One advantage of operating in an emerging market like China is
that many sectors of the economy are just getting their feet wet,
so you have much less chance of bumping up against established
That's the case with discount retail. Unlike in the U.S.,
where the biggest chains have had decades to build their brands
and consolidate their leads, discount retailers in China haven't
been around that long.
The field is thin and scattered, especially in second-tier
cities. Companies that want to grab up market share in a hurry
have ample opportunity to do so.
One of those companies isVipshop Holdings (
), a China-based online discount retailer that sells apparel,
household goods, cosmetics and other branded lifestyle
The company specializes in "flash sales," in which a set
number of goods are sold over a limited period of time, often
during the retail off-season.
It has exclusive rights to sell selected products from more
than 700 brands and boasted about 27 million registered users at
the end of last year.
Vipshop helps manufacturers reduce overstocking by selling
merchandise to customers who might not otherwise have access to
Because the company operates in a category without much
history or entrenched competition in China, analysts give it high
marks for growth potential.
"Unlike the discount retail market in the U.S. where strong
offline players such asRoss Stores (ROSS) andTJX Cos. (
) are well-established and control sizable off-season
inventories, China does not have a significant presence of
offline discount retailers," JPMorgan analyst Dick Wei noted in a
March report initiating coverage on Vipshop.
China does have some brick-and-mortar outlet malls in
first-tier cities for branded goods, he says. But outlet malls
don't have a big presence in lower-tier cities, where Vipshop
gets most of its revenue.
"Without a strong presence of offline discount retailers in
lower-tier cities, we believe Vipshop has the opportunity to
consolidate the market quickly," Wei noted.
The company is already well on its way. Citigroup analyst
Muzhi Li notes that Vipshop's relationships with more than 3,000
apparel manufacturers and 7,000 brands make it China's largest
aggregator of discounted apparel.
Vipshop hosted more than 29,000 sales events and handled 5.1
million stock keeping units (SKUs) in 2012, Li noted in a recent
report initiating coverage on Vipshop.
The company logged sales of $692 million last year. As
recently as 2010, its annual revenue was only $33 million.
Though it will be difficult to sustain triple-digit sales
gains as Vipshop gets bigger, analysts reckon the company still
has plenty of room to grow.
"To improve its revenue growth, we expect Vipshop to not only
expand its vendor base, but also to have more sales events to
reduce premium-brand overstock," Li said.
JPMorgan's Wei estimates that Vipshop accounted for 7.7% of
China's total discount retail market at the end of 2012. By
comparison, TJX has about 38.2% of the total U.S. discount retail
"Considering China has no comparable offline discount retail
chains, we believe Vipshop has decent room for growth in terms of
dominance within the China discount retail segment," Wei
Rivals Large And Small
Much of Vipshop's competition comes from either smaller
players or large online retailers trying to branch out into
Among the latter group is Tmall, formerly Taobao Mall, an
online business-to-consumer and retail business operated by
China's Alibaba Group. Tmall launched a "Brand For Sale" business
in September 2011 that competes against Vipshop.
Another company,Dangdang.com (
), recently launched a channel to sell discounted inventory and
named it "wei pin hui," which Li notes is "pronounced in the same
way as Vipshop's Chinese name."
Although rising competition is always a concern, most analysts
say Vipshop is in a good position to fend off rivals.
"Vipshop's success largely reflects the company's brand
positioning, operational efficiency and industry experience of
the management team," Li noted.
He says existing online retailers can't easily duplicate
off-season sales channels "because destocking sellers need
different skill sets to sell general merchandise."
In addition, he adds, "flash sales players lag behind Vipshop
in the off-season apparel market."
Vipshop also has a lot more financial might than most of the
competition. The company's stock debuted on the NYSE in March
2012 at an opening price of 6.50. Shares have been on a steady
rise since then and currently trade near 39.
Financially, Vipshop has delivered three straight quarters of
profit after previously losing money.
During the first quarter it logged earnings of 17 cents per
American depository receipt vs. a loss of 25 cents the previous
Sales more than tripled to $310.7 million. The number of
orders nearly tripled to 8.8 million, while the number of active
customers rose to 2.8 million from 1 million a year earlier.
Vipshop is due to report third-quarter results in early
August, though an exact date has not been set. Analysts polled by
Thomson Reuters expect earnings of 18 cents per ADR, up from a
loss of 8 cents the prior year.