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Social seller Yunji on the verge of a Nasdaq IPO

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Alibaba’s founder Jack Ma once compared his company to a crocodile in the Yangtze River. He wanted to distinguish it from Ebay, which he had likened to a shark in the ocean. The predatory implications were clear. But the Yangtze is the third longest river in the world: there was always going to be room for other species.

Less than a year after e-retailer Pinduoduo’s $1.6 billion flotation (its shares popped 39% on its debut on Nasdaq), another challenger to Alibaba’s crown is trying to tap the US market this month for as much as $200 million in funding.

Known as Yunji Weidian locally, the five year-old firm has earned investor attention with its pretty stupendous sales performance in the last two years. Revenue multiplied nine times to Rmb13.02 billion ($1.89 billion) between 2016 and 2018. This represented its cut of gross merchandise volume (GMV) of Rmb22.7 billion sold on its platform. That 11 times leap in GMV helped narrow its net losses by nearly 47% to Rmb56.3 million last year.

Yunji’s growth resembles that of Pinduoduo (see WiC404), whose topline revenues rose more than six times on the year to Rmb13.12 billion in 2018, while its GMV trebled to Rmb471.6 billion.

Both firms hail from the e-commerce crucible of Hangzhou and position themselves as e-marketplaces that thrive because of social media.

While Pinduoduo makes the majority of its money from advertising fees from merchants, Yunji earns its crust partly by charging its users. It provides benefits and discounts to its community of fee-paying members and also rewards them for recruiting new members and generating sales.

Its proprietary micro-stores (or weidian) can only opened through invitations or referrals from Yunji members. (Nearly 82% of its 7.4 million members were actively trading goods on the platform as of the end of 2018.)

Yunji acknowledged in its prospectus that it started out with pyramid selling but says that its model has now evolved. “Normally there are four actors in a sales process, namely endorser (for building trust in the product), media (for educating buyers), dealers (for distributing the product), and retailer (for reaching customers),” its founder Xiao Shanglue told Wallstreet.cn. “Yunji is different in a sense that all vendors play multiple roles as endorser, media and distributor, while Yunji provides the back-end services.”

The sellers in Yunji’s stores don’t hold inventory or take care of deliveries themselves, focusing more on promoting their products on WeChat to their circle of friends.

“Yunji takes a 10-15% cut on the income for providing logistics support such as traffic management, customer services and inventory; while vendors take 20%,” Xiao added.

The implication is that the ‘supply-to-business-to-customer’ (or S2B2C) model creates bargains. However, it also strays into multi-level marketing – the kind of territory that make the authorities anxious.

Yunji hopes to fetch a valuation of between $7 billion and $10 billion in its upcoming IPO, Reuters reports, although its early investors have had to ride out the risks of a regulatory backlash over the way that Yunji does some of its business.

In 2017 Yunji was fined Rmb9.6 million (including the confiscation of income that was perceived as illicit) for pyramid selling. The firm subsequently revamped its marketing strategy. Instead of incentivising its salespeople, or vendors, with direct financial rewards, it pays them with virtual Yun-coins, which aren’t redeemable for cash and can only be used as credits for future purchases.

Yunji says it has received verbal assurances from the authorities in Hangzhou that it hadn’t breached pyramid scheme regulations as of December 2018.

But it also says in its prospectus that there is no assurance that its business model will be compliant with the country’s laws, regulations or policies in the future.

Another risk factor: Yunji sells goods from 1,369 suppliers but its prospectus adds it cannot guarantee that none of the merchandise is counterfeit.


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