Topshop's Chinese Agent, Shangpin.com, Has Been Acquired. What Kind of Deal Is This?

Shangpin.com promised to open “100 stores in five years” for Topshop, but it had neither retail experience nor capital. Hemei Group's acquisition solves both problems. What it cannot answer is how much room Topshop still has in China.

On January 3, Topshop announced it would open “the world's largest” flagship store on Huaihai Middle Road in Shanghai, due to open on September 10 this year. It added that it was already scouting sites for a Beijing flagship of similar size, and “plans to open more than 100 stores over the next five years.”

The Shanghai flagship will sit at No. 775 Huaihai Middle Road — a four-story street-front building of 3,400 square meters, with retail on floors one to three and offices on the fourth. The site was once the Huaihai Youth Plaza and has stood empty for nearly a year; it now belongs to the New Bailian Building, part of Bailian Group. One intersection away is the MUJI flagship that opened in 2015, promoted at the time as “the world's largest” too.

The agent behind this run of announcements is Shangpin.com, an e-commerce site with almost no experience in physical retail.

Five days later, on January 8, Shangpin.com was in the news again: Hemei Commercial, a wholly owned subsidiary of Hemei Group, would pay 250 million yuan for a 90% stake in Beijing Shangpin Baizi E-Commerce Co., Ltd., the entity that operates “Shangpin.com.” It would also pay 150 million yuan for 100% of Hecheng Yuxin, a brand-management consulting and merchandise-sales company registered in Hong Kong by Shangpin.com CEO Zhao Shicheng. Hecheng Yuxin holds 100% of “Shangpin.com,” and it and Beijing Shangpin share the same parent, New Shangpin.

In press reports this sounded like a deal that suited everyone — “online and offline complementing each other to connect the business.”

Hemei Group, founded in 1994, listed on the Shenzhen Stock Exchange in February 2010. It holds licenses for about 45 international fashion and luxury brands, among them Armani, Hogan, Dolce & Gabbana, MCM and Versace, and its main business is running retail for international brands. Before buying Shangpin.com, Hemei spent nearly 1.5 billion yuan last year acquiring three international-brand agents or licensed retailers in a row: Shanghai Oulan, Wenzhou Chonggao Department Store and Shenzhen Zhenqiao. This year it also plans to join Fosun International, Septwolves and Shandong Ruyi Group, among others, in bidding for the luxury brand Bally.

“Hemei will not make new adjustments to Shangpin.com's existing mature customer base and business, but will shore up its weak points in sourcing and in opening offline stores.”

In theory the deal solves the problem buried in Topshop's “plans to open more than 100 stores over the next five years,” and makes up for what Shangpin.com lacks in money and physical retail channels.

But is that really so?

What kind of company is Shangpin.com?

Public records describe Shangpin.com founder Zhao Shicheng as a repeat entrepreneur whose early career was in the internet. He started out on banking projects at HP, then went to study in the United States and joined the real-estate listings site Move, where he worked on internet product design. After returning to China in 2005 he founded three companies in turn: Yingtianxun, Yazuo and Shangpin.com. Yingtianxun ran outsourced operations for bank credit-card malls; Yazuo sold cloud-based CRM services to restaurants.

Shangpin.com was the venture Zhao started in 2009, positioned at first as a discount luxury e-commerce site.

China's first crop of luxury e-commerce sites appeared around 2008 — Vipshop, Youzhong.com, Jushang.com, Zouxiu.com and Meilihui among them. From 2010 to 2011 venture capital chased them hard, and the investors were well-known firms: Sequoia Capital, IDG Capital, JAFCO Asia, SoftBank China, China Media Capital, Bertelsmann Asia Investments.

That boom rode on two others happening at the same time in China: luxury spending and online shopping. Figures from the China E-Commerce Research Center put the country's online luxury market at 2.86 billion yuan in 2009 and 17 billion yuan in 2012, with 2013 forecast to pass 20 billion yuan. Between 2010 and 2012, meanwhile, annual sales of “Taobao-native brands” began doubling, and in some cases growing five- to tenfold, year on year.

Asked to describe their business models, these sites all said much the same thing, and most invoked the French luxury flash-sale site Vente Privée. In short, membership plus flash sales: “buy cheap from overseas agents, import the goods into China, build a website, and put them up for sale.”

Carried by that current, Shangpin.com raised US$60 million from four investors, including Lei Jun and Morningside Venture Capital. In a 2011 interview Zhao said Shangpin.com had that year reached “revenue of 200 million yuan, more than 2 million registered users, and an average order value of 2,000 yuan — 10 times the average for e-commerce sites.” Lei Jun posted on Weibo at the time: “Shangpin.com's performance over the past year has exceeded my expectations.”

But brand licensing, counterfeits and poor service were always the biggest problems these platforms faced. The wave passed quickly and a run of companies were bought or closed. In March 2013, Yang Peifeng, founder of Jiapin.com, left nine months after bringing in a US$15 million investment from Macy's; Jiapin.com ceased to exist and became Macy's full-price online mall in China. That same year Qiaowu Qiaoyu said an “inside thief” had made off with and sold 120,000 items from its warehouse, leaving it unable to keep cash moving, and announced it was shutting down. Zunxiang.com folded in late May 2014; in June 2014 Meilishuo bought Tianpin.com.

The survivors all looked for something else to be. Vipshop moved to flash sales of second- and third-tier brands, invested in beauty and mother-and-baby e-commerce, and even took up cross-border shopping. Jushang.com switched to limited-time sales of international fashion brands and called itself “an outlet mall online.” Zouxiu.com recast itself as a “platform for mid- to high-end women's goods.”

Around 2014 Shangpin.com, too, began turning itself into an affordable-luxury platform, where licenses were easier to get. Zhao's description of his target shoppers shifted accordingly: “When they buy bags and shoes they always go for a good brand; when they buy clothes they always go for a low price.” In 2015 Shangpin.com ran ads for an “affordable-luxury shopping carnival” in several metro newspapers: “You may be No. 1 in market size, but my prices are lower. You may be No. 1 in delivery speed, but my prices are lower. And even if your prices really are lower, your brands are too cheap to compare.”

Some platforms did win capital back after reinventing themselves. On July 8, 2015, Secoo raised US$50 million, and Alibaba took a stake in the flash-sale site Meilihui for US$100 million.

Last year the luxury houses that had insisted nothing could replace the store began building their own e-commerce operations, and grew more willing to work with third parties. LVMH, Hermès and Kering brought their brands onto Tmall one after another, and switched on selling through WeChat. Third-party luxury platforms were in demand again: in June 2017 JD.com put US$367 million into Farfetch; in September Secoo listed in North America; in December Tencent and JD.com announced stakes in Vipshop, buying shares for US$604 million and US$259 million in cash respectively.

Shangpin.com's own position looks awkward by comparison. After its Series C in 2011 it never won outside capital again, and it never clearly disclosed its sales — not until Hemei Group announced the acquisition on January 8.

How did Topshop become Shangpin.com's opening?

After the pivot, Topshop became the most visible sign hanging over Shangpin.com's affordable-luxury story — and the only one.

In September 2014, Shangpin.com won the exclusive online license for Topshop in mainland China, and also ran Topshop's Tmall flagship store for it.

That mattered a great deal to Shangpin.com. “Because [Shangpin.com] carries many categories, it's very hard to make its products distinctive. Its relationship with brands is loose. What most brands want is sales, so it's hard for them to be tightly bound to anyone. Put another way, a brand that works with Shangpin.com today can work with Secoo or YOHO!BUY tomorrow — to the brand there's no difference,” Isabella told QDaily, explaining what makes a multi-brand e-commerce platform hard to run. She worked at ELLE SHOP, Hearst's e-commerce site, and now heads Runner Camp, a multi-brand sports platform; she has spent years in fashion e-commerce.

Philip Green, Topshop's owner and chairman of Arcadia Group, has never explained to the press why he waited until nearly 10 years after fast-fashion rivals such as Zara and H&M had entered China before considering the market, nor why his partner there is Shangpin.com, a company that stands out neither in market share nor in recognition.

Zhao once described to reporters how he landed the Topshop agency: “Thirty thousand emails, 700,000 kilometers of flying, more than 900 days of waiting, and communicating over and over again,” and “Topshop first gave us a small order for Miss Selfridge. We deliberately promised a lot, which earned us many chances to talk with the company. Bit by bit we got a quarter, then half a year, and now four years of working with Topshop.”

In fact Philip Green may know very little about China. Topshop has no office there. It is busy on social media abroad, but its WeChat official account posts only once or twice a week in China, and its Weibo has not been updated since the “Double 12 Tmall Year-End Gala” last December.

Its agency arrangements in China have also looked messy. It sold through the Beijing boutique Fei Space early on; in 2015 and 2016 it opened a Topshop and a Topman in Galeries Lafayette. It also has one Topshop each in Jinguanghua Plaza in Shenzhen and the Ziyougang Outlet in Zunyi, the former of which closed in October 2017.

By Shangpin.com's own account to QDaily, all these stores are run by different agents and are not its responsibility. Once the Shanghai flagship opens, “all of them will be cleaned up and consolidated, and from then on Shangpin.com will be Topshop's only agent in China.”

Topshop has never published sales figures for its China business. According to Shangpin.com, “in the first year of the partnership, Topshop's online sales in China were twice what the contract called for; for the full year 2016, sales were three times the contracted figure.” The number Zhao cited most often in interviews: “A pair of jeans sells every ten seconds. Last year [2015] we sold 600,000 orders and 1 million items, and with barely any stores and no large-scale promotion it built up 3 million followers online.”

None of this has been verified. “Topshop China” currently has just over 50,000 followers on Weibo, and its WeChat official account averages about 2,000 views per post, on content that is mostly sales pitches.

“On an e-commerce platform the gap between a hit product and everything else can be enormous, even within one brand. Online, maybe 1% of products are hits and 60% sell nothing at all. Another 10% or 20% sell a few pieces a month. They'd only talk up jeans if jeans made up an unusually large share, and that may mean the gap between products is extreme,” Isabella told QDaily.

In 2015 Shangpin.com said publicly that it had reached 30 million users. That number contradicts what came before it: in 2014, FT Chinese reported Shangpin.com had 5 million users, and even then a fair number of mainland retail analysts thought the figure was badly inflated.

The performance guarantee attached to Hemei's acquisition offers another clue. It says that in the three calendar years after the deal takes effect, Shangpin.com's sales must be no lower than 400 million, 600 million and 900 million yuan, and its return rate no higher than 24%.

Performance guarantees exist to settle the information gap between two sides that value a company differently — which is to say Hemei Group and New Shangpin disagreed about what Shangpin.com is worth. Shangpin.com has to hit those numbers over three years to get the terms that go with them. If it misses, the valuation has to be done again.

How much room does Topshop still have in China?

For Zhao Shicheng, running Topshop's online business alone leaves Shangpin.com very little room to grow. Expanding offline and doing “new retail” has become a more appealing story than affordable luxury.

At the end of 2016, Shangpin.com said it would push a “new retail plan combining online and offline.” At the end of 2017 it said it had won the exclusive online and offline agency for Topshop, and would “open close to 100 physical stores within five years.”

Whether that story holds up depends on whether Topshop can actually sell in China.

Philip Green, Topshop's owner and chairman of Arcadia Group, was once summed up by an old rival, Marks & Spencer chief executive Stuart Rose, like this: “He tends to look back rather than forward. He is the classic bricks-and-mortar retailer, and at times he even seems a little out of step with the age.”

Topshop's retail strategy has always been cautious. The Times reported that in 2016 Topshop had more than 620 stores in over 40 countries. Zara had more than 2,100 stores worldwide (its parent Inditex's brands more than 7,000 between them), and H&M more than 4,300.

High prices are another problem. A 2014 survey of fast-fashion retailers by Fairfax Media found Topshop charged 35% more in Australia than at home in Britain.

Slow and expensive brought on a crisis. In the financial year ending in late August 2016, sales at Taveta Investments Ltd., the holding company of Topshop's parent Arcadia Group Ltd., fell 2.5% year on year to £2 billion, and profit dropped 16%. The fortune of Philip Green and his wife Tina Green shrank by £433 million in 2016, to £2.8 billion.

Abroad, Topshop has expanded mainly through agents. But last year its exclusive agents in Australia and New Zealand both announced they were giving up the Topshop business because it was losing money, and Topshop pulled out of both markets.

At home in Britain, it closed nearly half its stores to restructure. Its leadership turned over heavily: Topshop general manager Mary Homer, commercial director James Mooney, and Kate Phelan and Gordon Richardson, creative directors of Topshop and Topman respectively, all left one after another.

At the end of 2017, Philip Green named former Burberry chief marketing officer Paul Price as Topshop's CEO and set course for a digital overhaul — which looks late, given that even luxury houses now run their own e-commerce and the newer fast-fashion brands went online a decade ago.

China may be Topshop's chance to save itself. But as we have argued in earlier reporting, making money in this market is no longer as easy as it once was.

Over the past 10 years fast fashion has done its job as a basic education in style. The tastes and the wallets of that first generation of fast-fashion shoppers have probably moved up, and their choices are far wider. Fast-fashion chains also opened stores in lockstep with commercial property in China's first- and second-tier cities, and that property now has regional bubbles: H&M's average annual sales per store in China fell from 32 million yuan in 2012 to 19 million yuan in 2016.

Topshop putting its largest flagship in the world at No. 775 Huaihai Middle Road is a case in point.

“Fast fashion isn't chased the way it was when it first came to China, and the best locations are hard to find now,” Du Bin, general manager of the leasing business line at RET, told QDaily. “The whole of Huaihai Road has been in a slump for a long time. The ‘Barbie Building’ everyone once talked about still hasn't been leased — that's been three or four years now. Rent came down from tens of yuan to a few yuan, and I heard it got to 8 yuan and still found no tenant. Shoppers these days would also rather walk a mall than a street of storefronts.”

Even so, with Hemei Group behind it, finding new sites will not be hard. “Malls always tire of the old and want the new. They have to keep bringing in new kinds of tenants, keep the blood fresh, to keep the foot traffic strong. Right now a lot of fast-fashion leases have just expired or are about to. More than 900 malls will open next year too, so there's room for it to survive.”

In Du Bin's words, “this is a choice that's hard to get wrong” — how it turns out is another matter.

As of now, Shangpin.com has given no official response to the acquisition.

Cover image: Topshop