What’s in a name? Netease Yanxuan is betting an unbranded pair of jeans from a factory that produces for Calvin Klein would look just as good to Chinese consumers. 

Chinese shoppers may be intimately familiar with names such as Timberland, Muji and Armani, but they know nothing about the original design manufacturers that make their goods, said Liu Xiaogang, chief executive of the three-year-old company, an offshoot of Chinese internet pioneer and gaming giant Netease. 

By working with and sourcing directly from these companies, Yanxuan — whose motto is “better life, better price” — borrows the brand cachet of global names to sell similar, unbranded goods of comparable quality, but at lower prices. 

“In China, there are hundreds of manufacturers for these brands but consumers don’t know about them so we use labels like ‘Muji manufacturer’ to make sure customers understand these products are from the world’s top factories,” Mr Liu said. 

The approach appears successful. Jiguang, a data provider, estimates Yanxuan has half of a market of around 6m customers who shop at sites selling private-label goods, which also include Xiaomi Youpin, an ecommerce venture from the smartphone maker, and Biyao. Jiguang estimates nearly half of Yanxuan’s customers are 24 or under, are mostly high-income university graduates and are concentrated in the more developed eastern parts of China. 

Mr Liu would not say whether the site is profitable but did say Yanxuan, which means “strictly selected”, is aiming to grow sales this year by at least as much as 2018’s increase. The revenues of Netease’s ecommerce arm, which includes Kaola, a site selling imported goods, rose 65 per cent last year. 

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Yanxuan differs from its competitors in its involvement along the whole supply chain, from design through to manufacturing, logistics and aftersales service. One result is a pair of indoor slippers, similar to those sold by Muji. Yanxuan adapted these with rubber, rather than polyester, soles, to allow their use in bathrooms and kitchens. 

“We do more than provide a showroom, unlike the others — we co-operate with our partners to design a pair of slippers that fit Chinese lifestyles,” Mr Liu said. 

As China shifts from being an export-focused economy, and as household consumption increases, Yanxuan is helping companies like Esquel Group reorient towards a long-neglected domestic market. Esquel provides shirts to brands which together account for more than 40 per cent of the US market, but this focus on exports means the company has a negligible domestic following. 

“Yanxuan has the same high standards as us and has the technology and data to help us predict market trends and develop new products,” said Lv Guangwei, an ecommerce manager for Esquel. 

But explicitly aping foreign brands is not a strategy without risk. Yanxuan may not deal in the pirated goods that have tarnished China’s manufacturing reputation, but selling skinny, high-waisted jeans sourced from the same factories that supply similar jeans to Calvin Klein — and aggressively marketing them as such — sails close to the legal wind. 

From the factory straight to the consumer, eliminating the brand price premium,” says Yanxuan’s brand manufacturer section. It offers goods from factories supplying names including Timberland, Alexander McQueen and Muji © Netease Yanxuan

Yanxuan says it has toned down these aspects of its business. As a US-listed company, Netease is careful on matters related to intellectual property, Mr Liu said — any product seen to infringe intellectual property rights would not last long on the website. 

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Joyce Zhao, an analyst with Analysys International, an internet research company, said infringement arguments hinge on the scope of specific licensing agreements and boil down to proving enough similarities in the hundreds of details that go into these products. 

“This is a grey area in China — it is very hard to prove infringement in these cases,” she said. 

A more immediate concern for the company is the fallout from last year’s overexpansion. Diversification makes sense for Netease given the uncertainty shrouding online gaming in China, which remains the company’s cash cow. However, profits at Netease’s ecommerce division fell last year as costs rose. Yanxuan’s stock-keeping units, the variety of products it stocks, last year doubled to 20,000 in a failed effort to more than double gross merchandise volumes. 

The company denied reports that it was cutting nearly 40 per cent of its 1,400-strong workforce but has acknowledged that 8 per cent of staff have left the company. Mr Liu noted that the company made 33 new hires in the first quarter but also said Yanxuan has no plans to increase its number of stock-keeping units, while acknowledging the risks of overexpansion. 

“We don’t want to walk too fast, especially in the face of slowing ecommerce growth,” he said. “We’re not trying to become Tmall or JD.com — traffic is important but it isn’t everything. Our priority is to find a way of working with manufacturers so that every click is profitable.” 

Critics of the company argue that Yanxuan’s approach is too hands-on. Maintaining a large catalogue of goods is expensive, while efforts at micromanaging every part of the supply chain are too unwieldy. 

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“The internet can lower market response times but the only way to cut costs is automation and cutting defect rates,” said Xu Jian, a textile manufacturer from Jiangsu province, who has shifted his business online. 

The outcome of attempts to build a brand is uncertain. Yanxuan faces a host of competitors in this sector, including Alibaba’s Taobao Xinxuan, all of whom offer a variation on the theme of budget minimalism that was originated so successfully by Japan’s Muji. 

But Mr Liu believes a distinctive and competitive Yanxuan brand is emerging as the company’s designs improve and as it continues to maintain its price advantage against global brand names. 

“We’re working out our own style, in co-operation with third parties, and that’s why I’m confident we can compete,” he said. 

Ms Zhao, from Analysys, said Yanxuan stands a chance in an increasingly crowded marketplace. However, the company will need to overcome the problems associated with managing relatively large inventories and with serving a discriminating and fickle client base. 

“You can’t just look at Yanxuan as an internet company — its model is more like that of a traditional retailer so it’s facing the same challenges,” she said. “If it can solve these then it will grow faster.”

— Wang Suya, director of Network Research, FT Confidential Research

scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research



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