How And Tencent Benefit From Investment in Vipshop

    The deal signals increasing competition among major e-commerce players in China, and luxury brands need to choose strategic alliances wisely.
    The deal signals increasing competition among major e-commerce players in China, and luxury brands need to choose strategic alliances wisely. Photo courtesy: Shutterstock
    Ruonan ZhengAuthor
      Published   in Technology

    On December 12, internet conglomerate Tencent and e-commerce giant JD ( announced they were investing a total of 863 million in flash sale e-tailer Vipshop. This two-year-long deal will allow each company to appoint a board member to Vipshop. Tencent will invest 604 million for seven percent share of the stock, and JD will invest 259 million for a 5.5 percent stake.

    The common goal of this deal is to compete against Alibaba, which accounts for 57 percent of e-commerce market share in China. Alibaba also owns, a similar fashion and luxury flash sale site whose market share is smaller than Vipshop.

    Besides making themselves more competitive against Alibaba, each investor has their own motivations for completing the deal.

    According to JD’s chief Executive Richard Liu, the investment will help JD to “expand the breadth and reach of the fashion business.”

    The fashion sector is not the strongest aspect of JD’s business—they’re better know for gadgets—but they’ve clearly taken an interest in it. In the past year, we saw the unofficial ambassador of JD fashion, Richard Liu’s wife, Zhang Zetian, feature at major fashion events, a new partnership with Farfetch, and the launch of high-end fashion platform, Toplife, which is a competing platform to Alibaba’s Luxury Pavillion. But how does Vipshop help their strategy?

    JD dominates the market in electronic, baby products and FMCG. In 2017, JD has more than 50 percent market share in 3C products (computer, communications, and consumer electronics). However, fashion is a bigger prize in the e-commerce business; it’s the sector that attributes the most revenue to Alibaba. And Vipshop, the third biggest e-commerce platform in China, profits from deep discounts to luxury goods. Its single item profit far exceeded Tmall, JD and other dominant players.

    Although JD had 258 million active users by June 2017, and the number of female users has already exceeded that of male users, most of the sales still come from men. Vipshop, on the other hand, has more than 60 million active buyers, and most of its sales are contributed by female users, a demographic that JD would like to reach.

    Another key component of JD’s motivation in this deal is the increasingly fierce competition against Alibaba. In July, JD released a statement accusing “some e-commerce sites” (a term commonly understood to mean Alibaba) of being unfair and monopolistic market players. In JD’s Q3 conference call, the company pointed out the sales of fashion apparel sector has had zero growth due to such “unfair” business practices.

    That’s not to say that Vipshop doesn’t have its own problem to worry about. Both the number of active buyer and profits at Vipshop experienced significant growth in Q3 2017. However, user growth is slow compare to JD — Vipshop's annual active users reached 60,500,000, an increase of 22 percent year on year, whereas JD has an annual active users 270 million, an increase of 34 percent from 2016. Meanwhile, the compliance cost at Vipshop has increased 63 percent over the same period last year, putting pressure on net profits.

    This deal also signaled Tencent’s ambition to enriching the e-commerce functions on WeChat. As its President Martin Lau said, “We already see substantial demand from our users to discover, discuss and purchase branded apparel in our applications, and we believe that connecting our users more deeply to products on Vipshop’s platform will enrich their online experiences while benefiting Vipshop.”

    How does Vipshop benefit from this deal? As part of the agreement, Vipshop will gain access to Tencent-owned WeChat and JD’s large volume of users by being included in both apps. This is likely to smooth Vipshop's journey in user acquisition, and by partnering with JD, who has a complete logistics system, it's likely to alleviate Vipshop’s logistics pressure. Both JD and Tencent have agreed to “assist Vipshop in achieving certain GMV (Gross Merchandise Value) targets”.

    What should luxury brands expect to happen in the next two years? The competition between major e-commerce players is likely to grow more intense, and brands should carefully examine each. It’s important to choose strategic alliances in China in order to enjoy long-term benefits.

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