Article / 03 June 2015 at 9:10 GMT

China's e-commerce reform right up Jumei's alley

China Watcher / Shanghai
China
  • Cross-border e-commerce will be key for China's online retailers in 2015
  • Cosmetics retailer Jumei has had strong initial success with Jumei Global platform
  • Jumei has taken a minority stake in South Korean cosmetics brand It’S SKIN

By Neil Flynn

Online cosmetics retailer Jumei has seen strong growth in its cross-border e-commerce platform Jumei Global since its launch in December, and the firm has been benefiting from being able to offer a wide range of imported cosmetics that rivals aren’t able to sell. However, investors have been concerned over the government’s recent import tariff cuts and the recently announced free-trade agreement with South Korea. 

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 70% of cosmetics consumption in China happens overseas. Photo: iStock

Growth of Jumei Global

Jumei’s net revenue in the first quarter grew 51% sequentially, and was primarily driven by the new cross-border e-commerce Jumei Global platform. To put this into context, the sequential revenue growth in the first quarter of 2014 was 10%.

Since its launch in December, Jumei Global has the dominant market share in cross-border e-commerce in beauty and baby categories in China, but as a whole, the market is still very young, and we have yet to see significant developments in these markets from rivals.

However, I would expect that the likes of VIPshop, Alibaba’s Tmall and JD.com will develop their cosmetics and baby product ranges throughout the year. JD.com will likely provide the biggest challenge to Jumei in the long run, because as I have discussed before, it has opened country-specific cross-border e-commerce platforms for Japanese, Korean and French products.

These three countries are known for their premium beauty products, which should allow JD.com to compete directly with Jumei. However, as Jumei has developed its cross-border platform, it has signed exclusivity agreements with many foreign brands, particularly smaller brand names who want access to Chinese consumers. Therefore as of today, 90% of Jumei’s imported goods do not have any rivals in the online retail market in China.

Cross-border e-commerce in China (sales volume)
Cross Border Ecommerce Growth
Source: Jumei Investor Relations  

China-South Korea free trade agreement 

China and South Korea recently announced a free trade agreement, which will cover a whole range of products. However, due to the high price of Korean cosmetics, Jumei’s management believes that beauty products will not be included in the zero import tariff agreement.

Whilst this may initially sound disappointing, investors should consider two aspects of Jumei’s business. Firstly, Jumei has a strong position in the retail of Korean cosmetics in China, therefore as luxury Korean cosmetics are exempt from this free trade agreement, rival firms such as VIPshop, JD.com and Alibaba’s Tmall won’t have any further incentive to expand their presence in the imported cosmetics market.

Secondly, the largest tax that Jumei faces is the 50% passage of parcel tax, compared to the current 2% import tariff tax, so should the import tariff on Korean cosmetics have been eliminated, the effect on Jumei’s costs would have been minimal. 

70% of cosmetics consumption in China happens overseas, with these products being brought back into China, and is known as the grey market. It’s very common for people to visit countries such as Japan, South Korea and Hong Kong, purchase cosmetics and bring them back into China for friends, such is the price difference between these countries and mainland China.

In order to allow the cross-border e-commerce market to grow, Chinese customs are implementing stricter policies on this grey market, because it pays no import tariffs and no VAT. The amount of cosmetics that an individual will be allowed to bring into China will be reduced so that it can only be for personal use. This will be highly beneficial to Jumei because consumers who typically purchase their overseas cosmetics through the grey market would likely turn to Jumei. 

In a previous article, I discussed how the import tariff cuts on certain consumer goods would be beneficial to the industry. The announcement of this saw Jumei’s share price plummet as investors were concerned that Jumei’s price advantage would be negatively affected by the tariff cuts, and would allow rivals such as VIPshop, JD.com and Alibaba’s Tmall to gain market share. 

The import tariff on skincare products has been cut from 5% to 2% but this effect will be negligible on Jumei because tariff costs represent such a small percentage of product price composition. In addition, Jumei claims that 90% of its imported products have no direct competition in China, other than from the grey market of individuals bringing products back into to China from overseas. Therefore the effect of this tariff cut should be negligible.  

Impact of tariff cut on retail price

Jumei's Price Composition
Source: Jumei Investor Relations   

Acquisition of minority stake in It’S SKIN

On Tuesday, Jumei announced that it has taken a minority stake in the South Korean cosmetics brand It’S SKIN, which is a skincare product manufacturer that enjoys a prestige reputation throughout Asia. The firm has grown on the popularity of Korean culture and fashion over the past decade, and Jumei will use this investment to boost transaction growth of Korean products through its cross-border e-commerce platform Jumei Global. South Korean cosmetics are seen as the highest quality products in Asia along with Japanese cosmetics, and hence are a lot more expensive than domestic Chinese products.

It'S SKIN
 

































Source: It’S SKIN

I have long argued that for Jumei to drive revenues in the long run, it needs to develop its own brand goods. Chinese consumers will always have strong demand for luxury brand named products such as Chanel, but with its growing cosmetics retail platform, Jumei actively promotes its own brand products, and can take a large share of the budget and medium price cosmetics market. The acquisition of this minority stake will help Jumei to solidify its position in the medium price market. Throughout the rest of the year, I would expect to see that Jumei makes further strategic investments in overseas cosmetics companies.


– Edited by Susan McDonald

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
3y
ChinNick ChinNick
@Neil. Thanks for the great write up! One question, what is the "50% passage of parcel tax" and how does it work?

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