Can a Company Born on Taobao Start a Revolution in Physical Stores? | QDaily's New Companies of the Year

Yinman is hardly new. One of the most successful brands on Taobao, it is now close to going public. What we want to know is how it is moving offline in an unusual way, and how big this business can really get.

There may be two hundred stores selling cotton-and-linen clothing on Tmall. Fang Jianhua says the stores ranked second through tenth, put together, still sell less than Yinman.

In 2008, Fang founded Huimei Group, Yinman's parent company, in Guangzhou. The company's first web domain was "Cotton-Linen Artist," and it soon moved onto Taobao. Between 2010 and 2013, Huimei's sales grew 15-fold to 1.12 billion yuan, making it the most successful of the first generation of "Taobao brands." It is now a large company with 1,600 employees, and according to figures Fang provided, its sales are still growing by more than 30% a year.

In a Yinman store, you can find clothes in this style

But the past year's Double 11 sales rankings were not kind to Taobao brands like Yinman. The top spot passed from Handu Yishe to Uniqlo, and apart from Handu Yishe, every brand in the top five was a traditional clothing brand that started offline. Yinman fell from fourth place in 2014 to ninth. These domestic and foreign brands began moving onto Tmall in force in 2014, and they have become Yinman's new rivals online.

"Don't wait for the day you hit the ceiling. By then it will be too late," Fang said. He worries that if Yinman does nothing, it may hit that ceiling soon. In an interview with QDaily at the end of November 2015, he said: "Quite a few traditional clothing companies can grow past 10 billion yuan, but for a Taobao brand, 1 billion yuan is the limit."

At the time, Yinman's first directly operated offline store had only just opened. And another "legend" about Yinman was starting to spread: by 2020, Yinman would open 10,000 offline stores. Yinman announced the plan in July last year and called it "Thousand Cities, Ten Thousand Stores." By the end of 2015 it had signed 202 franchisees, and this year it plans to reach 1,000 stores.

To people who run traditional shops, that number is unimaginable. Even Uniqlo, famous for how fast it opens stores, has only 442 in China (as of its report for the third quarter of 2015), after entering the market in 2001.

Fang faces as much doubt now as when he started the business in 2008. Back then, people warned him that the market wanted Korean-style fashion, not cotton and linen. Now they keep reminding him how hard e-commerce has hit physical stores. Even Zhao Yingguang, founder of Handu Yishe, has urged his old friend not to be naive. Liebo, another Taobao brand of similar fame, did test the offline market in 2012, but it has since closed all its stores.

Fang is unmoved. "When you explore something new, you have to put up with a lot," he told QDaily. "I think that when offline business is getting harder and harder for everyone, that is exactly where the opportunity is."

More and more people have indeed noticed the trend. On online platforms led by Taobao and Tmall, the cost of attracting traffic keeps rising. In other words, each new customer costs a merchant far more than before. And the core of any merchant's business is keeping old customers and winning new ones. Fang says these costs now exceed the cost of opening a physical store in a third- or fourth-tier city.

The franchise recruitment page on Yinman's Tmall store (the number of signed stores is still being updated)

Because the times have changed, Yinman's earlier failure with physical stores hardly matters anymore. In 2011, Yinman opened a store in Guangzhou, and that is how Cai Ying, now head of "Thousand Cities, Ten Thousand Stores," came to know Fang. Cai came from IT. He was then developing an interactive touchscreen, and Fang, who was trying to work out how this online brand could run physical stores, was the perfect customer for his pitch.

Cai recalls that the store plan failed for reasons that can be blamed on the era: smartphones were not yet widespread, QR codes that could connect to payment did not yet exist, and people had not yet formed the habit of shopping offline with their phones. But the attempt brought an unexpected payoff. Cai later joined Huimei Group as vice president of channels and information systems. At first, the job was to take Yinman onto open platforms beyond Taobao and Tmall, including JD.com and Vipshop.

Starting last April, Cai led a team of about 40 people to build a system that would keep the "Thousand Cities, Ten Thousand Stores" plan running smoothly. A new distribution system was added to the group's existing finance, supply chain, order and logistics systems. Orders from every channel, including the physical stores, the official website, the Tmall store and the JD.com store, are pooled together, and the distribution and logistics systems then allocate inventory. How well the system works decides whether each channel gets the stock it was planned to get.

Yinman wants every offline store to replace half its merchandise every 30 days, with unsold items quickly sent back to be sold online. That is a faster turnover than the fast-fashion brand Zara's (though Yinman's supply chain is still slower than Zara's). The approach carries over a strength of Taobao brands: Yinman's Tmall store adds 20 new styles every week.

A Yinman directly operated store. The clothing tags carry QR codes, and the store also sells homeware

In October 2015, Yinman opened its first flagship store, 200 square meters, on the second floor of the Paris Spring department store on Pujian Road in Shanghai. A month after it opened, Yinman ranked third in sales on that floor, behind only Ochirly and Only.

The location was chosen with great care, and online data helped. The delivery addresses of Yinman's online customers showed that many of its buyers live in Jiangsu, Zhejiang and Shanghai. More specifically, although the area around the Shanghai flagship is not the busiest shopping district, quite a few Yinman customers live nearby. Later data showed that fewer than 4% of shoppers who clicked on an item online went on to buy it, but 65% of those who tried clothes on in a store did.

Still, this is Yinman's only directly operated store for now. Such stores make up just 1% of the 2016 opening plan. The other 990 will be franchised stores of only 50 to 60 square meters, in second-, third- and fourth-tier cities.

Fang imagines that the women standing in the franchised stores and greeting customers will be fans of the Yinman brand. They know and love Yinman and share the artistic temperament typical of "Yinman people." They may know nothing about retail, but they have a natural gift for persuading the customers the brand is after. Fang says these fans have grown in number over the past few years, and their enthusiasm keeps rising. During Shanghai Fashion Week in 2015, Life on the Left, another brand owned by Yinman's parent company, took part in an official runway show, and more than 200 guests paid for their own flights and hotels to come and watch.

If they want to become store owners, they need only cover the rent and staff costs, pay a deposit based on the store's floor area, and sign a two-year franchise contract. Yinman will pay for the clothes on display and the furnishings.

"My greatest confidence is that we can take what used to be simply selling goods, the old heavy-store model, and make it lighter, so that starting a business becomes easier," Fang said. When he talks about how pioneering this is, he sounds very much like Jack Ma, the founder of Taobao. In Fang's office, a portrait that pastes half of Fang's face beside half of Jack Ma's hangs in plain view.

By the same logic, building an O2O (online-to-offline) team has also become easier. In Cai's view, once stores become lighter, traditional retail experience may be useless. That experience teaches people how to display goods and how to squeeze the most revenue out of the least space, and it leaves them unable to accept a temporary "loss in sales per square meter" in exchange for "considerable long-term returns" from locking in customers. So he has not hired a single new employee with offline retail experience.

But traditional clothing franchisees struggle to understand this, which troubles Cai. They joined the "Thousand Cities, Ten Thousand Stores" plan drawn by Yinman's growing fame. In 2014, Yinman sponsored two seasons of the fashion reality show Goddess' New Clothes. Fang sat beside Star Wardrobe and D2C, telling designers and celebrities what they were doing right and wrong, and Yinman at last became "a fashion brand for everyone." Its Baidu Index and Taobao search index both doubled.

Fang Jianhua posted this carefully made image on Weibo

Among those in the "Thousand Cities, Ten Thousand Stores" plan, shrewd franchisees with at least some experience in the clothing trade far outnumber the fans. What they most want to know is how likely they are to lose money right now.

"The Yinman project has made a lot of noise with the public, and it's under pressure to go public, so Mr. Fang shouldn't let the offline business die that easily. So I decided to take the risk," said Mr. Cao. He opened a 60-square-meter Yinman store in a third-tier city in the inland south, and is testing the two conditions Cai says the new model needs to keep growing: mutual benefit and the ability to be replicated.

Run the numbers on Mr. Cao's experience: for a 60-square-meter store in a mid-range location in a third- or fourth-tier city, rent plus staff costs about 20,000 yuan a month, and the initial fit-out costs 30,000 to 50,000 yuan. For Yinman, each store saves nearly 300,000 yuan a year in cash flow.

But the franchisees seem to have had less luck, and they soon ran into problems. A prominent one is the difficulty of restocking, especially popular styles. This never happened in traditional clothing retail. Yinman wants its offline stores to be showrooms where styles change often and each style comes in only a few pieces. The franchisees clearly do not see it that way, and they suspect that Yinman favors its online store when allocating goods. In other words, the distribution system Cai built is not fair to the offline stores.

Production volume may also be a problem. According to Fang, Yinman makes about 500 pieces of each item. That used to be enough to support online sales, but for comparison, Uniqlo makes 2 million of a single T-shirt.

In one franchisee WeChat group, other common complaints include these: Tmall's discount system does not work for offline stores, and gross margins are too low for franchisees to keep running. When signing contracts, Yinman stressed that part of the franchisees' income would come from "conversion sharing": when a customer shops in a physical store and then goes back to buy online, the franchisee gets a cut. But this has not been put into practice effectively.

Yinman's official website promotes "fan store owners," but most franchisees are real businesspeople

To open 1,000 offline stores smoothly, Yinman must solve these problems this year. In an interview with QDaily, Cai said that, compared with expectations, perhaps 20% of the situation had gotten out of control, including some franchisees who insisted on painting the stores' required white walls red. But that is within what he can accept, and Yinman still has enough time to turn things around and so "change the industry." The real problem, he said, is that the whole clothing industry is beset by crisis, "money isn't as easy to make as it used to be," and most people "can't let go of their pride."

Given that Yinman has already put going public on the agenda, Cai may not have that much time. Investors are easily excited by this light, fast way of expanding, all the more so because it lets Yinman shift some of the risk onto others, in keeping with the character of Taobao, where it was born. But investors also care about real growth in sales: how big can this business actually get? On this point, they are more short-sighted than the franchisees.

To grow the business, Fang has kept adding sub-brands to Huimei Group since 2013. They cover every age group and have helped win customers beyond cotton-and-linen fans. Like Liebo and Handu Yishe, the other two of the "big three" Taobao brands, Huimei Group owns 12 sub-brands, including the homeware brand Yinman Home, which launched on this year's Double 11.

This homeware brand used to be Shuishen Zhi Cheng, a small Taobao shop with good sales and reviews. Just as with the "light model" of franchised stores, Fang invited the shop's owner to become a "strategic partner" inside Huimei Group, though the owner had to bring an investment to join. Fang calls this, too, "a new starting point in the startup stage."