Digging a Tunnel to Chinese E-Commerce
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In the United States, online shopping is pretty boring. You determine you need something, you Google it, and then you end up on Amazon or a smaller, lesser-known e-commerce platform. This lack of competition may give the illusion of simplicity but it also means you have fewer choices, limiting competition. This is what China looked like back in 2014, when Alibaba controlled 81% of the country's online shopping.
Through its three marketplaces, Alibaba.com (B2B), Taoboa (C2C), and Tmall (B2C), the conglomerate successfully operated the largest shopping platforms in the world and was poised to continue this domination. Unlike the West, where in-person shopping has always reigned supreme, China has struggled to provide enough retail space to accommodate its population in dense areas so online shopping became a necessity long before the pandemic. The e-commerce market in China is now worth more than $2 trillion, easily surpassing its American counterpart in 2013. However, this early adoption has meant that features like instant-buy and expedited shipping are old news and no longer enough to hold the attention of the average Chinese consumer. Welcome to the age of e-commerce innovation.
Unlike in the United States, where retail services have remained consolidated in their own corner of the web, China has integrated it into everything. To quote The Economist: “online-shopping platforms in China now blend digital payments, group deals, social media, gaming, instant messaging, short-form videos and live-streaming celebrities.”
In the West, we talk about experience stores, places like Apple which hopes to be seen as a futuristic town square that can "enrich customer’s lives". In China, it's experience e-commerce. This can look like a famous live-streamer showing you a product and vouching for its integrity (Douyin), a celebrity-ridden concert thrown by Alibaba, a Pinterest-like social media platform (Xiaohongshu), or being able to shop within your favorite messaging app (WeChat). The power of these formats should not be underestimated. Viya, China's most popular live streamers, can garner 36 million viewers a stream, more than the Oscars. Kim Kardashian once collaborated with her on a stream and sold 150,000 bottles of Kardashian perfume in a single minute.
All of these options have ensured that e-commerce in China has become thoroughly segmented and Alibaba, the great and powerful, has watched its market share decline from 81% to 55%.
So what does this mean for investors eager to take advantage of Chinese e-commerce? Look for the middle man.
Baozun is one of your options and a stock that has lived on the MyWallSt shortlist for a few years. Baozun provides Western companies with a way into the Chinese market, helping them build e-commerce sites, establish fulfillment centers, and provide customer service. Most importantly, it helps brands like Nike, Philips, Microsoft and Haagen-Dazs navigate the ever-expanding ecosystem of Chinese retail channels and understand the unique differences and nuances of each. As the Chinese market becomes more complicated, you may assume that Baozun's value proposition will increase. However, the company must first make a few investments.
Until now, Baozun has been largely focused on Alibaba's Tmall, moving 75% of its gross merchandise volume (GMV) through the site. This was fine for the China of 2014 but in today's market, it isn't enough to remain competitive. For this reason, Baozun has laid out a 5-year plan of strategic investment, which will see the company create services for live-streaming, social media, and WeChat. On top of this, it's committed to further developing its high-end segment to take advantage of the rapidly growing luxury market within China, in addition to embracing technology to reduce expenses and maximize profitability. While these changes may mean some short-term expenses for the company, a few cold feet from investors, and increased volatility, it will undoubtedly secure Baozun's long-term potential in a rapidly expanding market.
That being said, Baozun has long been a puzzling stock when compared to its MyWallSt counterparts. Bouncing back and forth between prices, BZUN hasn't achieved an all-time-high since June 13th of 2018. This underperformance seems to be a combination of factors, such as being a small-cap in China, which is often classified as a riskier region for investment. Additionally, there would appear to be somewhat of a misunderstanding around Baozun's business thanks to early bulls calling it the "Shopify of China", an inaccurate label. Despite its disappointing performance so far, the company's revenue and GMV growth has been consistent and its founder-CEO, Vincent Wenbin Qiu, remains firmly at the helm.
While its days of volatility are not quite behind us, the company continues to perform and adapt for the changing Chinese e-commerce market. For an investor with a diversified portfolio and appetite for risk, it may just be a stock worth taking a chance on.
Due to its latest moves we have updated our comments on Baozun. To read them, click the stock button below.