The survival strategy of Vipshops' "small and beautiful" | Insight Research

Vipshops, known as the "online outlet," has shown outstanding performance.

While other vertical e-commerce platforms are still struggling, Vipshops has been profitable for 11 consecutive years since achieving profitability in the third quarter of 2012.

The latest financial report shows that in the 2023 fiscal year, Vipshops' net profit attributable to common shareholders was 8.117 billion yuan, a year-on-year increase of 28.86%, with operating income of 112.856 billion yuan, a year-on-year increase of 9.41%. In the fourth quarter, the company's operating income was 34.674 billion yuan, a year-on-year increase of 9.18%. Net profit attributable to common shareholders was 2.952 billion yuan, a year-on-year increase of 32.16%.

Referred to as the "silent wealth creator" by outsiders, Vipshops has cleverly avoided the "heavy subsidy areas" such as white-label goods and 3C categories where industry giants compete fiercely. While others are caught up in fierce battles, Vipshops focuses on its "brand discounts," accumulating a considerable number of highly loyal customers and enjoying prosperous days.

However, compared to comprehensive e-commerce platforms, vertical e-commerce platforms have limitations in terms of categories, scale, and resources. Can Vipshops continue to meet market expectations by persisting in being "small yet beautiful"?

The Victory of "Outlets"

When it comes to Vipshops, many consumers still associate it with being "niche" and the choice for price-sensitive users. Indeed, in the midst of competition from e-commerce giants, the presence of Vipshops, a vertical e-commerce platform, seems to be diminishing. However, this does not mean that Vipshops has lost its place in the market.

On the contrary, by sticking to the "small yet beautiful" strategy, Vipshops has maintained profitability for many years and is now experiencing a better moment in the era of cost-effectiveness.

Throughout 2023, Vipshops' Gross Merchandise Volume (GMV) exceeded 200 billion yuan, with a growth rate of 18.7%. In the fourth quarter, Vipshops' GMV growth was quite impressive, reaching 66.4 billion yuan, a year-on-year growth rate of 22%, far exceeding market expectations of around 62 billion yuan and a growth rate of about 14%. This growth also significantly outperformed the 7.3% growth in the overall online retail market in the fourth quarter and the single-digit growth of traditional industry giants.

Despite the boost from the winter cold wave promoting winter clothing sales and the higher average order value of winter clothing, such growth is still remarkable.

(In the fourth quarter, the growth rate of GMV exceeded the growth rate of orders, mainly due to the increase in average order value, data source: wind) Not only did the "online outlets" performance exceed expectations, but the "offline outlets" did as well. Last year, the offline outlets created a revenue of over 160 billion, surpassing any previous year.

This is also the consumption level that the outlet model has never reached in China in the past 10 years. One reason is the limited variety of goods, and "brand discounts" have always been in a relatively niche market. Another reason is that consumers who purchase high-priced major brands are not necessarily seeking discounts.

With the changing consumer environment and mindset, although people are increasingly demanding cheaper prices, the need for both price and brand pursuit still exists. This group of customers is highly loyal and sticky. According to Vipshop's disclosure, in the fourth quarter, the growth of super VIP members increased by 14% year-on-year, with over 7.6 million active super VIP members contributing 46% of the annual online shopping expenditure.

Providing better return and exchange services is a key factor in attracting users to upgrade to super VIP status. When clothes or shoes don't fit, SF Express can deliver the right size the next day for a direct exchange. In addition, within the validity period, SVIP members can enjoy unlimited free shipping. Although this has led to a higher return rate (over 30%), resulting in a gap between the 9% total revenue growth and over 20% GMV growth in the fourth quarter, it still exceeded the expected 5%.

A consumer on Xiaohongshu who deleted Vipshop due to "quitting" also proves from another perspective the "user-friendly" and "high stickiness" of Vipshop.

Last year, the per capita consumption of SVIP members was over 8 times that of non-VIP members.

Vipshop's Survival Strategy of "Small and Beautiful"

What has enabled Vipshop not only to survive in the midst of adversity but also to thrive?

• One of the survival rules of "small and beautiful": Not competing with giants, focusing on their own business

The CEO of Vipshop emphasized a key data point at the performance meeting, "In Q4, wearables once again became a greater driving force, with GMV growing by 29% year-on-year; looking at the whole year, the performance of wearables has always been better than the industry average, growing by 24% compared to the same period last year."

(Almost 50% of Vipshop's clothing, footwear, and bags category, data source: CMB Securities)

Why do wearable products shine on Vipshop, far exceeding categories such as home products and household appliances and electronics? This is mainly because platforms like Tmall and JD, which are "big and comprehensive" e-commerce platforms, have a larger variety of SKUs, offering a wide range of household items for consumers to feel a stronger sense of "selection". JD is particularly important for consumer electronics brands, which are usually the "hardest-hit areas" for platform subsidies. However, Vipshops cleverly avoids this area and has achieved significant growth with the recovery of the clothing industry.

Moreover, in the consumer environment where cost-effectiveness is pursued, people are becoming more "willing to go the extra mile". Compared to "one-stop shopping" on comprehensive e-commerce platforms, they prefer to compare and make precise purchases on multiple apps. Therefore, the decentralized consumption trend of "Taobao for daily necessities, Pinduoduo for groceries, JD for electronics, and Vipshops for clothing and shoes" is becoming a trend.

• "Survival Rule of Being Small and Beautiful" No.2: Choose the right track and stick to what you are good at

As one of the few vertical e-commerce platforms that have made it, Vipshops can prove from historical experience another fact: compared to vertical fields like beauty and 3C, the clothing category is more suitable for the survival of intermediaries. For example, Jumei, which focuses on cosmetics, has been delisted from the NYSE; the luxury shopping platform Secoo's stock price is less than $1, facing delisting risks at any time.

This is because the characteristics of highly diversified and continuously competitive clothing brands make the brand's influence relatively low in the market. At the same time, clothing brands are easily influenced by seasonal and fashion trends. Many brands use a futures ordering system, where products are determined a year in advance, produced and stocked a few months before. Such large-scale production and procurement in advance may lead to inventory backlog due to changes in market demand or fashion trends.

Based on this, intermediaries that can help brands clear out excess inventory through discounts can thrive in the market.

However, as brands gradually recognize the value of clearance sales, they naturally tend to build their own clearance business to "reduce the profit margins of intermediaries". Therefore, for intermediaries like Vipshops, their survival space is being squeezed.

Currently, well-known brands such as Nike, Li-Ning, Anta, Coach, etc., have successively launched their own outlet stores, mainly selling out-of-season and discounted clothing, and actively exploring the C2M model of selling based on orders to minimize inventory.

However, the industry consensus is that big brands will still sell regular-priced and discounted products through different channels and platforms, effectively differentiating between different consumer groups and platforms through SKU management. For example, clothing brands can offer exclusive styles on their own platforms; Maotai can differentiate between banquet and personal consumption needs through 500ml and 100ml*5.

Vipshops' team introduced over 1,500 new brands last year, covering more fashion and high-end brands. According to Vipshops, these brands have rapidly increased their sales using Vipshops' platform and promotional activities.

How far can the "Small and Beautiful" path go for Vipshops?

In the "Small and Beautiful" business model, Vipshops has found its foothold. However, this "Small and Beautiful" model is often criticized in the market for lacking imagination. Vipshops once tried to transform into a comprehensive e-commerce platform. For example, at the end of 2013, they focused on revamping their model, establishing their own logistics brand Jun Express, and expanding into categories like electronics, maternity, and beauty products. However, the response was mediocre, leading to a significant loss of long-term customers who were attracted to the "flash sale" concept. This caused Vipshops' market value to plummet to $3.7 billion in 2018, evaporating $10 billion within a year.

It wasn't until July 2018 when Vipshops' Chairman and CEO, Shen Ya, announced a return to the flash sale strategy, focusing on what they have always been best at.

Despite attempts to venture into luxury brands like LV and Gucci to elevate their brand image, Vipshops found that their audience for clearance and out-of-season items did not align with luxury brand consumers.

Vipshops shifted its focus to cost-cutting.

In order to streamline processes and reduce costs, Vipshops introduced the "JITX" model. Brands now directly ship products to customers through Vipshops' designated logistics partners, reducing the manpower and turnover pressure on self-operated warehouses, achieving a certain level of asset-light operation.

From a cost perspective, Vipshops continues to tighten its belt. This quarter, the marketing expense ratio decreased significantly by 20% YoY to 2.4%, with actual spending of $840 million, significantly lower than the market's expected $1.1 billion. At the same time, the R&D expense ratio decreased by 0.7% YoY to 1.4%, contributing to profit growth.

However, Vipshops also revealed its intention to increase some marketing expenses in 2024, collaborating with platforms like Xiaohongshu and Bilibili, which have large user traffic and align with their target audience, to expand their customer base.

Strong cash flow is the foundation supporting this plan.

Based on this, in addition to the existing buyback plan, Vipshops announced their dividend policy for the next fiscal year at the performance meeting, including a $250 million cash dividend payout in 2023.

Despite the chaos in the e-commerce battlefield, with fierce competition and endless battles, Vipshops anticipates a period of "good days" ahead.