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Online Retailer's Costly Growth
Summary:Vancl lost its way after sales grew sixfold early in 2011 - a pile of mops and cookers taught the CEO that a shortage of stock is better than a surplus.

By Liu Dan, Chi Youlei
Issue 567, April 30
Corporation, Page 25
Translated by Tang Xiangyang
Original article:

Online retailer Vancl, which last year sold 3.5 billion yuan worth of clothing, shoes and other goods, had problems with its data analysis, the company’s chief executive, Chen Nian, told the Economic Observer.

The company’s warehouses were holding 1.44 billion yuan worth of goods at the end of September, after it started selling a broader range of products on its website. Since then, it has been posting loses and cutting staff.

In order to sell down its stocks, Vancl, launched a new advertising campaign with its brand ambassadors, blogger Han Han and actress Wang Luodan.

Chan, whose business has become China’s sixth largest online retailer since he founded it in 2007, said the large stockpiles were a consequence of rapid growth.

“If Vancl slowed down, there would be no storage problem. But that’s not Vancl’s fate.”

Traditional clothes retailers replenish their stocks twice a year and only know their complete sales data six months later. They keep an average of 1.4 garments in storage for each one that is on their shelves.

As an Internet company, Vancl can restock whenever it wants, but, as a clothing company, it still has to deal with the problem of storage and stock that might become unwanted when fashions change.

Chan’s nightmare scenario came when manufacturers told him, “You still have to take your order from last year.”

Vancl started off selling orders by telephone, and began online marketing in 2008.

In 2010, Han Han and Wang Luodan came up with a new slogan, which was linked to a way of combining sentences and amused many Chinese internet users.

That campaign helped boost Vancl’s sales and Nian saw sales growth of 300%, twice the pace that he had been expecting. The company had to outsource its designing, and its stocks couldn’t cope with the new demand.

It takes the two weeks to manufacture and deliver a new batch of T-shirts, and Vancl’s suppliers were so busy with orders from the company that they had to give up orders from other clients. This had major consequences on small manufacturers - these firms had to run on full steam when Vancl needed one particular product and then sit idle if Vancl’s products were selling poorly.

One small manufacturer complained that his factory had to stop production for a month because of Vancl’s poor production planning.

Vancl can only guess how many items it will sell and the manufacturers have to do guesswork too.

“The growth was underestimated; the marketing process got confused,” Chen Nian remembered, adding that Vancl “never knew how to match orders, storage and stock keeping units.”

Worse still, when sales growth last January was six times that of the previous year, Vancl’s management team began to lose perspective. They thought they could sell products worth 10 billion yuan through 2011. 

As Chan Nian loosened control, Vancl employees began to sell all sorts of clothes, shoes, home textiles and cosmetics. While some items, such as silk stockings, was very popular, most of the new products weren’t popular.

One day Chen Nian lost patience when he saw mops and electric rice cookers piled up in the warehouses.

“We finally realized that it would be OK if we made only 200 items when demand was for 20,000. But it would be a disaster if we made 2,000 items when only 200 were needed,” Chan Nian reflected.

Since Spring Festival 2012, Vancl has been focusing again on “fast fashion”: no reorders to manufacturers when goods are out of stock; a steady stream of new products; and low stocks for each item.

Vancl lists its items in batches – at any one time only 10% are available to buy. The list is updated once a week and items that are out of stock aren’t reordered. At this time last year, almost two third of items were listed online.

Over the last year, by keeping lower stock, the company has reduced the days of inventory on hand, a measure of how quickly products are sold, from 100 days to 30 days this year.

Vancl sells 150,000 T-shirts a day and now 2 to 3 million in stock instead of 7 million a year ago.

Chen Nian doesn’t have universal support - people at the company told the EO that Chen Nian is whimsical and has squeezed out top executives, and another source said his business has a huge advertising bill to pay.

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