Vipshop (“Company”) operates as an online discount retailer for brands in China. The Company offers branded fashion, home goods, apparel and accessories at a deep discount through “flash-sale” events.
Vipshop Homepage (Listing of various products and categories)
Vipshop does an incredibly good job of effectively aligning its business model with its operating model. The Company was founded by two consumer product distribution experts looking to provide value to vendors / brands that need to offload premium excess capacity merchandise. In turn, Vipshop would provide this premium merchandise to end consumers at a deep discount. The Company has been able to accomplish this goal by developing deep relationships with key merchandisers / brands, understanding consumer preferences and meticulously targeting customers while optimizing “flash sale events”.
Vipshop Merchandising & Selling Process
A business model is defined as how a firm creates and captures value. In Vipshop’s case the firm creates value for two key customers (i) vendors / brands (ii) end-consumers. Vendors, especially in the apparel / accessories space face the constant struggle of optimizing and managing inventory. A vendor must understand the latest trends in fashion, predict customer demand for the season and stock stores accordingly. The reality is that this is incredibly difficult to do and brands get it wrong frequently. There are major factors that are largely out of the control of brands that can lead to holding excess inventory such as (i) market downturns (ii) weather / seasonality (iii) fashion fads (iv) market competition. When a vendor / brand is inevitably stuck with excess inventory, it has limited options of what to do with this inventory. This is where Vipshop comes in, the Company provides a platform for vendors / brands to sell its excess inventory directly to consumer at deep discounts. In this case, vendors / brands are able to liquidate their inventory before the next season.
To the end-consumer the obvious benefit is that they get access to high quality brands at deep discounts simply because vendors / brands overestimated their inventory needs. Vipshop does a great job of providing a wide selection of brands that are tailored to the fashion interests of its customers (n.b., 75% of Vipshops customers are females). Additionally, the level of customer service and focus on customer experience is paramount, which has led to a strong sense of brand loyalty. Customers have a repeat order rate of over 90%.
Vipshop has aligned its operating model and business model in a very effective manner. The company has optimized its inventory management, and actually does not hold inventory of the products they sell for longer than a couple days. When a flash sale takes place the vendor sends over the goods to Vipshop who then briefly stores the goods before sending them to the end customer. 90% of the inventory that Vipshop holds is on consignment (destined for a customer) and the unsold inventory is returned to the vendor. Under this model Vipshop does not take on inventory risk. Separately, given Vipshop’s critical focus on customer service, the Company offers a seven day no-exception return guarantee. This policy is focused on confirming customers are satisfied with the products they purchase, but also helps incentive buyers to make purchases online they would have otherwise not felt comfortable making.
In conclusion, Vipshop’s ability to align its operating model and business model by focusing on deep vendor relationship, the highest customer service and inventory management has led to a high performing company which has a competitive advantage in the space. The Company also benefits from being a first mover in the space which has allowed it to develop beneficial economies of scale.
Vipshop Investor Presentation: http://ir.vip.com/phoenix.zhtml?c=250900&p=irol-investorkit
Wall Street Research: Jefferies Initiation of Coverage – Vipshop Leader in Flash Sales – A Pond That is Not So Small
HBS Case: Vipshop Holdings Limited by Robin Greenwood and Yuhang Vivian Wang