Baozun Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by for Baozun's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a remainder, today's conference call is being recorded I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Investor Relations Director of Baozun. Please proceed, Wendy.

[Wendy Sun:]

Thank you, operator. Hello, everyone, and thank you for joining us today. Our fourth quarter and full year 2020 earnings release was distributed earlier today and is available on our IR website at ir.baozun.com, as well as on GlobeNewswire services. You can also find a PowerPoint presentation that accompanies our comments today on our IR website at sections of Quarterly Results and Webcast and Presentations.

[Vincent Qiu:]

Thank you, Wendy, and thank you all for joining us. It's being a busy and exciting quarter and I'm now pleased to report another solid set of results. During the fourth quarter, brand partners accelerated their digital transformation in response to rapid changes across the e-commerce landscape in China. The nature of online consumption is evolving rapidly. Our unique positioning as a leader of solution-driven platform for brands puts us at the center of this evolution, with technology that enable us to keep our brand partners ahead of the curve. If you are following along with our presentation, I'll start on slide number two. We executed on our strategies throughout the fourth quarter. We would like to share a few key highlights with you including a record-breaking Double 11 campaign, strong momentum in brand acquisition with a net add of six brand partners to reach 263 and the continuous operating margin enhancement.

[Arthur Yu:]

Okay. Thank you, Vincent. Hello everyone. Thank you for joining our earnings call today. I will talk about our financial performance in Q4 and the full year 2020 and in fact our priorities in 2021.

[Operator:]

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question from the line of Binnie Wong from HSBC. Please go ahead.

[Binnie Wong:]

Hi. Good evening, management. Thank you for taking my questions here. So congratulation on a strong set of results and wrapping up 2020 with a good set – solid set of quarter, especially on the margin side, right? So we see a meaningful improvement on the margin. And then this is something that's also almost close to our historical high right? And then do you think that like any structural drivers you think that I guess post COVID that we can think about that will go forward to 2021? And should we expect that – we talked about earlier, we should expect actually a better – a higher raising – I guess, raising the long-term margin target from here? And then the second question is also very encouraging to see that, you talk about this non-Tmall channel contribution is also rising. That contribution rise here was 25% of total. And so if we – can you help us to just understand in terms of that 25% how are they allocated? Is it some in mini-program or maybe some into brands' flagship stores? How is that 25% allocated? Just to get what sense for our understanding? Thank you so much.

[Arthur Yu:]

Okay. Thank you, Binnie, and I will take the first one about the margin in 2021, make some comments, and then I will pass on to Vincent for the second question. Yeah. So in terms of the margin in 2021, we made our investment into technology and our optimization of our different brands. We have seen a strong outlook into the 2021 on our marketing. So there are several factors. One is, in some of the categories like the luxury, which we enjoy a very good margin compared with the other sectors, and we are now seeing a great growth in that area. And secondly, our efficiency drive, like by the technology and innovation, has now seen the benefit coming through, and we have seen some really strong drivers to enhance our profitability and our overall margin in 2021. At the same time, I just want to add another comment. 2021 is a year of investment. As just we mentioned, we're actually making investments into new channels into new business models, which we will expect to see some early investments, but we believe, this investment will lead us to higher top line growth in 2021 and also in the next three to five years. So, that's my outlook for the margins.

[Vincent Qiu:]

Okay. Binnie, I'm here for your second question. I think last year is a quite different year, because we see this very clear trend of multiple channel or omni-channel, trend is realizing quite quickly. So it's the first time as you -- as we said, it's a first time that the non-Tmall channel contributes more than 25% of the total GMV. Inside of this 25%, we are seeing that several channels like the official web store, like mini-program and JD, all growing quite apparently. So, I think the detailed distribution of this, yes, we can exchange more views on that later on. And -- but the interesting thing is that I think, a lot of brands now take several of the new channels as their private domain -- so-called private domain or dot-com initiative like the Mini-Program and even Douyin for a lot of brands will take this as a private domain. So, I think there will be more resources and trace the channels differently from the major transaction-based channels. So I think for this year, looking forward, I think there will be a lot of dynamics going to happen in the private domain or non-traditional channels. Thank you, Binnie.

[Binnie Wong:]

Well, thank you. And by the way, Vincent, thank you for clarifying. I just have a quick follow-up on your comment. So should we think structurally, because there's more and more channels, say, you'd also mentioned some of the short video platforms. Does that mean that, brands actually rely more to use a third party service solutions like Baozun, even more of a higher demand, right? Because, now they have multiple channels and they don't know how to allocate -- what percent they don't know, but that it will leverage your expertise, even more, right, because you have the expertise across all of the channels. So the more diversified an e-commerce channel is actually worked towards the benefit for Baozun longer-term growth. Is that a fair comment?

[Vincent Qiu:]

Thank you for your follow-up question. Yes, sure. Thank you for the follow-up questions. I think traditionally, for the transactional part of the e-commerce, Baozun has established a very strong solid foundation to enable the brand partners to do business online. So, I think for the new channels, basically for the mid-end and the back-end, I think it's mostly the same. For example, technology order processing payment collection, order fulfillment, customer experience, customer service, all these kind of thing is basically the same. So actually, we can just use the infrastructure that built up in the past and keep serving all the new business and -- to leverage the cost down as well. So, that's the number one. Number two is that for the -- for a new channel, yes, I think for a new channel for front-end, I think the marketing, the way they spend in marketing dollars will be very different. So that's why, we think the marketing capability is so important for the emerging new channels. We -- you remember, we did this in more than three years ago. And now, I think our digital marketing capabilities are very strong than before. So, in this case, we can deliver an end-to-end solution for the brands on new channels and new platforms. Thank you.

[Binnie Wong:]

Thank you. Thank you very much, very helpful.

[Arthur Yu:]

Yes. I'll just add a point on Vincent's comments about the multiple channels. We're actually, not only using the organic growth. We are using the inorganic way to enhance our capabilities as well. For example, you may remember in our iClick deal, we are utilizing the SaaS capability of iClick to deploy our front end – the front end mini-program solution, which helped us to deliver the growth to our brand partner in a very effective and also a good service way. So this is why we are pulling all those capabilities together.

[Binnie Wong:]

Okay. Thank you. Thank you, Vincent. Thank you.

[Operator:]

Thank you. We have our next question from the line of Alicia Yap from Citigroup. Please go ahead.

[Alicia Yap:]

Hi, thank you. Good evening, management. Thanks for taking my call and congratulations on the solid quarter. I have two questions. The first one is related to your recent partnership with iClick. Could management help us to frame the financial opportunity in terms of the incremental upside from the revenues or even the additions of the new brands onto the future monetization improvement with the existing brands with the launch or even the readiness of this private traffic domain platform? Second question is we heard from another e-commerce hear recently that this year Chinese New Year because of these travel restrictions and all that. So they are actually seeing a stronger than usual Chinese New Year seasonality. So not sure if Baozun is also seeing the similar trend that this New Year is a little bit stronger than usual. If so could you elaborate on the demand? Is that strong demand on fashion or electronics or even FMCG? Thank you.

[Arthur Yu:]

Okay. Thank you. I will take the first question on iClick. And then Vincent may comment on the Chinese New Year trend. Okay. On iClick, since acquisition we have started to conduct several workshops. So the workshop is looking into the IT and data of both companies. What we are looking for is to have an integrated IT solution which combines the very strong SaaS front end and very strong OIMS and operation capability of Baozun to create a solution. And that solution will be an attractive proposition to our brand partner in the content deposition. So this is the first thing we are currently doing. And secondly, we have seen – there has already the cross-selling opportunity, which we have already seen which is there is a travel kind of brand we have introduced to iClick and another kind of the paper brand which iClick did introduction to us. So we are confident that it will lead to some tangible financial results very soon. And thirdly, we are now looking into the digital advertising operation because iClick historically are very strong in the digital advertising area. And we are looking at how to combine our – kind of our digital marketing and to create more synergy and to create a better outcome for our brand partners. So combining all those three things together, we think we will start to see the financial results from the second quarter of this year. But now purely just we can category to say this is purely done through the iClick deal and not done through the iClick deal because the reason we do this kind of MOU is to build our capability to allow Baozun's original mini-program team or mini-program business to grow bigger. So this will contribute to the top line growth of Baozun for 2021. But it's difficult to split to say, which specifically has contributed to iClick and which is not to the iClick. But we are confident about the program.

[Vincent Qiu:]

Okay. Yes. Second one is about the CNY sales. Ms. Li?

[Tracy Li:]

Thank you for question. We think actually in terms of CNY sales results, we do see a good sign regarding the consumer perception regarding the trends. And also we think the private domain the trend is going to be continuing for the whole year. And also you can see, actually we have done serious astonishing revision on the major platform since the beginning of this year. And among them, you can see to improve the consumer experience and enhance membership and the sales management are the major topics. So to our observation from the Q1, we already see the platform spending efforts in many angles to improve the consumer journeys, for example to reduce the complexity of searching mechanism and to decrease the promotion channel to synchronize the traffic and also to create a more friendly environment to brands and also service partners to doing business on the e-commerce platform. So all of these efforts and the methods have been I think lead the environment to be more healthy and also promising for the growth. And to brands, I think it will also affect their budget plan on media and promotion and also their investment on consumer and data assets in longer time. And from Baozun's point of view, we -- actually we still believe the trends on the consumer perception regarding the entertainer RMPs and also live stream RMPs is going to be the trending topic for the whole year. That's why we have been paying much more attention on opportunities of live streaming, especially on the self-owned live streaming and also short video production, performance advertising and also interacting marketing technologies to expand our capabilities on the new marketing tools. Thank you.

[Alicia Yap:]

Thank you.

[Operator:]

Thank you. We have our next question from the line of Joyce Ju from Bank of America. Please go ahead.

[Joyce Ju:]

Good evening, Vincent, Arthur and Wendy. Congrats for the solid fourth quarter. And thanks for taking my question. My first question was related to this year's full year outlook. As we know Baozun has already discussed with the brand for this year, it's like growth plan, just want to get an idea for this year when you discuss the -- like outlook with brands like, is there any like outlook which you see different from like last year, or generally speaking, you see the growth plan, how it compared to last year? And is there any like new areas we should actually focus? And the second question was related to the addressable market because we -- of our new channels and new categories. We know like Baozun actually will look to expand its presence in like you mentioned like Douyin, WeChat and also JD. Just want to get a quantitative idea, how big will be the potential market? How much GMV contribution we should actually expect from these new channels in the following years? Thanks a lot.

[Arthur Yu:]

Okay. So I probably will -- yes. I will get Vincent to talk about the first question and then I will cover the second one.

[Vincent Qiu:]

Okay. Thank you for the question. Yeah. For 2021 online traffic, a lot of surprises how to say surprises to look -- to expect. I think firstly from the brand point of view, you can see a lot of the initiatives happening on their private domain, including the official TC, official web source, mini-program app this kind of things and also some new channel expansion plans. So I think 2021 maybe the first year for the brand to trying to allocate a lot of resources on multiple platforms seriously. So I think in this case, there will be a lot of new initiatives like data-related application and CRM is kind of omnichannel driven solutions is quite important. And also talking about the size of the business in 2021, I think we can refer to an aggregated GMV for each of the platform. So generally, I think that is the addressable market or the brand's expectation for the channels, especially those who -- which is previously not a brand e-commerce marketplace. But right now it's getting more and more brand e-commerce oriented. So I think the potential is huge. So for the second one, it's about the addressable market.

[Arthur Yu:]

Yes. Yes. So in terms of the addressable market, I think it will one -- on one hand it will depend on the market trend i.e. where the brand partners will select how they sell their products. And Baozun last year because we are omni-channel -- we have the omni-channel capability. It doesn't matter how I change from Tmall or non-Tmall we are there to support our customers. And in terms of the category, we actually see still a very strong in terms of the luxury and apparel kind of category. This is which we are making the investment into to further grow our market share. And also we have seen some new opportunity in the healthcare which is after the COVID-19 people now making further attention to their own personal health. So we think that there will be some new opportunities in that as well. And finally, on the new business model we are seeing some new ways of cooperating with the client partner under the GPO initiative. And that will help us to further strengthen our relationship with the brand partner which is giving us more room to further grow the business in the existing business. So that's our view on the channels and on opportunities for next year.

[Vincent Qiu:]

Thank you. Can we move to the next question?

[Wendy Sun:]

Hello – yes, go ahead.

[Operator:]

Yes. Next question comes from the line of Thomas Chong. Please go ahead.

[Thomas Chong:]

Hi. Thanks management for taking my questions and congratulations on a solid set of results. I think this is the first time that we talk about the 3 to 5-year strategic plan. May I ask about how we should think about it translating into financial outlook? Thank you.

[Arthur Yu:]

Okay. Thank you for the question. I think we have some time to look into our strategy going forward. Our goal is to deliver a sustainable and profitable growth. Our long-term view is depending on the market growth overall rate, we are looking at to become a business with RMB 150 billion GMV in three to five years' time and we would like to make an operating profit of RMB 2 billion by the end of this 3- to 5-year period. So this is our goal and our financial outlook.

[Operator:]

Move to the next question presenters. The next question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

[Tian Hou:]

Yes. Thank you management. So I saw the GMV -- the distribution GMV as a percentage of total continued to decline. So can management share with us some of your thoughts and outlook in that front? In terms of the two business models distribution and services how do you think those composition will be in the future?

[Arthur Yu:]

Okay. Thank you for the question. In terms of the distribution model as you can see in Q4, it's actually not performing strongly. So this is due to one of our personal appliance brand which is a big brand which has an overall softness in their overall performance in the Q4, 2020. And actually Baozun -- our online channel is performing better than that brand's off-line channel and also the Tmall channel is performing better than other channel online. So basically, we are confident in terms of -- so this is only a one-time kind of performance drop. So, in Q1 this year, we have already seen a trend of recovery and we are seeing an improvement hopefully, so this brand will be able to recover. And Baozun, we have shared our insights into the brand to help them to recover quickly through the Tmall channel online. And secondly, the reason why it has the impact is also due to the high discounts and higher return rate. In terms of the high discount, because it's a distribution model for Baozun, so we actually in order to protect the brand image, we didn't go further on the discounts in order to achieve the volume. We actually go for the profit and also the longer-term brand image, because as a responsible brand partner, we think that's something, we should be doing. And in terms of the higher return rate, it's actually industry down for the Q4, due to the extended period of Double 11. So overall, we hope this is a trend for the Q4 only. And hopefully, in Q1 this year, we will see a recovery.

[Tian Hou:]

Thank you, so much. I have a follow-on question. Okay, keep going.

[Arthur Yu:]

Please, please.

[Tian Hou:]

Okay. So the follow-up question is regarding your omnichannel. So I realize, a lot of brands are seeking out much more fresher and newer channels go beyond Tmall. And so, in other channels, in terms of operator like you guys are there any existing operators? And how do you, how to say position yourself in other channels like Xiaohongshu in JD? And what is your competitive advantage over existing operators, if there are any? So that's the second question. Thank you.

[Vincent Qiu:]

Okay. Thank you for the second question. This is Vincent. Actually, for the emerging channels like you know, you just mentioned Xiaohongshu, they traditionally were not a lot of existing operating service partners just because previously this kind of channel or platform is not a TMA platform. But right now they are changing. They are more and more turning to e-commerce business, and the -- because they need the brand's media expenditures and also transaction business on that. So it's a new one. So it's emerging, how we call it emerging new channels. So for Baozun, we are as new as the others but for the front-end operations, but we did have more than 10 years of e-commerce operating experiences. And also, we have been investing in digital marketing for multiple channels for more than three years. So given this tool, I mean fulfillment capability technology, plus digital marketing of more than three years of investments, I think, we are very solid and very strong in facilitating the brand in e-commerce business on any of the new emerging channels. Thank you.

[Tian Hou:]

Thank you, Vincent. That was my question.

[Vincent Qiu:]

Thanks.

[Operator:]

We have our next question from the line of Charlie Chen from China Renaissance. Please go ahead.

[Charlie Chen:]

Thank you. Thank you, management for taking my question. I have two questions. First of all is about the brand partner pipeline. How does that look like especially, we understand that the company has been exploring the opportunities in categories like premium brands, luxury brands, as well as health food? So how is the progress there? And in particular, any initial signal that the Full Jet is helping the company to get breakthrough into the premium brand segment? I will take the first one first.

[Vincent Qiu:]

Okay. I will -- I'll be here for your -- to answer your first question. I can say that the company is more capable in bringing more new brand partners including different categories. Right now I think the pipeline is very strong. We see not only the demand for the traditional channels like Tmall is growing in our pipeline but also the private domain opportunity is also a lot. So I think for different platforms you're getting more and more, how to say, more and more rich pipeline items. And for the categories, we think that different categories like fashion, like cosmetics, like premium or luxury are very promising. So we are happy to see that. For Full Jet, I think they are very experienced in talking to global brands and premium brands. So we are working with them closely not only to work with the local team of the premium brands but also the global team. So in this case I think we can form a better positioning and integrated strategies to work with a potential brand. Thank you. Please go ahead with the second one.

[Charlie Chen:]

Sure, sure. Thank you. My second question is more of a high level, I mean changes in the brand partners strategy in Internet. As we understand last year was pretty difficult year on the full year impact of COVID. So after the full year how does -- how do your company recognize the difference between the marketing activities now versus pre-COVID? I understand you talked about the private domain et cetera. Can you give us more details on how they spend their dollars differently? Are they using the private domain to get new traffic or maintain their users, or any other details that you can share more with us that would be great. Thank you.

[Vincent Qiu:]

Okay. Yeah, I think the last year, the COVID year is very special and it changes. It has a profound influence to the brand e-commerce or digital marketing strategies. I think right now e-commerce or digitalization has been the center of the strategy of most of the consumer brands. So they are pulling in more and more resources to enhance their position on their DTC initiatives and also e-commerce digital marketing initiatives. So I think the key for this one is that at the center of the strategy that means that the brand will invest for long-term not only short-term. So for short-term its channel sales is discounting promotion. For long-term it's more about system. It's more about capability and talent. So in this case, we are quite comfortable working with the plan for longer term of the partnership.

[Arthur Yu:]

Yeah. And just to add a comment on this, we have seen the brand partners start to explore different -- the different channels. So for example in Q4 and Q1 this year, we held one of the major -- one of our major soft partner -- soft brand partner to do some Douyin live video show, which achieved some really good results. And that we have seen more brand partners talking to us about different channels.

[Charlie Chen:]

Right. Thank you very much. That’s all my questions. Thank you.

[Vincent Qiu:]

Thank you.

[Operator:]

Thank you. We have the next question from the line of Ashley Xu from Credit Suisse. Please go ahead.

[Ashley Xu:]

So on the mini-program, because in the past we have seen that effective take rate is actually lower than the service fee model on Tmall. Just want to understand whether this is attributed to structural difference in these two platforms, or it's just due to different development stage? And if we look at the long-term, do we see similar monetization opportunity on mini-program compared to Tmall? Thank you.

[Vincent Qiu:]

Okay. Thanks for the question. There's a lot of discussions happening for mini-program e-commerce. I think from three years ago, we have formed a very solid team to serve the brands to open stores on mini-program. But right now we have already tens of existing mini programming working for different brands. So we think there's a lot of potential on that. Talking about the structure of different platforms especially for mini-program, I think they are quite different from the traditional ones, like Tmall.com. It is more -- it's more marketing-driven and more data-driven transactions. So it's -- so for example, there is not the -- it's not a commission for the platform, or even if there's not a platform. It's actually separated by private domains on the ecosystem. So in this case it is quite important. And because, there is a social commerce space, so for doing the e-commerce transactions it's easier than the traditional platforms. So I think, in this case, yes, the front-end maybe is not as -- a lot of things to be done as a traditional platform. But for Baozun, I think the middle-end like the order fulfilment -- the other processing and the back-end order fulfilment, it's the same. So in this case, in this value chain part, I think the cost structure and the profit model will be the same. For the front-end transactions is easier than before, but marketing is more comprehensive, so in this case, I think we can form up long-term a very healthy charge model for the brand partners. Thank you.

[Operator:]

The next question comes from the line of Feitong Zhang from CICC. Please go ahead.

[Feitong Zhang:]

Hi management. Thanks for taking my questions. We saw the net addition of brand partners in the fourth quarter was five to six. We know we are adjusting our brand portfolio in the fourth quarter. So just wondering, how many brand partners are terminated from the collaboration with us. And how many new brand partners we acquired in the fourth quarter? What is our brand acquisition strategy moving into 2021? Can you share some color on our current brand pipelines? Any color would be very helpful. Thank you.

[Arthur Yu:]

Okay. So in terms of the brand partner only -- we only had six new additions for quarter four. And quarter four historically speaking is not a quarter where, a lot of brand partners will open the Tmall app, so that's because it's after the Double 11. And for the sales, it's actually not a bad number from our perspective. From a full year perspective, we actually added 35 new brand partners, which is a good contribution to our portfolio. And secondly, I just want to maybe talk about the principle in terms of adding the brand partner. We're only looking for those brand partners which will contribute to our sustainable and profitable growth i.e. our proposition is how can Baozun add value to the brand partner, and how we can create -- how we can help the partner to grow their business. We are not a company where focus on extremely low cost in order to win the business. So in this case, we will optimize our portfolio, if the brand partner's kind of -- the overall strategy on selecting the strategic partner is not meeting our value proposition. But we will do it, with our effort. We will try to keep our overall growth. And try to serve as many as brand partner as possible.

[Feitong Zhang:]

Okay. Thanks. Very helpful.

[Arthur Yu:]

Okay. Thank you.

[Operator:]

Thank you. As there are no further questions, I would like to hand the call back to Wendy. Over to you.

[Wendy Sun:]

Thank you, Operator. In closing, on behalf of the Baozun management team, we would like to thank you for all your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now. Thank you.