BEIJING, CHINA – 13 Oct, 2017 – On September 22, 9:30 am American time (9:30 pm Beijing time), the Chinese luxury goods e-retailer Secoo (NASDAQ: SECO) became available on NASDAQ, becoming the first Chinese online luxury goods company to go public.
After going public however, stock prices were thrown into chaos. Closing prices dropped 23.08% that day and continued to fall for days afterward. After looking at the stock market, it seemed that some investors refused to acknowledge Secoo, or at least held some bias towards the company.
Secoo, established 9 years ago, has already proven victorious over all other online luxury e-tailers. But after its performance on the American stock market, will Secoo be able to triumph once again?
After making an investment during each of Secoo’s A-E investment rounds, IDG Capital participated in a discussion about the logic behind their decision to continue investing in Secoo, as well as the current state of Secoo itself.
Below is the transcript of Yan Yisheng’s conversation with Sina:
About Stock Price: Building Market Confidence Takes Time
Sina: How do you view the huge drop in Secoo’s stock price? What do you think caused the drop, and how can the stock price recover?
Yan Yisheng: From a technical angle, it’s definitely because so many hedge funds bought the stock at that time, and hedge funds are short-term. They’re not like long-term funds that will keep the stock for a long period of time and continue to invest in the company’s value. But the fundamental issue is this: for how long will it take for the American market to see this as a sustainable high-performing business and cast aside their hesitations? Because, after all, Secoo just posted profits for three quarters in a row.
In American and Hong Kong, I asked some people who work in the Secondary Market — some investor friends — and they don’t think there is anything to be done. With a few more profitable quarters, along with maintaining a steady increase and profit margin, and continuing an open line of communication with investors, the stock price will gradually recover. The market just needs time to establish confidence in the company.
Sina: How much time will you need?
Yan Yisheng: I think about a year. The American Stock Exchange publishes performance results every quarter. So if the next three to four quarters are strong, then market confidence will rise.
Sina: After IDG Capital lifts the restrictions will they sell Secoo stock?
Yan Yisheng: IDG Capital currently holds 18.5%. We believe Secoo has continuously been undervalued because the outside world does not understand the company. Therefore, the longer they’re on the market, and the longer they maintain a high performance value, there’s no doubt that the stock with rise. Our short-term plan is to not sell the stock, because really, they just started out. Their true potential and value cannot be reflected as of yet.
About Competition: Secoo Lacks Rivals
Sina: What is the competition like for Secoo? Who are Secoo’s rivals?
Yan Yisheng: As you can see, they have no rivals. Two years ago everyone asked if JD.com or Tmall (Alibaba) was going to start selling luxury goods. How could Secoo compete with those giants? But now, basically no one asks them that. For instance, IDG Capital invested in Farfetch, as well as JD.com, but the brands on Farfetch aren’t actually sold on JD.com. Their partnership is just in terms of distribution and finance.
Of course, pressure from competitors still exists, but I just don’t think that it’s a major factor. We invest in Farfetch, but Farfetch mainly just revolves around selling commodities, they haven’t started carrying other kinds of items. Their long-term position differs from Secoo: one is a global e-commerce platform selling high-end luxury goods, and the other one provides a wide range service approach to China’s high-end consumers. This kind of all-around service could mean anything — it could be merchandise, it could be consultation services, it could be anything you can think of. Perhaps in the short term (Farfetch and Secoo) will overlap, but the ultimate vision of both companies are completely different.
About Future Potential: Honing in on Offline Experiences
Sina: Where is Secoo’s primary market located?
Yan Yisheng: Its primary target is Asia. Even in Malaysia, where we have a brick-and-mortar store, our main target are Chinese tourists, of which there are many. In China, our main target is people who live in one or two-tier cities. Three or four tier cities, too. It’s basically anyone whose level of spending is high, or who uses the internet and lives in a big, more developed city.
Sina: In the future, will Secoo look towards expansion in three and four-tier cities? Is that plan already set in place?
Yan Yisheng: Yes, they will. Secoo already has an off-line expansion plan. After going public, there were a lot of offers to work with high-end shopping in third or fourth-tier cities. Brick-and-mortar shopping malls have experienced a recent downturn in growth, particularly in third or fourth-tier cities, because they already have all of the top-name brands. Shopping malls want to work with a versatile company like Secoo because it carries multiple brands that are not easily available otherwise.
Currently, Secoo has five brick-and-mortar stores. Before the end of the year they’ll open five more, including ones in Qingdao, Tianjijn, Xiamen, and Wuhan.
New flagship stores will become lifestyle experience centers, a vision of the ultimate home. Inside there will be kitchens, dining rooms, livings rooms, etc. You will be able to cook a meal inside, and if you like the products you can purchase all of that through the APP on your mobile device and Secoo will deliver it to your doorstep. If you like an entire cabinet, or even an air purifier, you can purchase all of that and bring it home with you.
Sina: Do you think purchasing luxury goods can be seen as a form of impulse shopping?
Yan Yisheng: Yes, I do. Most people don’t even know what they want. They need to first be introduced to the product and experience it. I think C2M is unreliable. Most consumers don’t even know what they want. How are they able to make that decision? Most people are actually just “followers.” If you recommend something to me and I end up liking it, then I’ll probably buy it, even if I didn’t have a clear idea of what I wanted to begin with.
For instance, some high-end American and European stores have helpers who let you test the merchandise. I’ve been before and when I went I told the helper what kind of brand I liked and which style I preferred. I showed him some pictures and he took out all of the suitable brands to let me try. There were a lot of brands and styles I had never even used before that he recommended and allowed me to see. This is a very old-fashioned approach. In the future, data will certainly replace these people’s jobs through its ability to recommend great products. We will also be able to use technology and data to increase efficiency.
Sina: How will Secoo incorporate this aspect?
Yan Yisheng: Right now, Secoo has tried this in two ways. They’ve worked strategically with Tencent through gaining access to their database. This has not only allowed them to know which groups of people look at which kinds of bags or shoes, but in addition, it has allowed them to know what kind of videos they watch, what kind of articles they read, and who they follow online. This completes the entire image of the consumer.
The other way was through looking at offline and online data from an experiment Secoo conducted in Shanghai. In the Shanghai store, the display is not set up according to the traditional logic of selling products, but rather through the way items are purchased online. For example, when you buy something online, you will see a window below that says “people who like this also like…” Wanting to see if this could increase efficiency, Secoo used this same logic and applied it to their brick-and-mortar store, using what the data recommended and displaying it with those items.
Sina: Something difficult that Secco faces is resolving the issue of selling second-hand counterfeit items. What is the appraisal team at Secoo like?
Yan Yisheng: Establishing authenticity is very important because you’re inviting consumers to buy your product. When they first started out, Secoo had C-level suppliers, in addition to distributers and other partners, and if we didn’t get rid of them they would try to sell counterfeit items among the authentic ones. If a customer buys a counterfeit item from us, then it’s disastrous to the brand. So during that time we invited appraisers from Milan Station and Japanese second-hand luxury stores, and we even had them train other appraisers. This is something that other platforms aren’t doing right now. One of our male appraisers came with us to New York when we went public on the stock market. He has been an appraiser for us since our founding 9 years ago.
About Investing: E-Commerce Retailers Need a Unique Kind of Competitiveness
Sina: Other than Secoo, IDG Capital has also invested in other high-end e-commerce retailers. What is it about high-end e-commerce retailers that makes them worth investing in?
Yan Yisheng: We think e-commerce retailers are able to persevere in the following ways: one is that they’re able they have control over supply chains, their products are unique, and they have control over the quality of their own products; the second is that their site traffic is superior and its cheap; and the third is the uniqueness of their services. Most service providers on these platforms are not high-end consumers themselves. At the beginning of this year, JD.com sought out IDG Capital and wanted us to introduce them to Farfetch. After three months JD.com invested in Farfetch basically because they were doing what JD.com could not. The only way to survive in this business is when you can do what large online platforms cannot. Otherwise, it would be incredibly difficult to turn a profit while competing against e-commerce giants.
Sina: Why will IDG Capital continue to invest in Secoo? What was the first meeting like with Secoo’s founder Li Rixue?
Yan Yisheng: We were introduced to Li Rixue around 2010. At that time, they had a very, very small shop in Beijing’s SOHO district. Many people were crammed into the shop, and it looked totally un-presentable. But I think Mr. Li is very capable, and he has a lot of great ideas. He has a clear vision for Secoo’s future and so we snatched up the opportunity to work with him.
The second time we met with him, we offered him three pieces of advice: the first was to ensure the authenticity of his products and to end partnerships with the suppliers who have poor oversight; the second was to close the small shop in SOHO so that he could build consumer trust; and the third was to develop the online platform because, going forward, they knew that they would need stores both on and off-line.
Mr. Li is incredibly capable. We only gave him a bridge loan and in three months he did everything we advised him to do. He made an incredible impression on us.
At that time there were many online luxury goods retailers, and we communicated with a lot of them. But we thought that Mr. Li’s vision was the most reliable. He knew that he first needed to do appraisal work. This is a problem that many large online platforms are unable to deal with thoroughly. Even other luxury goods e-tailers have trouble solving this problem. It’s simply a counterfeiting issue. So very early on they brought in appraisers from Japan and Hong Kong to ensure the authenticity of their products.
Another thing is that early on they understood the importance of brick-and-mortar stores. Especially because, early on, many people were hesitant to purchase luxury goods online. If you could simultaneously have an offline and online experience, all the while building trust in your offline brand, then you would lower the chance of consumers trying to buy something cheaper.
As the market for luxury goods changes, Secoo adjusts their platform. They’ve done so every single year. In 2011, Secoo went through rapid market growth. At the beginning, Secoo was just a second-hand store, but after realizing the need for brand new products items, they began to sell new items along the second-hand ones. And percentage of sales for the new products grew exponentially. After three years, the entire market for luxury goods in China experienced a downturn due to the government’s anti-corruption campaign and the crackdown on using luxury goods as a way of leveraging political capital.
Secoo approached this issue by lowering the proportion of wristwatches and handbags that had low frequency levels of customer transactions, and they increased the amount of clothes, skincare products, and lifestyle products that had high frequency levels of customer transactions. Although the price of transactions per customer dropped about 3,000 RMB, the level of user activity grew tremendously. From last year up until now, the entire luxury goods market has already recovered. More brands have started to work with online e-commerce platforms directly. Secoo has become the leading platform that luxury good brands want to try and work with. As the market changes, the company will make adjustments. This is why we continue to invest in them.
Media Contact
Company Name: SECOO Group
Contact Person: Xiaoxu XU
Email: xuxiaoxu@secoo.com
Phone: +8610 6588 0135
Country: China
Website: www.secoo.com
