After 46 consecutive quarters of profitability, Vipshop has become a typical representative of China's Internet industry that "makes money quietly."

The first-quarter financial report this year shows that Vipshop's MV (total sales) for the quarter was 52.4 billion yuan, an 8% year-on-year increase; Non-GAAP (Non-Generally Accepted Accounting Principles) net profit reached 2.6 billion yuan, a 25% year-on-year increase.

Despite seemingly impressive performance, the stock price has not improved.

After reaching a high of $20.190 per share in February this year, Vipshop's share price has continued to fluctuate downwards, reaching a low of $12.760 per share as of August 12. Compared to the peak of $46 per share in 2021, the share price has halved.

Setting aside the reasons for insufficient market liquidity, Vipshop has developed a business model driven by "special offers as the core and relying on loyal members for consumption." Guangfa Securities' analysis also points out that Vipshop's revenue growth is mainly due to the increase in the number of paid members and ARPU (Average Revenue Per User).

However, regardless of the special offer model or the size of the loyal member base, Vipshop faces significant challenges.

Vipshop CEO Shen Ya once pointed out that acquiring customers is one of Vipshop's priorities in 2024, and they will try some platforms with less past cooperation but a larger user base, such as Xiaohongshu and Bilibili.

However, the actual growth is far below expectations. In the first quarter of this year, the number of active SVIP users on Vipshop increased by 11% year-on-year, lower than the levels in each quarter of 2023.

The competitive core lies in the special offer model based on discounts, which is encountering more external challenges. Since 2023, Taobao, JD.com, Douyin E-commerce, and others have made "price competitiveness" a crucial strategy. In January this year, Fitch also released a rating report stating that Vipshop faces fierce competition from larger e-commerce platforms and live streaming and short video platforms.

As more experienced, comprehensive e-commerce platforms with more comprehensive systems and a broader range of merchants push for cost-effectiveness, competition becomes increasingly intense, posing a new challenge for Vipshop.

But can Vipshop solve this problem?

Even with impressive performance, there are hidden concerns

Behind the continuous profitability, Vipshop's revenue and various expenses have also continued to shrink.

In the first quarter of this year, Vipshop's total net revenue was 27.6 billion yuan, an increase of only 0.4% year-on-year. Although the first quarter is traditionally a slow season for e-commerce, this growth rate is far lower than the same period last year (9.1%) and the levels in each quarter of the previous year.

In fact, Vipshop's revenue growth rate has continued to decline since 2016, maintaining a level below 10% in recent years. According to statistics, Vipshop's revenue growth rates from 2016 to 2023 were 40.27%, 28.74%, 14.53%, 8.85%, 9.84%, 14.17%, -12.59%, and 9.4%, respectively.

For the future, Vipshop expects total revenue in the second quarter of 2024 to decrease by approximately 5%-0%.

Not only revenue but also Vipshop's expenses have declined significantly. In the fourth quarter of 2023, Vipshop's marketing expense ratio was 2.4%, a significant decrease of 20 percentage points year-on-year, and the actual expenditure of 840 million yuan was also lower than the market expectation of 1.1 billion yuan. Meanwhile, the R&D expense ratio was 1.4%, a decrease of 0.7 percentage points year-on-year.

By the first quarter of this year, Vipshop's total operating expenses increased by only 0.6% year-on-year, with general and administrative expenses decreasing by 11.3% year-on-year and marketing expenses decreasing by 17.4% year-on-year, mainly due to reduced advertising investments and promotional activities.

The significant reduction in marketing expenses reflects Vipshop's reduced expansion, with fewer incremental users and reduced revenue from them. While the consumption of existing users is gradually stabilizing, the income generated by this segment is also limited due to fierce competition from comprehensive e-commerce platforms that divert users.

Meanwhile, Vipshop's market share has continued to decline, from 3.25% in 2017 to just 1.88% in 2019. However, even with a market share of less than 1%, Vipshop can still generate profits through stable purchases by loyal users. According to the 2023 annual report, Vipshop's active SVIP user base reached 7.6 million, contributing 45% to GMV.

However, compared to comprehensive e-commerce platforms, the number of Vipshop's members and the revenue they generate are still insignificant.

In August 2022, JD.com's PLUS membership exceeded 30 million, with the average annual spending of members being ten times that of non-members. According to Alibaba's second-quarter 2022 financial report, the Alibaba ecosystem had 25 million 88VIP members, who contributed 1.4 trillion yuan in GMV over the past 12 months.

The critical difference lies in the service experience, product range, and purchasing scenarios of vertical e-commerce, which pale in comparison to comprehensive e-commerce platforms. Platform-level e-commerce platforms, with their long history and deep supply chain accumulation, have built a reputation for "more, faster, better, and cheaper" among a broader user base.

In contrast, Vipshop's model is more akin to a "fan economy," where only a small fraction of loyal consumers make long-term purchases. Vipshop has also attempted to become a larger platform e-commerce player, such as investing nearly 26 billion yuan over five years in asset expenses to build its own logistics network, launching Vipshop Finance to attract new users, and experimenting with offline brand outlet stores to tap into retail market growth.

However, most of these business attempts ultimately failed.

Vipshop has also had opportunities for acquisition. In 2017, Tencent and JD.com jointly invested approximately $863 million in cash in Vipshop. At that time, JD.com was still the second-largest e-commerce player, but it hoped to expand into shoes, apparel, and accessories. Tencent, which did not yet have e-commerce on its video platform, hoped to direct its massive user base towards actual transactions.

If subsequent investments had continued, Vipshop could have leveraged JD.com's supply chain advantages and Tencent's traffic advantages to enter larger markets. However, perhaps due to Vipshop's desire for "independent development," this path did not materialize.

Regarding the phenomenon of domestic e-commerce players using promotions and subsidies to attract users and emerging live streaming e-commerce platforms competing for user time, Shen Ya once stated that Vipshop did not blindly participate in industry subsidies, saying, "We don't want to waste money by offering unnecessary coupons to customers."

This is the truth but also a sign of helplessness. E-commerce competition is becoming increasingly fierce and brutal. "Defenders" are actively innovating to adapt to market changes, while "attackers" are leveraging model innovations to shake up the market landscape in a more focused, direct, and efficient manner. Vipshop, which does not belong to either category, finds itself in an awkward position.

Perhaps, as a core discount and special offer platform, Vipshop can still find a glimmer of hope amidst the trend of consumer downgrading.

But is Vipshop's special offer model truly solidly grounded?

The special offer model has lost its moat

Vipshop's special offer model shares similarities with the discount model of "clearance sales" in offline retail stores.

In its early days, Vipshop's buyer teams reached out to various well-known shoe, apparel, and cosmetics brands to handle their inventory overstock needs, selling products at lower prices on the platform, forming the basis of the "big-brand special offer" model.

Data shows that Vipshop currently collaborates with over 44,000 brands.

As the platform grew, Vipshop expanded beyond merely handling inventory overstock for brands, actively partnering with them to introduce Junior customization products with different specifications and complimentary items, enriching the platform's differentiated offerings. For example, the flagship store of the Korean cosmetics brand Sulwhasoo sells its star product, the Balancing Emulsion, for 640 yuan for a 60ml bottle, while Vipshop offers a 60ml bottle with a complimentary 77ml bottle of the same product.

According to financial reports, in the fourth quarter of 2022, the number of customized products and overall sales on Vipshop increased by over 100% compared to the previous quarter.

With its combination of authentic special offers and exclusive big-brand products, Vipshop's business model is straightforward, and consumers will always demand genuine products at affordable prices, especially in today's environment. Most of Vipshop's loyal members come from this consumer group.

However, today's mainstream e-commerce players have a deeper understanding of cost-effectiveness and invest more resources towards it.

To achieve extreme low prices, Pinduoduo is willing to allocate various resources such as site-wide traffic and subsidies to dealers willing to compromise on pricing and margins. These dealers, concerned about inventory buildup, have a clear need to offload stock. Later, to establish the "Billion Subsidy" channel, Pinduoduo invested over 100 billion yuan in marketing and sales expenses.

Following Pinduoduo's rise, Taobao, JD.com, Douyin, and others have also been drawn into this e-commerce pricing war. Taobao was the first to announce its "price competitiveness" strategy, while JD.com made the "Billion Subsidy" a daily offering to compete for even lower prices.

The special offer model of yesteryear might have found a relative "blank space" within traditional e-commerce, but as larger platforms engage in e-commerce price wars with significant strategic and tactical shifts, the special offer model no longer possesses a differentiated competitive edge.

In other words, the moat surrounding the "special offer model" can now be easily crossed.

With more e-commerce channels competing, dealers have more options when clearing inventory. Meanwhile, as KA brands tighten their control over dealer shipments and pricing rights, Vipshop faces pressure to continuously offer more exclusive big-brand special offers, leading to occasional quality issues on the platform.

According to statistics from Heimao Complaints, as of April this year, there were over 36,000 complaints about "Vipshop" on the platform, mainly related to "false advertising, refusal to price match, difficulty in refunds, quality issues, suspected counterfeit goods," etc.

The customization model faces similar challenges. E-commerce and retail platforms accumulate and analyze vast amounts of front-end data, enabling timely feedback between supply and demand. This results in a richer range of private label products that better align with consumer trends. However, offering only customized products with different specifications is no longer sufficient to attract a significant portion of consumers.

Furthermore, due to its limited scale and e-commerce capabilities, Vipshop has weaker control over its supply chain and less influence over dealers. KA merchants will vote with their feet, making the seemingly attractive exclusive model difficult to sustain in the long run.

Relying on less than ten million loyal members and continually downsizing, Vipshop may continue to generate profits. However, in an era of challenging traffic growth and having lost the advantage of a protective moat in its business model, how long can Vipshop persist?