VANCL: China’s Clothing Giant Stumbles Back From the Brink
The VANCL IPO fell apart after the brand fell out of favor. How did the once mighty retailer become China’s diaosi (loser) brand, and can it make a comeback?
China’s apparel market is now one of the fastest growing markets in the world. Euromonitor statistics show many foreign brands doing well: Uniqlo currently holds 1.6% of the market for specialist apparel and footwear; Danish company Bestseller Fashion Group China, which operates brands like Only, Jack & Jones and Vero Moda, is holding 2.3% of the market share. Where are the local apparel brands?
VANCL, a Chinese e-commerce clothes retailer, is almost a forgotten name. It had a 4.5% share in the apparel market in 2011, but something went wrong. For more than four years it has seemed like an afterthought. Recently, VANCL’s name came back to the public—though not for any enviable reasons.
VANCL’s 2016 summer T-shirt design has lots of quotes from a book written by, Mu Dan. On a Chinese talk show, Chen Nian, CEO and founder of VANCL was asked “Is Mu Dan to you what Jay Chou (a Taiwanese singer-songwriter) to Chinese youngsters?”, his quick answer “After 100 years Mu Dan can still be remembered, while Jay Chou would be rubbish” provoked the public.
Jay Chou is the pop king of to China’s post 80 and 90s generation and unsurprisingly, VANCL, Chen Nian and Mu Dan’s name received 22,000 hits in a day on a popular search engine, an explosion compared to the 7,000 which VANCL alone normally gets.
The hypocrisy of Mu Dan’s commentary, given VANCL’s reputation as a has-been company, was not lost on netizens, but the controversy did, at least, tell people that VANCL is still alive.
Chen Nian started as an editor, and became a serial entrepreneur. He founded weekly magazine Shuping Zhoukan (literally Weekly Book Review) in 1998, co-founded Joyo, a successful B2C retailer, in 2000, which was later acquired by Amazon for $75 million. He later founded another B2C business called Woyou. In 2006 he published an autobiography Guiqulai, and in 2007 he started his now nine-year-old baby VANCL.
“VANCL targets a market where young men are looking for cheap shirts that look good, that’s how it became popular at first” said Suo Zhiguo, an e-commerce analyst. To position itself on the market, VANCL learned from PPG (which doesn’t exist anymore), which sold men’s shirts via a call center. Moving their homogenized products online, VANCL quickly attracted students and young internet-savvy professionals with moderate purchasing power and fashion sense. Having noticed that women’s wear dominates the apparel market, two years later VANCL introduced women’s wear lines along with children’s apparel.
The Key to Success
VANCL’s marketing has always being its core competence. In 2011, VANCL spent $158 million on marketing, equivalent to over 15% of its net sales (verses the 3.5% typical of most apparel retailers). The “VANCL Style” (used in its marketing campaigns) consists of messages that encourage customers to focus on their own style choices, conveying key messages like: “be yourself”, “strive to succeed” and “do not fear”.
It went viral overnight, proving popular with youth audiences.
Price, of course, was another key motivator.
One tale that Chen Nian loves to tell relates to how their contract manufacturing workers wear the T-shirts they produce. “Before VANCL, in the case of these workers, no matter whether they were children or elderly, what they produced had nothing to do with what they could have. They simply couldn’t afford [the products they made]”, “VANCL represents the ‘People’s fashion’, our job is to make affordable fashion designs for everyone.”
Convenience is another factor that pushes VANCL forward. Although it is completely online without any brick-and-mortar stores, it still manages to sell over 30 million items a year. VANCL has its own delivery brand—Rufengda. With Rufengda, customers can get items delivered to their door, try them on, and then decide whether to pay. “It makes me feel no burden, I can have it if I want, I can also say no and send it back, it didn’t cost me any money.” says Meng Yu, a 22 year old student who used to be a VANCL fan. VANCL also offered free deliveries in 2009 for some time, and saw a 60% increase in sales orders.
Although VANCL’s profitability remains unclear, a case study in June 2012 indicated VANCL would receive a multi-billion dollar IPO on the NASDAQ within 24 months.
This IPO was cancelled, as VANCL’s golden era fell apart.
In 2010, VANCL held 28% market share of online apparel retailers domestically, ranking first among its peers. It generated RMB 2 billion turnover, sold more than 30 million items, was China’s 6th largest B2C company by revenue and 5th B2C by monthly users.
“I hope I can acquire Louis Vuitton in future, and sell [those products] at VANCL prices and also acquire Converse, then sell canvas shoes for RMB 50,” Chen Nian said in 2010.
But it didn’t take long before his “People’s Fashion” approach started to go awry.
From 2007-2010, VANCL received $70 million in financing; however in 2010 and 2011 the company received a massive financing injection of $430 million, daring it to expand. In January 2011, Chen set an annual sales goal of $6 billion for his team, which represented a 200% increase from 2010’s successful target.
Two months later he ‘adjusted’ that goal to 10 billion.
“We have more than 30 product lines, every day new ideas occur to us and we want to add new categories,” Chen once told the 21st Century Business Herald.
Customers, however, found the new and energized VANCL baffling. “I went on to VANCL’s website and had a shock, it’s overwhelmingly busy with clothes, skincare, humidifiers, mops, chopping knives, there are so many products here, they’re kind of irrelevant,” commented Yu.
While VANCL was expanding like crazy, quality issues also arose. “A VANCL T-shirt looks fine when it’s new, but if you wash it more than twice, the color fades, the neckline becomes loose, and the shape’s gone, it’s almost like one-off clothing,” recalled Yu.
And Chen himself also noted this problem, but it was too little, too late. “I had 600 VANCL canvas shoes in my office, I tried them on, one by one, my feet hurt, I was disappointed and angry, those shoes were all rubbish.”
Together with overestimated demand and growth, there were also problems with delays and re-orders, meaning best-seller items were out-of-fashion by the time customers got hold of them. Wild expansion of product lines meant that by the end of 2011, VANCL had inventory worth RMB 1.4 billion lying in warehouses unsold.
Instead of a glorious IPO, VANCL was struggling to survive, and things were getting worse.
Chen Nian and Xiaomi CEO and founder Lei Jun, worked together at Joyo and had been like brothers ever since. Lei consistently backed Chen, in 2008 he helped VANCL receive $1o million in financing and in 2014 he prompted another $100 million of financing for VANCL. At the time, he persuaded Chen Nian to “focus on a simple item and make it perfect”: the Xiaomi philosophy, or “Xiaomilization”.
Chen did just that.
He moved his office out of the CBD, sacked 10,000 employees and whittled the company down to just 300 people. “I started to look at each product rather than marketing gimmicks,” Chen said in his self-reflection story.
Finally, in 2014, VANCL was ready to run again. They held a product launch announcement called “A Shirt” to tell a story.
It was a tale designed to be a stark contrast to mass production: the pursuit of a good, simple, cotton shirt. Chen and his team flew to Vietnam and Japan many times to meet shirt experts, choose better material, talk to good designers, check the manufacturing process and demonstrate care for quality. Then, similarly, in 2015, they positioned their T-shirt as a “love letter” to VANCL fans, as a form of luxury at a reasonable price.
“Xiaomi’s success is not only about the product and price, it is about good timing as well…learning Xiaomi’s model is a good start, but the crux is tailoring it for your own use,” the CEO of T.H. Capital Hou Xiaotian remarked.
The cheap strategy helped VANCL win 4.5% market share in 2011, but it also had a negative byproduct for this brand— a ‘Diaosi (loser) tag. When people like the product but don’t like the brand, that’s a problem. The question is, can VANCL shed its image as cheap and undesirable, and attract value-focused customers?
“Of course you can make high-quality shirts, but even if you are of good quality it doesn’t necessarily mean people who want high-quality shirts will come to you. Making people appreciate a brand is not easy at all,” Suo said.
In retail, the considerations go well beyond price and quality: fashion trends change every quarter.
“Even if the shirt is the most likely to be ‘xiaomilized’ item, you still need to look at what the post 80s and 90s are looking for, their tastes change all the time,” one e-commerce expert, who requested anonymity, remarked.
Last year Chen told Chinese media that producing a wash-and-wear shirt costs RMB 140, but he only sold them for RMB 129. He was adopting a “hunger marketing” strategy in which sometimes people have to wait half a month for an order. He also believed that word of mouth could help with market share, and after gaining some market share VANCL would adjust the prices. Which is exactly what happened: now VANCL’s wash-and-wear shirts sell for RMB 349.
While Chen claims currently VANCL’s per transaction amount is over RMB 300 and the company’s profit is strong enough to maintain it for another 10 years, it is also encouraging people to put money into a VANCL account to receive a 50% discount. On ZhiHu (China’s Quora) users are very suspicious of this intention—VANCL is having cash flow issues.
VANCL’s home page displays more than just simple, perfect shirts. There are shoes, bed sheets, quilts, kid’s clothes and underwear… the whole display seems like a repetitive mistake.
But at the end of the day, regardless of what others say, Chen is marching on. In early August he posted a photo of a pair of shoes on Weibo, saying he had jogged 14 km in VANCL’s new sample sneakers and he felt great.
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