If asked to name an e-commerce company besides Amazon, most investors might come up with such popular names as MercadoLibre, Shopify, Alibaba, and eBay. But investors would do well to have some other, lesser-known but well-established e-commerce companies on their radar as well.
One such company is Vipshop(NYSE: VIPS), which is among China's leading e-commerce companies, and yet most investors have likely never heard of it. Let's dive in and learn.
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What smart investors know about Vipshop's business model
China's e-commerce market is the largest and most competitive in the world, with numerous players vying for a share of the booming online retail sector. The three most prominent players, Alibaba, Pinduoduo, and JD.com, largely dominate this fiercely competitive market thanks to their enormous scale.
Despite the dominance of these massive marketplaces, niche e-commerce platforms like Vipshop still survive (and thrive) as it focuses specifically on discount branded products. On Vipshop, consumers buy well-known brands at much lower prices than regular stores. These goods are generally high-quality products that people love, more than just some cheap, low-quality products that consumers buy in mainstream marketplaces like Pinduoduo or Taobao. In a way, Vipshop is the T.J. Maxx of China.
While Vipshop serves consumers by offering exclusive deals and significant discounts on branded items, it is also an essential platform for companies to offload their out-of-season inventory without diluting their brand. By focusing exclusively on this category, Vipshop has become an online discount retail industry expert with solid mindshare among consumers and brands.
Vipshop's unique value proposition has allowed the company to remain profitable over the last decade, even as the e-commerce industry in China becomes increasingly more competitive with newcomers like Pinduoduo and Douying. That's no small feat considering that JD.com has struggled to remain profitable during this period.
What smart investors know about Vipshop's prospects
Vipshop might have been largely unknown to most Western investors -- unlike its more prominent peer, Alibaba -- throughout its public life. However, that did not stop the company from quietly growing its operations. In the last decade, it has increased revenue more than tenfold, from 10 billion yuan in 2013 to 103 billion yuan in 2022.
While such a growth track record is not easy to replicate going forward, there are good reasons to think Vipshop's best days are yet to come. As a start, the Chinese e-commerce market is enormous, reaching more than $3 trillion in 2022. At 103 billion yuan (or $15 billion), Vipshop has just touched the tip of the iceburg.
Another way to look at it is that the e-commerce company had 84.8 million active users in 2022, just 10% of the 841 million Chinese online shoppers. It can attract new users to experience the joy of buying cheap branded goods on its platform, reactivate its past users to become active users, and increase the share of wallet from its loyal customers.
Now, competition in the e-commerce market will remain intense and it won't be a smooth journey for Vipshop. Fortunately, it has built a good reputation among consumers for high-quality branded goods at low prices. For instance, 86% of active users in 2022 were repeat customers. Besides, its long-term relationship with brand partners allows it to secure an ever-growing catalog of off-season products.
So long as the company can continue to delight users with an ever-growing catalog of cheap branded goods, it will have no problem attracting new customers and retaining existing ones. A growing and loyal user base, in turn, will make it indispensable for brands looking to offload their inventory while maintaining brand equity. And the virtuous cycle continues.
In short, Vipshop's prospects look bright, and investors should keep an eye on this company.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and Pdd. The Motley Fool has positions in and recommends Amazon.com, JD.com, MercadoLibre, and Shopify. The Motley Fool recommends Alibaba Group and eBay and recommends the following options: short October 2023 $52.50 calls on eBay. The Motley Fool has a disclosure policy.
