Brand Kingdom of China's Gilt: Vipstore.com's Vertical Integration Strategy

BEIJING, November 1, 2011 /PRNewswire/ --

With two years' rapid development, China's luxury B2C sector has entered a new stage of consolidation and ferocious level of competition. As an industry leader, Vipstore.com has raised tens of millions of dollars in a new round of financing led by Intel Capital, as part of the company's plan to enhance its footprint in the Chinese market. Other investors participating in the financing include GSR Ventures, Taishan Angel Fund, Litian Investment and HGI Capital.

Even without considering the capital funding, one thing for certain is that Vipstore.com, established in 2009, is alleged to be the largest luxury B2C e-commerce firm in China and has, like Gilt, adopted the flash or limited time sale model. The firm has organized over 4,500 online sales events featuring top, second and third-tier internationally known brands, and more than one thousand designer brands.

Vipstore.com Chairman William Dong said, "The success of the operation of an e-commerce company is built on ten thousand processes and a million details." Many of Vipstore.com's investors are eagerly looking forward to the day the firm becomes the largest luxury sales group in China. At the ceremony celebrating the second anniversary of Vipstore.com, investors from six investment firms crowded on stage around the company's two founders.

The opportunity for luxury B2C in China

In 2008, William Dong had returned from Australia and was especially optimistic about the luxury B2C business, a field in which he already had much experience: he is not only the founder of Vipstore.com, but also one of the original founders of Xiu.com. "At the time I felt that the Gilt model would have unique opportunities in China," he said.

The opinion gained traction with investors

Raymond Yang, founding partner of Taishan Angel Fund, explained, "If the Chinese national economy continues at its current growth rate over the next 10 or 20 years, it goes without saying that the luxury goods sector would be an excellent business opportunity." The prediction that China would become the world's largest consumer of luxury goods was the guiding principle behind deciding to invest.

"The off-line sale model never reached a real level of maturity in the country, while the online model is obviously able to develop faster," said Zhang Yonghan, partner of HGI Capital.

This was demonstrated by the growth rate delivered by Vipstore.com. According to public reports, just six months after its inception, the website had 150,000 members and delivered monthly sales of up to RMB1.80 million (approx US$283,000), with an average monthly growth rate between 50% and 100%.

The overseas supply chain: the "trump card"

"Compared to its counterparts, Vipstore.com purchases 70% to 80% of its goods abroad with a team consisting of more than 100 buyers worldwide," Chen Liang, partner of Taishan Angel Fund, said. The vast majority of luxury B2C firms purchase 60% of their goods in China, according to a person close to the situation.

Vipstore.com boasts lower purchasing costs than domestic competitors, thanks to direct contact with foreign primary dealers and even brand owners. The top brands, for example, may provide their out of season merchandise at a 50% discount. This relies on the firm's cooperation with European luxury e-commerce site Buy-VIP, which has direct relations with more than 800 international brands.

"Brands directly ship their goods to our warehouses in China," Allen Yang, CEO of Vipstore.com, said. "That means that costs associated with cross-border logistics can be kept well under control." He further pointed out that it is also feasible to hire overseas Chinese to act as couriers. However, Vipstore.com bears the costs for its four overseas warehouses and related labor expenses.

Like most "flash sale" models, Vipstore.com initially focused on top brands. COO William Dong said, "We take advantage of the awareness of these brands." However, the website now handles just over 50 top-tier brands and 150 second-tier brands, with the rest being third-tier and designer brands. Sales revenues from the top tier account for approximately 20% of the total.

This is because the "top-tier brands lack scalability", as evidenced by the growth cycle at Gilt, the U.S. online prices of which range between US$150 and US$250, while Vipstore.com's unit price is RMB700 (approx. US$105).

Vertical integration of B2C

In efforts to turn itself into a 'luxury retailer', "Vipstore.com is bound to eventually replace its existing offline sale model with the possible option of opening physical stores across the country," said Allen Yang.

Vipstore.com has been on track to develop its offline business. The website launched some special promotional activities offline with China Minsheng Banking (CMBC) during this year, according to Wang Hong, general manager of Wealth Management Center at CMBC, and has partnered with several financial institutions, including China Merchants Bank, on these special promotions.

Vipstore.com offers offline special promotions as a "supplement to the online sales" and not only to make money. One of the reasons is that consumers in third- and fourth-tier cities are not yet familiar with the concept of a luxury B2C site and the best way to expand into the third- and fourth-tier cities is to work with local banks and other organizations and leverage the support and resources.

In preparing for its future physical stores. Vipstore.com chief operations officer William Dong said that the product selection and pricing standards, transportation and storage, method of display as well as training of shopping guides and how to plan for special promotions of luxury goods are all different from those for online sales.

"We will have more assets, heralding a rise in demand for capital by then," said Allen Yang. Does this mean that the luxury B2C site will see tens of billions of yuan in sales with no profits like 360buy.com and Vancl.com? "I think the answer is no because luxury goods are more lucrative than consumer electronics and daily consumables. After all, there is only a 10% overlap between Vipstore.com and its peers' products lines, so we will not find ourselves engaged in any kind of fierce price war."