature enough to generate sustained demand and the site received insufficient orders.
So Vipshop changed tack, focusing on mid-tier brands that appeal more to the mass market. The timing was also good. In 2008 many designer labels were struggling with excess inventory amid weak consumer sentiment in the US and Europe. They eagerly shovelled unsold goods to Vipshop, says 21CN Business Herald. The site had little inventory risk because products that weren’t sold could be returned to vendors too.
The business model also tapped into the Chinese obsession for bargain hunting. As sales are limited-time only offers, customers feel pressure to purchase as they know they are shopping against the clock, Shen also told Money Week.
Perhaps more importantly, Vipshop tapped customers in China’s second and third-tier cities that have decent purchasing power but less exposure to foreign brands. In fact, Shen says these cities contribute over 60% of its sales. Sales from trendsetter cities like Beijing, Shanghai, Shenzhen and Guangzhou accounted for just 13% of revenues, while fourth-tier cities contributed the rest.
The company now has 1.5 million active customers, and processes 10,000 transactions a day.
But Vipshop’s success has roused competition. 360buy recently launched its own flash sale site. But Shen reckons that his new rival doesn’t have the merchandising expertise to threaten Vipshop’s lead. “Selling apparel is different from selling a TV. If you want to buy a TV it doesn’t matter whether you buy it from 360buy or Suning,” Shen warned. “But apparel is different. If the style doesn’t look good no matter how much discount you give, no one is going to wear it.”
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