China Consumer

Out of fashion

Online clothes retailer Vancl struggles to regain its mojo

VANCL CHINA

Not currently dressed for success: Chen Nian

Lei Jun may be an expert when it comes to smartphones but he says he understands e-commerce, too. The chief executive and founder of Xiaomi discussed the sector for more than 60 hours recently with Chen Nian, who runs Vancl, the online apparel retailer.

Lei – who is also a substantial investor in Vancl – told Chen flatly that his company’s products lacked appeal. Then he proposed some broader strategic moves to refocus the online retailer, even offering his time personally as a consultant.

It remains to be seen whether Chen will take up his offer. But what’s clear is that all is not well at Vancl. The internet apparel company, which aims to be Zara and Amazon rolled into one, has been the subject of negative media coverage since August. Reports claim that it has been delaying payments to suppliers, says the New Financial Observer, while some of the company’s creditors have taken to weibo to voice their discontent. One particularly disgruntled party threatened suicide at Vancl’s office building.

The company has sought to clarify the situation. One insider told Southern Weekend that Vancl was late in paying its bills but that all the debts had now been settled. Chen admitted that Vancl went through a dark period late last year, but said it is now on the mend. To that end, it has moved its head offices from Beijing’s CBD area to Yizhuang, a cheaper district. It has also cut staff numbers from 11,000 at its peak to the current 3,000.

So what went wrong? When WiC first profiled the company in 2011, Vancl was riding high. Revenues were growing fast and it was talking about raising $1 billion in a New York initial public offering. However, the listing fizzled as investor sentiment turned sour on promising but money-losing Chinese internet firms.

Two years on, Vancl is further away than ever from a blowout IPO. The company has continued to bleed cash while sales have tapered off. Vancl says it isn’t confident that revenues this year will surpass last year’s sales of Rmb5 billion ($820 million). And that can’t be blamed on wider problems in the online shopping industry. In the second quarter Vancl’s much larger rival Alibaba grew revenue by 61% from a year ago.

One reason Vancl is struggling is because competition has become more intense. E-commerce rivals like 360Buy and Alibaba now count clothing as one of their biggest sellers among their broader product lines. But Vancl has made some operational mistakes too. To challenge its larger rivals, Chen decided that Vancl needed to expand faster. To that end, it boosted its inventories and spent heavily on advertising. It also added new product lines, selling make-up and tampons. And taking a cue from Alibaba’s hugely successful TMall, it launched V+, an e-commerce platform for third party sellers.

But the anticipated demand didn’t materialise. That left warehouses stuffed with unsold goods, forcing discounted sales. Vancl’s inventory expense soared to Rmb1.4 billion by the end of 2011 and the company incurred a total loss of nearly Rmb600 million.

The company’s critics say it lacks a distinct identity. “Vancl has a strategy: whoever makes money, whoever can raise funds, Vancl will copy,” says Tencent Technology, a portal. “The company has developed a brand. But it’s a brand no one can pinpoint.”

Mao Ajing at Analysys concurs: “Vancl’s biggest problem is that it often hovers between being a branded retailer and developing an e-commerce platform. Its indecisiveness and vague positioning have led to its failure today,” she told Shenzhen Daily.

Hence the latest effort to refocus on a new strategy. According to Chen, Vancl will emulate Lei Jun’s model at Xiaomi, which focuses on a simple and attractive product range of continuously improving quality. Chen also told Southern Weekend that he is rereading a book about the success of the Japanese casual apparel brand Uniqlo and how it also produces quality products so consistently.

Chen may be too late in hoping to reinvent the company. “I really don’t see too much hope for Vancl, which is probably running low on cash and could soon get cut off by its suppliers. All that said, I would expect we will see Vancl either close up shop or get purchased within the next year, with the former outcome more likely,” says Doug Young, author of Young’s China Biz Blog.

Yet Uniqlo has also had to survive more troubled times in China. When it opened its first two stores in Beijing in 2005, it was forced to close them within a year. With little experience outside Japan, its parent Fast Retailing admitted that it had misread the market by lowering the quality of its products to make them more affordable. Business only started to pick up when the company raised its prices and focused on making higher quality casual wear.

Since then Uniqlo has become much more popular among Chinese urbanites. In fact, the Japanese firm is set to open a new flagship store covering 8,000 square metres in a bustling area in Shanghai. The new outlet is even larger than its Tokyo equivalent and will be the largest in Uniqlo’s retail network, says China Entrepreneur. Fast Retailing plans to open at least 1,000 Uniqlo stores in China by 2020 with a sales target of $11 billion.


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