Case study : China's top online cosmetics retailer and the quest to become the top E-commerce hub for women

1. Introduction

Leo Chen was in deep thoughts as he was looking out of the window of his office to the

Beijing skyline[1]. He had accomplished so much in the past few years, and the company

he founded, Jumei, which only employed a few people less than five years ago, was doing

well. In fact, Leo Chen, then 31 years old, had become the youngest Chief Executive Officer

(CEO) of any NYSE listed company in 2014 (China.org, 2014). Jumei's net revenue

exceeded $900m in 2016[2].

However, Jumei was currently facing a major milestone. Disappointed by the performance

of the stock, Chen wanted to take the company private with the backing of other private

investors. However, the privatization process had been on-going for more than a year since

they released the non-binding "Going Private" proposal on Feb 17, 2016[3]. Public or

private, could Jumei become a mega-commerce hub like Alibaba? Or should it stick to its

core product line - cosmetics - which was already being challenged by brand websites

such as Lancme, SK-II and Clinique, as well as other horizontal e-commerce competitors

such as Sephora, JD and T-mall? In three days, he had a full-day meeting scheduled where

he would present his vision for Jumei 2020. He was enthusiastic about the future of his

brand, and he had a plan, but he felt he needed to go over them again [. . .]. Jumei, founded in 2010, had become China's biggest online retailer of beauty products.

Coming from humble beginnings but not staying that way for long, the company's revenues

increased explosively within the next few years, with net revenue exceeding $1bn in

2015[4]. With more than 50 million users in China, it captured more than 80 per cent market

share in cosmetic flash sale market and 22.1 per cent share of China's online cosmetics as

early as 2013[5]. As an aspiring one-stop virtual mega-mall, Jumei focused on offering

goods and services specifically for women. Its ambitious goal to become the No.1

cross-border e-commerce hub for women had been emphasized in almost all of their

annual and quarterly reports since 2014[6]. To accomplish this goal, Leo Chen created

Jumei global store in June 2014. Adding Maternal and Child products in April 2015 was

another way to extend its product line as Jumei's initial cosmetics customers happened to

be in the Maternal and Child products target market as well. Chen hoped that a wider

product line could meet its active users' growing needs and make Jumei more competitive,

especially as other strong competitors were joining the global e-commerce market.

Jumei has heavily relied on its founder and CEO Leo Chen as the public face of the

company, which became a distinguishing factor for its success story. While not altogether

unusual for the US market (renowned founders such as Colonel Sanders of KFC and Dave Thomas of Wendy's were known to represent their companies in TV ads), Jumei was the

first major company in China where the CEO, as opposed to a celebrity spokesperson,

became the brand ambassador. Jumei did benefit from this branding approach. However,

Chen was also worried that the tight connection between his personal image and the

company could harm brand development in the long run.

2. Company background

Leo Chen (known as Chen Ou in China) was recognized as a young, good-looking and

inspiring entrepreneur. In a successful advertising campaign featuring himself[7], he

powerfully conveyed how he created Jumei and instantly became an idol for many Chinese

consumers. It was December 2012 when Leo Chen personally appeared in Jumei's first

video ad in which he declared, "I am Leo Chen. I speak for myself" to express how he

chased his dream fearlessly and encouraged young people to never give up on their own

dreams[8]. The rest is history. This creative advertisement resonated strongly with young

consumers, especially on social media. The advertising format named after Chen, "Chen

Ou Ti" (meaning "express your personality and your dream") went viral and became a

mega trend in China in 2013, with more than 2,000 internet users and celebrities following

the format of "Chen Ou Ti" to express themselves[9]. Similarly, more than 20 Chinese

universities created their own "Chen Ou Ti" to advertise themselves (Edu.sina.com, 2013).

Even other companies followed the trend and created their own version of the ad[10]. This

viral marketing campaign not only made Leo Chen an instant star but also made the startup

company a household name in China. Nevertheless, Chen believed there could be further

opportunities to use his CEO/Celebrity power to create more buzz for his company and

extend his brand.

Jumei (originally named Tuanmei) was founded in March 2010.[11] It was positioned as

China's first women-oriented flash sale cosmetics website. As a business-to-customer

(B2C) company, Tuanmei focused on building the brand image based on attributes of

"affordability" "professionalism" and "trustworthiness" to distinguish itself from other online

cosmetics retailers. When the company launched, the prices of cosmetic products in China

were almost two or three times of more than the prices in the USA. "Taobao" (China's

version of eBay owned by Alibaba) was the only website that had international

e-commerce[12]. Like many other C2C e-commerce companies at the time, Taobao did not

have sufficient controls regarding product quality (Li, 2016). Therefore, some of the

products sold through Taobao were perceived to be fake and of poor quality. Thus, when

Tuanmei introduced "100 per cent authenticity guarantee" and policy of "30 days

unconditional returns," it stood in stark contrast to competing offerings and was exactly

what the customers of online cosmetics wanted. Realizing the market potential and the

distinctive advantage of authenticity, the company was also rebranded after six months to

"Jumei" and broadened its target position to become the online discount-shopping

platform for women by adding curated sales and an online shopping mall beside its original

flash sales. Within one month of rebranding, Jumei's monthly revenue exceeded $1.5m for

the first time, and explosive sales growth followed, owing much to its self-made celebrity

CEO, Leo Chen. Market penetration and sales growth had been growing fast until 2016.

Figures 1 and 2 and Tables I and II depict the performance of Jumei[13].

3. Leo Chen background[14]

Leo Chen was born as Chen Ou in 1983 in a mid-sized town called Deyang in Sichuan

Province. At the age of 16, he was admitted to the Nanyang Technological University in

Singapore with a full scholarship. As he was working on his undergraduate degree in

Computer Science, he founded an online gaming platform called GG war platform (GGWP).

GGWP was designed as a new generation of interactive game platforms that included

some neat features such as ping display next to ID, unlimited selection of channels, instant message and chat, support for popular games such as Dota, Starcraft and World of

Warcraft and, arguably the most attractive feature of all, support for a ladder that ranked

players by level of expertise (GG war platform has since been renamed Garena [meaning

"competing stage" in Chinese] after Chen sold the company)[15]. Upon selling GGWP, Leo

Chen enrolled in and completed Stanford's MBA program in 2009 and subsequently

started his second company "Reemake company," which enabled brand placements and

ads in social games. Upon realizing that the American/Western business models do not

work in China without adapting to local norms, he then went on to start his third company

Jumei (offering 100 per cent authenticity warranty and generous no questions asked return policy from the get-go) in 2010. The third time was the charm for Leo Chen and within four

short years, the then 31-year-old became the youngest CEO of any NYSE listed

company[16].

4. Current situation and future opportunities

To cope with the slowing sales growth, Leo Chen had several options which included

emphasizing low prices for market penetration (selling more to the same customers),

adding new product categories to the current offerings (selling new products to the same

customers), cross-border market development (selling same products to new customers)

and diversification (selling different product to different customers)[17]. In choosing his

approach, he had to consider the following opportunities:

4.1 Chief executive officer celebrity power

Leo Chen regularly appears on National TV, participants in movies and acts as guest host

on entertainment and talk shows. He makes the most of the opportunities to advertise his

company through traditional methods and social media. By September 2017, he had more

than 44 million followers on Weibo[18] (China's version of Twitter) and averages more than

100,000 "likes" for each of his posts. He gives out exclusive coupons or vouchers only

available via his social media account. To maintain the "cool" factor, he uses trends,

celebrity news, well-known hashtags and catch-phrases as promotion codes. For example,

"I am Still a Kid," "Burning Fat," and "I Have You Guys" were a few of the promotion codes

used by Chen[19].

4.2 Quality control and return policy[20]

Leo Chen's celebrity appeal has always been a major marketing strength for Jumei.

However, the current levels of success of Jumei would not have been possible if it did not

offer the value and quality to successfully reinforce the "express yourself" movement.

Notably, Jumei offered the 100 per cent authenticity guarantee from day one. It also

emulated the leading retailers in the USA and allowed for 30-day unconditional returns, no

questions asked. For the Chinese market, such a generous return policy was and remains

quite rare. Indeed, Jumei is the only online cosmetics retailer in China that allows customers

to return products, even if the package is opened, or the product is used, as long as the

product is purchased within 30 days. In addition to the National Quality Inspection required

for all retailers, most of the products that are sold on Jumei come with a security code

through a joint effort between Jumei and the original brands. This double quality control

process is intended to demonstrate Jumei's keen attitude toward maintaining product

quality standards and sell genuine goods only[21].

4.3 Ability to combine flash sales, online shopping mall and curated sales[22]

4.3.1 Flash sale. Jumei's website offers featured products for sale for a period of 24-36 h.

Potential customers register to get notifications for the deals-of-the-day and to receive

online offers and invitations by email or social networks. Every day, Jumei has more than 30

products and brands offering limited-time offers with deep discounts. The high frequency

of flash sales and hefty discounts keep the attractiveness of the website for users loyal and

new. Flash sales also increase page views of the entire web platform including the online

shopping mall and also result in sales for products that are not heavily discounted.

4.3.2 Online shopping mall. Jumei online shopping mall sells makeup, skin care, fragrances

and personal care products with discounts up to 80 per cent. The Jumei online shopping

mall offers a broad selection, from luxury brands to local Chinese brands, from American

(e.g. Kiehl's, Clinique and Este Lauder) and European brands (e.g. L'Oreal, Nivea and

Lancme) to Japanese (e.g. SK-II, Shiseido & Kose) and Korean (e.g. Innisfree, Laneige

and The Face Shop) brands. Besides the wide product line available in the online shopping mall, the availability of hot and popular items at the curated sale with deep discounts

enhances customer loyalty and contributes to its leading position in the market.

4.3.3 Curated sale[23]. Jumei curates collections and recommends branded products with

differing themes for limited periods of time at attractive prices (e.g. good reputation

hydrating products collection). Jumei hopes that curated sales format could embrace value

and convenience for their customers and further enhance their trend-setting image.

4.44.4 Close relations with companies

Jumei works directly with manufacturers, taking the middleman out of the supply chain. To

work with internationally renowned brands (Elizabeth Arden, Lancme and Kiehl's)[24]

directly, Jumei builds flagship online stores for each premium brand - which then provides

a unique platform for them to sell new or discounted products. The close relationships they

nurture with these brands enables Jumei to sell popular products for relatively low prices

(10-50 per cent off compared to market prices) and ensures that the products sold are

authentic.

4.5 Jumei global store[25]

To meet Chinese consumers' rising spending power, quality expectations and the

increasing need for overseas online shopping, Jumei built a platform for overseas

companies. The Chinese Government enforces a 10-25 per cent tax on general luxury

products, and this tax can get as high as 35-60 per cent for luxury cosmetic products[26].

Furthermore, pricing skimming strategies (where the marketers initially set a relatively high

price for a product, and subsequently lower it over time) that most luxury companies use

in China have led to further increases in the prices of luxury products. Jumei Global store

centralizes the customs clearance and domestic fulfillment processes to ensure fast

delivery to customers. Jumei's platform gives overseas companies access to a channel

they did not practically have before, creating a win-win scenario: suppliers can sell

products directly to Chinese customers, and Jumei is able to expand its product line and

revenues further.

4.6 Maternal and child products

With the disappearance of one child policy in 2016 (which was introduced in 1978), a baby

boom is expected to occur in China. Jumei immediately took advantage of this major

demographic trend by starting a new channel for international maternal and child products

in April 2015. Chinese consumers have had little trust on domestic maternal and child

products due to the milk scandal in 2008[27]. The scandal involved milk and infant

products being adulterated with melamine. Six infants died from kidney stones, and more

than 54,000 babies suffered kidney damage. The perception that foreign products have

better quality control than domestic products is widespread among Chinese consumers. It

is reasonable to assume that the high-quality reputation that Jumei established in

cosmetics could help sales of the maternal and child products as well and enable Jumei to

grab a higher share of wallet of its existing customers, as the target customers of cosmetic

and maternal child products overlap significantly. Jumei intends to transform itself from a

cosmetic flash sale website to a one-stop shopping platform for women over time. In the

quest for expanding product lines, Jumei's brand equity has to rely heavily on both

customer acquisition and retention. The numbers of their active customers were

approximately 13.3 million in 2014, 16 million in 2015 and 15.4 million in 2016. The number

of new customers was approximately 8.9 million in 2014, 10.9 million in 2015 and 9.0 million

in 2016. Orders placed by repeat customers accounted for approximately 87.6, 92.0 and

91.2 per cent of our total orders in 2014, 2015 and 2016, respectively[28]. With the added

trust and loyalty maternal and child product line customers, this line has become a new

profit growth driver for the company.

4.7 Competition from other e-commerce platforms

When Jumei first entered the cross-border e-commerce business, there were no

competitors in the market. However, Alibaba, JD.com and Amazon.cn all have started to

develop their global stores and build their own customer base. One of Jumei's biggest

challenges will be to win over customers from these three major competitors (who also have

developed their versions of global stores for international vendors). Jumei's vertical

integration business model has become a double-edged sword. Vertical B2C platform only

focuses on a few product categories. Thus, it helps to build the image of a professional

high-end retailer. However, it can also limit Jumei's control over their offerings. Among all

the top Chinese B2C players, Jumei had only 0.6 per cent market share in 2016, leaving

much room for future growth[29].

4.8 Competition from online brand stores and the T-mall

When Jumei first entered the cosmetic market in 2010, only a few world-famous brands had

their own online stores in China. However, almost every global brand had launched its own

online store and starting selling through the T-mall soon after that (Shayon, 2017). For

example, Lancme launched their T-mall store by the end of 2015 (Wang, 2016). T-mall

was launched by Alibaba as an independent Web domain to differentiate listings by its

merchants who are either brand owners or officially authorized distributors[30].

Direct brand online stores may be perceived to be even more trustworthy than Jumei,

leaving Jumei with merely a price (rather than authentic quality) advantage. In addition,

more and more competitors have started to reconsider their price skimming strategies and

began to lower their prices to adapt to the increasingly competitive landscape and gain

market share in China. For example, Este Lauder announced discounts up to 30 per cent

in 2015 (SCMP.com, 2017), which includes every cosmetic and skin care brand within the

company (such as Bobbi Brown, Clinique, Este Lauder, La Mer, MAC). French cosmetics

company LOral (with brands such as Lancme, YSL, Giorgio Armani), Korean

Amorepacific Corporation (with brands such as Sulhasoo, Hera, Laneige) and Japanese

SHISEIDO group (with brands such as IPSA, Shiseido) have begun to reduce their prices

in the Chinese market.

4.9 Limited product line depth

To protect their established sales channels and brand image, some brands only allow

Jumei to sell a limited/designated selection of products or set price floors. Thus, available

selection (and pricing) can be limited especially for products in high demand from famous

brands.

4.10 Unimpressive growth in net income and poor profit margins

Jumei's revenue is increasing significantly every year; however, its net income growth, net

and gross profit margins are not impressive. The gross profit margin has been under 50 per

cent the past five years. TheStreet.com rated Jumei's stock a D and advised selling due to

its low profit margin and slowing revenue growth (Schiavo, 2016).

Most of a global company's financial value lies in its brand equity (value) alone, for

example, just the brand value of Apple was appraised at over $178bn in 2016, excluding

book value of any of its physical assets[31]. Jumei badly needed to build its brand equity

to meet its aggressive growth objectives. Much of its cool factor and brand identity was to

that of its owner. What if something happened to Lei Chen or somehow he lost the "it"

factor?

Of all the options available, diversification was viewed as the riskiest. At the same time, it

was the most likely route to success if Jumei were to realize its goal to become the top

e-commerce hub for women one day. E-commerce giants such as Alibaba and Amazon continued to grow fast, and Jumei's sales, while impressive, dwarfed next to their volumes.

Perhaps pivoting to become a global B2C specialist by focusing on few product categories

was a more viable approach. Advantages of this approach included more effective market

segmentation and precision marketing

5. Looking ahead

The speech that Leo Chen made in the Jumei annual meeting in 2016 introduced the

concept of "Beauty Economics," the combination of fashion, entertainment and

e-commerce[32]. It demonstrated that Jumei would continue to create & use their cool

factor to differentiate the company from other competitors. By using the generic

differentiation strategy (as opposed to cost leadership or focus)[33] Jumei hoped to

distinguish itself from similar offerings on the market and avoid virulent price competition.

To maximize the buzz effect and celebrate its sixth anniversary, Jumei held a gala event in

February 2016. Guests included Hollywood stars such as Jason Statham, world-famous

pop-artist Psy and more than 50 celebrities from Korea, Japan and China (Kim, 2016). This

gala enhanced Jumei's avant-garde and cool impression among its target audience. In

conjunction with the ceremony, they also held a sale on their website to attract the fans of

the guests who attend the gala to become Jumei customers.

Jumei announced they were going private in February 2016. Feeling that the stock price

was vastly undervalued the CEO Leo Chen, co-founder Yusen Dai and shareholder

Sequoia Funds submitted a letter offering to take the company private for $7 per share and

purchase 90 per cent of Jumei's outstanding shares. A crucial reason that Jumei did not do

well in the stock market was because of its low profit margin due to flash sales and

competitive prices. The market was also becoming more competitive. These problems

would not cease to exist if Chen took the company private. There was also some indication

that the brand was losing its cool factor in its prime demographic with ratings low on

sophistication and average on sincerity (Figure 3). How could Leo Chen balance the

relationship between line extension and profitability? How and how fast should Jumei

expand? Other celebrity CEOs such as Virgin's Richard Branson had been able to

successfully overcome these issues. Was global expansion even the right way to go for

Jumei? If so, could it be accomplished with online presence alone or was a hybrid business

model that included brick-and-mortar stores part of the future? Should Jumei emphasize

low prices again, differentiate more or focus on its early niche to remain profitable? These

were only some of the questions that Leo Chen had to address in three days.

Question : Do you think Jumei should become a Mega-commerce hub by realizing it's goal to become a top e-commerce hub for women , and compete with Alibaba and Amazon ? or should it stick to it's core product line, become a global B2C cosmetic specialist , by focusing on few product categories and compete with luxury retailers such as Lancome, SK-II and Clinique and other horizontal E- commerce competitors such as Sephora, JD and T-mall. Evaluate the situation and justify your opinion with 2 reasons ( 10marks)