Chinese Tech – Chasing the IPO
A most dangerous assumption to make about Chinese tech companies is that the Alibaba IPO will start a trend of going public as endgame. The danger lies in the fact that the trend is already very well established, with any number of Chinese commerce sites focused on impressing potential investors, rather than consumers. In many cases, the IPO is the grail; a truly valuable company is not.
The quest centers around outrageous advertising budgets, and subsidized discounts, with an eye to putting up the sorts of traffic and sales numbers that are by no means sustainable, but hopefully sufficient to secure the next round of funding.
This situation speaks to a second dangerous assumption: that the incredible China ecommerce tide lifting Alibaba’s ship will raise rather than capsize similar publicly traded companies. Alibaba hasn’t many tangible assets, but neither does American Express. Both have an unassailable reputation for value with both the customers and merchants who use them, however.
China’s leading online cosmetics platform does not necessarily have the rep to withstand repeated product authenticity issues. Investors may be recovering confidence, but Chinese social sphere and BBS sentiment, albeit much harder to quantify, suggest that Jumei’s approximate one fifth market share of China’s online cosmetics market is far from locked in.
It’s not that Jumei can’t do better, but that so many other platforms are rushing in to the lucrative space, worth $36.5b in 2013 and growing at a 17% YoY pace. Sites such as Lefeng are advertising just as heavily, and gaining a rep for better prices. Meanwhile, more and more of the big brands that drove consumers to Jumei – Lancome, Estee Lauder, et al – are beefing up search advertising to drive traffic directly to their Chinese sites.
From a better business perspective, Jumei needs to focus on driving its value home to consumers. Jumei did launch an “Authentic Beauty Products Alliance” recently, but even more recently added angel investor Xiaoping Xu as an independent director.
Another Chinese-site stock darling that may glitter on paper (to public charges of questionable reporting), but which is not necessarily making Chinese consumer eyes sparkle as it once did. The Flash Sale concept which drove its success has passed its freshness date, especially with so many other sites now adopting the same ploy.
Furthermore, the deep discounts that make a “special offer” special just aren’t there. It’s more or less public knowledge that some quick searching, so easy on Baidu and Alibaba’s ecommerce search engines, almost always reveal comparable, if not better pricing on other platforms, without that annoying bomb-like countdown timer ticking next to each SKU.
What does VIP Shop have left? Certainly not clear brand value, what with Nautica apparel positioned directly above uninspired Chinese labels (Gemaiq, Deesha, ad nauseum.) There is no underestimating China’s demand for quality western brands, or the potential decline in traffic as VIP’s B-label brand offerings grow in proportion to real VIP products that are truly on sale.
No Chinese site deserves its success more than Qunar, which revolutionized a visitor’s ability to research and plan travel with depths of information previously unavailable, all integrated for booking and sharing, to boot.
Alas, the two flies in the ointment. Most disconcerting is the advent of the IPO-hungry, who will promote and discount at completely unsustainable rates in order to go public or go bust trying. Such a site is Lailaihui, which has surely already spent its $16.3m in B-round funding on obnoxiously ubiquitous subway, bus, and elevator advertising, while offering fire sale prices.
The resultant muddied market draws the other fly – verticalization. Not even the BAT members (Baidu, Alibaba, Tencent) can be all things to all Chinese consumers, so while they consolidate, look to category segmentation as a mid to long term threat to Qunar, Ctrip, and Elong. Sites for flights, sites for “Flash Sale” outbound tours, sites for boutique hotel experiences (e.g. Zanadu), will not mean a drop in traffic for Qunar’s amazingly seamless experience, but rather in conversion percentages and subsequent revenues.