Is Baozun’s risky leap into brand management starting to pay off?

The provider of e-commerce services says it is turning the corner in its ‘journey of transformation’

Key Takeaways:

• Baozun’s revenues rose 5% last year following its acquisition of Gap China, which represented 14% of total annual sales
• Product sales from the company’s older e-commerce business fell by 21% last year, while e-commerce services revenue also slumped by 5%

By Edith Terry

Baozun Inc. (BZUN.US, 9991.HK) has been undergoing a major transformation this past year, buying brands and investing in a new offshore business as it diversifies beyond its status as one of China’s largest e-commerce service providers. But what exactly is happening at this company, whose major stakeholders include e-commerce giant Alibaba (BABA.US; 9988.HK)?

A few new hints came last week, when Baozun released its annual report for 2023 and announced two senior management moves. Catherine Zhu was named as the company’s new CFO, while Arthur Yu relinquished his former CFO position to focus on his other role as president of Baozun E-commerce. Both joined the company four years ago, with the latest shift apparently aimed at giving Yu more time to focus on reviving Baozun’s core e-commerce services business.

Baozun’s Hong Kong-listed shares fell 4% the day after the announcement, in the latest sign of lackluster investor interest in the company’s ongoing transformation. The company previously announced its 2023 financial results in March, meaning the latest decline was likely in response to the executive moves and new details in the annual report. The company’s Nasdaq-listed shares have lost more than 40% of their value over the last 52 weeks.

The annual report sheds some light on Baozun’s latest thinking. It is taking its year-old brand management business in two new directions domestically, while outside China it’s also heading south – to Southeast Asia, that is. Its purchase of Gap Inc.’s (GPS.US) China operations last year and its 51% joint venture formed with privately owned brand owner Authentic Brands Group just months later have become templates for the company’s two new brand-related businesses, Baozun Brand Management (BBM) and Baozun International (BZI).

Baozun E-commerce remains at the core of the company’s brand-management business in China, providing back-office e-commerce supply chain management services for brands. Baozun International is doing the same thing internationally, initially in Southeast Asia. CEO Vincent Qiu said on the company’s latest earnings call in March that Gap China, which lies at the heart of Baozun Brand Management, has sharply narrowed its operating losses as the company works to recast the chain as a more upscale brand.

“This breakthrough in our first year is the result of having established a solid foundation for growth and success in brand management,” Qiu said. “Baozun Brand Management is a key component of Baozun Group’s second growth curve. Baozun International represents a longer-term opportunity for which we continue to lay the business foundation and infrastructure.”

Unimpressive numbers

While the vision sounds good in theory, the actual numbers aren’t too impressive just yet. Baozun’s annual revenues for 2023, which includes 1.3 billion yuan from Gap China, rose just 5% to 8.8 billion yuan ($1.2 billion). The company’s core business providing e-commerce services to other brands slumped by 5% to 5.5 billion yuan, while revenue from product sales through e-commerce tumbled by an even larger 21% to 2 billion yuan.

Within the product sales category, revenue from appliance sales was down by 29%, and electronics was down by 56%, reflecting weak buying sentiment in China as consumers avoid big-ticket items.

The company lost 278.4 million yuan for the year, narrowing from a 653 million yuan loss in 2022. The company’s Brand Management unit, which mostly includes the Gap China operation, posted a 188 million yuan adjusted operating loss for the year. The chain closed 86 stores before the acquisition, and Baozun inherited operating losses from the chain. 

Baozun’s transformation comes amid painful changes taking place in China’s e-commerce realm, which is showing signs of maturing after years of strong growth. Major platforms, from Alibaba’s Tmall to Tencent’s WeChat Channels, are struggling with weak consumer sentiment domestically. Luxury foreign brands that were once one of Baozun’s main client groups, have also been facing new competition from home-grown luxury brands.

Baozun began its business in 2007 with a smart idea – offering back-office functions to big-name foreign brands looking to tap China’s rising e-commerce wave at that time. The company’s main partner for its core e-commerce services business is Alibaba, which owns 14.4 % of Baozun. Its dependence on Alibaba eventually became a liability by limiting Baozun’s growth opportunities, and the company later began to diversify by supplying e-commerce services to brand partners across a range of other platforms.

So where do things stand now? Baozun’s e-commerce division has responded to the disruptive impact of Douyin, the domestic version of short video sensation TikTok, in the domestic e-commerce ecosystem by launching a “Creative Content to Commerce” studios and by acquiring Location, a top-tier Douyin partner, according to the annual report.

Baozun Brand Management has been revamped from 70 historical systems into a single integrated operating platform, which will be the foundation for that unit’s future growth. Baozun has worked hard to shed the discount brand image associated with Gap stores, and implemented a new “China for China” brand philosophy.

The initial major piece of Baozun International is Authentic Brands’ Hunter brand, with Baozun holding intellectual property rights to the brand in Greater China and Southeast Asia. Baozun International has hired 150 employees across Singapore, Malaysia, Thailand, South Korea, the Philippines, Hong Kong and Taiwan. It will introduce the Hunter brand, famous for its outdoor wear and rubber Wellington boots, into Singapore and Malaysia this year.

The international unit has formed a similar collaboration with Japan’s Honda Motor Co., which will launch in Singapore and Malaysia later this year, according to Qiu, adding the pair will work together with both online and offline initiatives.

Baozun’s current price to sales (P/S) ratio of 0.13 looks quite depressed compared to domestic competitor Weimob (2013.HK), which trades at 1.38. Global peers Salesforce (CRM.US) and Shopify (SHOP.US) both trade much higher with ratios of 7.81 and 13.58, respectively. Baozun’s depressed valuation may explain why six of seven analysts canvassed by Yahoo Finance rate the company as a “strong buy” or “buy.” And at least one broker, Daiwa Capital, has recently upgraded the stock to a “buy.”

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