Hi folks - thought you might enjoy a sample of what the premium subscribers just got. Here’s an abridged version of my deep-dive this month. For the full version including Youzan’s strategic advantage, financials, risk and much more - feel free to become a paying member.
When I ask you about Youzan (有赞), what's the first thing that comes to mind? (If anything comes to mind at all).
Do you think the Chinese e-commerce back-end SaaS platform for omnichannel retail with a current market cap of $12.3Bn*? In other words, do you think of the Chinese equivalent of Shopify?
I think it’s the Chinese equivalent of Salesforce. But that's getting ahead of ourselves.
Youzan is at the intersection of several Chinese tech trends right now; the rise of private traffic in e-commerce, getting Chinese enterprises to pay for software and how to own the funnel. On top of all this, they've made strides in becoming a software platform through productisation, which sets them apart from Chinese software peers who are still heavily-services oriented. However, there's a tension at the heart of their complex product strategy - can the sprawling product offering bring additional ARPU (annual revenue per user) with manageable unit economics?
The year was 2012, and the meeting place was Beta coffee shop in Hangzhou. A small group sat there talking about starting something new. One of them had a bruising failure from their last startup, a shopping directory called Guang (逛 aka To Shop) shuttered. In his early 30s, Ning Zhu wanted another shot but was hesitant on going big. The group converged on a WeChat-based CRM; it seemed to like a solid niche offering that could be profitable in no time.
Ning Zhu had a legendary rise in the Chinese tech scene. His chosen moniker is White Crow (白鸦 aka Bai Ya), about a parable where a crow chooses freedom and death over a lifetime of cage-dwelling. He grew up in the poorest county in Henan. After dropping out of secondary school, he worked a series of odd jobs, including peddling clothes and construction work but eventually returned to education and got a degree in art and design.
After a break-up in 2003, he got on a train to Beijing and vowed to work for six years as a web designer to see what would come out of it. The timing was right, and a chance meeting led to a position in Baidu in 2006. It was there that he made the transition from web to product design. Then a jump to Alipay in 2008, where he climbed the ranks while simultaneously offending everyone in his path. He had no emotional intelligence back in the days, he would remark in later interviews.
At 30, with a healthy vested share schedule, he wanted to do something bigger. At Alibaba, he saw two things: consumers did not know how to find items, and there was no communication between the merchants and consumers. Thus Guang was born. But alas, in the PC era, where e-commerce platforms reigned supreme, there was no chance for a shopping directory.
The WeChat CRM helped merchants to manage their customer relationships on WeChat. The name was Pocket Tong (口袋通). Then a few events happened in quick succession. WeChat's user count exploded in 2013, and more merchants everyday wondered how to utilise this new platform to do business. They started groups and directed customers to their Taobao stores. Every expected Alibaba to crack down, but no one expected it to be as soon as Nov 2013. But when Alibaba blocked WeChat's links, the fanbase that merchants had spent a year cultivating had no place to go to finish their purchase journey.
The team had an opportunity in front of them, and they took it. The way forward was an e-commerce platform that utilised the private and decentralised traffic of WeChat to transact. Youzan was born and series A of 20 million RMB quickly followed by the end of 2013.
In the initial days, Youzan was solely focused on tooling for merchants to use WeChat malls. The VC capital winter of 2015 forced their hand to take the road towards being a full-stack micro store. Youzan started charging for a SaaS product and also implemented a transaction fee.
Youzan listed on the Hong Kong stock exchange in April 2018 (though it was more of a lengthy reverse takeover process) and currently has a market capitalisation of $6.4bn as of March 2021. It raised from the likes of Hillhouse Capital as well as Tencent and Baidu (both post-IPO). On the 28th of February, they made an announcement that they will be delisting from the Growth Enterprise Market of the Hong Kong Stock Exchange and have applied to be listed on the Main Board.
The revolt against platforms’ centralised traffic
Merchants have seen their traffic acquisition costs rise as they spend across a broader set of platforms. It has become untenable for SME merchants, who struggle to maintain the advertising outlay needed for a steady public traffic stream.
The Chinese internet stands out for its fragmentation of internet traffic. In the West, most merchants go to Google and Facebook and call it a day. In China, the baseline for advertisers is at least 4-5 platforms. Alibaba, JD, WeChat, XiaoHongShu, Weibo; the list goes on, and the spending is increasing. As a result, the typical CAC’s rising from duplicate spends across platforms for the same consumer set.
When the platform is dispersing traffic through a central algorithm, the traffic is 'public'. Under this traffic acquisition model, merchants are beholden to e-commerce platforms and ultimately limited by the platform. As Alibaba and JD's user growth slows down, and the top 1% of Taobao and Tmall merchants capture 40% of GMV, SMEs feel the pinch of advertising to stay at the top of the search results.
The need for cheaper traffic has had two direct sets of beneficiaries. The first is Pinduoduo, whose ranking algorithms favour lower price products. The second is e-commerce platforms such as Youzan. Not surprising, since 2015, when both the arrival of Youzan and other private traffic cultivation platforms, CPM has been slowly falling.
Source: Newrank research, Guosen securities (2013 is the base year, CPM = 100 )
The boom of short video platforms
The rise of Kuaishou and Douyin as new entertainment platforms has created recent tailwinds for e-commerce backend. Attention was being gathered on these new platforms and not being appropriately monetised.
Short video platforms have encouraged partnerships with e-commerce platforms to get the flywheel going. They need more creators on the platform, and nothing incentivises creators like getting them paid. The short video has also created a new opening for e-commerce: that of content e-commerce, where watchers are in low intend buying mode but could be led towards a sale. Youzan has been a key beneficiary as they now account for ~30% of Kuaishou's e-commerce GMV.
Brands owning their destiny
"The platform forces brands to digitise for domination, not to empower merchants. Merchants need to find more third-party service providers to solve digital problems. In addition to these necessary operations, we found that many excellent merchants do not have a single operating platform." - Bai Ya
As merchants grapple with the various platforms they can be present on, the platform’s risk becomes more apparent. Merchants increasingly want to be masters of their fate and be platform agnostic concerning Alibaba, JD, Kuaishou and Tencent.
With e-commerce SaaS platforms, these merchants can cultivate their pool of private traffic on one unified backend. Private traffic (or organic traffic) is a decentralised model that utilises social circle recommendation as the primary traffic dispersion source. Now brands can have one-to-one relationships with their customers without an intermediary. Platforms will be their way out of being commoditised by the aggregators.
External shocks, geopolitical influences and favourable policies for national brands
The pandemic has sped up e-commerce adoption. After all, only 25% of Chinese commerce is online. Offline stores that have been reluctant to digitalise had no choice last year. It was the ultimate push factor. Coupled with the emergence of Gen Z customers who are open to domestic brands and the affluent class are looking within China for their consumption fixes during a time of travel lockdowns and internal circulation. It’s fertile times for a new crop of domestic brands looking to lead with an online presence as much as their offline presence. Success stories like Perfect Diary, Genki Forest and Three Squirrels have emerged to pave the way.
Youzan covers the spectrum of functionalities for multi-channel e-commerce and then some. Merchants can open storefronts on multiple platforms with one centralised backend for order and inventory management, live-streaming, delivery, payment, and customer service, to name a few. They also provide PaaS and verticalised offerings in segments of beauty, education and retail chains.
Youzan's offerings have followed the funnel approach after a crucial realisation. Chinese companies see making money as their core competence; this means improvements in efficiencies and cost reductions are nice-to-haves. Tools that increase revenue are need-to-have. They are reluctant to pay for process optimisation but are willing to pay for positive outcomes. I believe every Chinese SaaS company encounters this mindset sooner or later, and the smart ones decide that they too need to make money and become revenue generation offerings. A key trend for the future of Chinese SaaS will be outcome-based pricing.
With this ethos, Youzan's offering enables its merchants to be a one-stop-shop for their customers.
In terms of what the product looks like. Storefront layout is relatively set and allows a certain degree of customisation. The layout takes heavy inspiration from Taobao (and I guess so does every other e-commerce platform).
While a general comparison for Youzan has been about how it's the Chinese equivalent of Shopify, upon closer examination, Youzan's product strategy is strikingly similar to Salesforce's. I think of Youzan being a CRM that commercialises through their e-commerce platform. Getting the comparison right means we see the logic driving Youzan's efforts in verticalised offerings and growing their ecosystem through ISV and third-party developers now. (Though I think verticalised offerings is also a general trend for Chinese SaaS).
* Earlier draft of this write-up mistakenly said the market cap was $6.4bn, but as the listed company of Youzan owned 52% of the operating company, the implied market value of the business is double what I’ve listed.
Always happy to hear what you think, reply to this email to let me know. I’ll be back with another longform in two weeks time.