The Recreation of New Egg

Where we fall, where we rise to foot,” said Mike Chou, new president of New Egg (China) who was only appointed this March. Maybe Mike Chou himself does not know how many presidents New Egg has recruited before him in the 12 years of development in China. But he does not want to be a meteor, even if he is facing the challenge that New Egg China is dealing with unfamiliarity in this country.

Not all good news awaits Mike Chou upon his appointment. In May, another foreign-funded ecommerce website – Rakuten from Japan – collapsed after one and a half years’ struggle in China with the waste of the investment of 50 million US dollars.

The collapse of Rakuten once again highlighted the problem about foreign ecommerce companies’ unfamiliarity in China.

Mike Chou knows he has great stress and he admits that. After all, every new measure he takes for New Egg aims at putting an end to the conclusion that foreign-funded ecommerce companies are doomed in China.

The Self-improvement

Mike Chou sometimes feels confused about why New Egg can earn profits in the US but staying far from seeing net income in China. Is the unfamiliarity of foreign companies with the Chinese market to be blamed for that situation?

He never admits that the changes of the executive team of New Egg China is the result of the business pattern of “focusing on profits and customer experience” losing to the radical operating pattern of “exchanging profits for growth”. But before taking the president of New Egg China, he more or less knew the predicament of foreign ecommerce companies in China.

When Chinese companies are earning applause even at the cost of losing money, they spoiled Chinese consumers with the custom of free delivery and deliver-and-arrival within 24 hours. In comparison, in the United States, New Egg holds onto the operating rule of making users pay for the delivery and sending the commodities within three days.

“If New Egg China required New Egg America to increase the investment into logistics, the latter might be confused and wonder why the logistics department in America could sometimes earn profits with logistics fees while the same department in China is like a devourer of money.”

Mike Chou said frankly that Americans believe that the ecommerce suppliers could earn profits if the cost of logistics takes less than 2% of the total sales revenue. However, the one-day delivery without any charges in China increase the cost of logistics to 3%-4% of the total cost. Americans wondered why further investment is needed for the logistics department since the ecommerce cannot earn profits.

What’s confusing him more is that foreign ecommerce companies strictly follow the relevant policy in China by issuing the invoice of paying 17% added value in purchasing commodities, leading to the disadvantages of foreign ecommerce companies in the price.

Because some Chinese domestic purchase commodities through some specific channels without issuing invoices, the prices of their products could be maximally 17% lower than the same products of New Egg. The result is that the market share of foreign B2C companies is swiftly taken by Chinese companies.

It is known that some employees of New Egg China once reported this problem to the senior executives of New Egg in America. However, Americans said that the founder of New Egg could not allow those “speculations”.

“Eventually, some foreign ecommerce companies in China found the cut-throat competition which would stop them from earning expected operating revenue and instead worsened their financial reports. Thus they chose to temporarily leave the Chinese market.” In Mike Chou’s opinion, the success of ecommerce is not necessarily reliant on the high-speed growth. What’s behind this is from whom Chinese and foreign ecommerce companies earn their money – local companies can endure the operating loss for a while only if this could award them with increasing clicks and revenue so that they could grab money from venture investors. In comparison, foreign companies are less fortunate to have the favor of venture investors and they have to earn money based on real operating profits.“Which pattern is better remains unknown until the end. The one who still stands at the end is the winner.”

Maybe New Egg’s resolution to stay in China is just generated from this viewpoint.

But Mike Chou clearly knew that it is hard for New Egg to see breakthroughs without the support of fast development, especially when the situation that Chinese ecommerce companies trade loss for market share cannot be changed for a while. What Mike Chou could do is “dig out potentials from the inside”.

Before his appointment as the president of New Egg China, he more or less knew some loopholes of New Egg’s management. The defects range from the “carelessness” of some employees sharing close relations with suppliers in watching and tracking when the sales rebates are given back to factories, which causes some unreasonable loss for New Egg China, to some employees’ latecoming to the work.

Zhou is definitely not the people who can endure the existence of these management loopholes. Soon after his enthronement, he fired a department director who cheated his superior about his late-coming. Though this action was considered a “harsh measure of a new boss to show his supremacy”, Zhou undoubtedly had his own reasons to do that.

In his opinion, this is the precondition for the ecommerce to touch success. Since ecommerce companies cannot directly “see” consumers, they can only improve the satisfaction of consumers through optimizing product purchasing, shelving products in the website, launching sales-promotion campaigns and improving the logistics system. “If the ‘honesty, responsibility and justice’ cannot be achieved inside the company, how can we earn the trust from consumers?”

“I don’t think that New Egg China cannot fit the Chinese market, but we might be haunted by the unfamiliarity with this market. Those who cannot fit the Chinese market are doomed to fail. But the unfamiliarity with the market can be overcome by the optimization of the internal management process before gradually reaching the success.” His blueprint of renovating New Egg China has revealed some measures of changing management process.

Nevertheless, the internal change of New Egg China was considered not to target the cardinal source of the problem by an expert in the ecommerce. As he said, the biggest problem to foreign ecommerce companies’ stagnancy in China is that the decision-making right is still taken by the investors outside of China which cannot make fast response to any changes in the Chinese ecommerce market.

For New Egg China, this also restrains the progress of renovating its internal operating process.

A Streamlined and Thin Company

Now, in the office of New Egg China in Shanghai, more and more employees are to get off work at 9-10 o’clock. They have to spare some time to read corporate materials which form dozens of pages.

In New Egg China, this document is called the “3-Month Battle Strategy”. The contents cover the analysis of sales of commodities purchased by New Egg in China, the judgment of the product competition in the future, the optimization of the logistics and delivery and the formulation of pricing strategies that can lead to profits. Every product manager is required to look through this “Strategy”and report their analysis results to department managers.

The “3-Month Battle Strategy” is a result of the new management pattern Mike Chou took to optimize the purchasing process of New Egg China.

What made him work out this strategy is his findings that New Egg seemed to be too generous in its previous purchasing – some product managers can order a dozen kinds of products from one supplier, but only ten out them have sales prospect and can generate profits while the rest commodities greatly consume the inventory of New Egg China.

This undoubtedly will lead to the waste of resources. In Mike Chou’s opinion, a commodity whose purchasing price is 100 yuan will increase the loss of inventory falling price of New Egg if it stays in New Egg’s storage for over 60 days. In New Egg China, part of commodities will be sold with a 10%-20% discount if their inventory turnover period exceeds 60 days. If the inventory turnover lasts more than 60 days, the discount might be close to 30%-40%. All the loss from the inventory falling price of commodities is afforded by New Egg China.

“The ‘3-Month Battle Strategy’ can make product managers know what products should be purchased for the sales and profits of the company. They will not accept all products from suppliers,”Mike Chou said. However, a simple Strategy is not enough. Supporting performance incentive measures should be taken to encourage workers to hand pick products with “profit space”. For this, New Egg China began to improve the assessment system of the performance of product managers, ranging from the list of purchased products, comprehensive gross margin of products, sales volume, total profits and number of customers.

While optimizing the purchasing system, Mike Chou is also gradually clearing out the high inventory.

In his mind, New Egg China should become a streamlined and thin ecommerce company, which owns light stress of inventory turnover and operating cost, as well as high efficiency with better HR management.

The large inventory of New Egg China is the biggest hurdle for his creation of a streamlined and thin company. Clearing out the inventory means that Mike Chou cannot submit good financial reports to the U.S. headquarters at the beginning.

In spite of that, he has made up his mind to do this. The commodities needing to be cleared out are the ones with certain sales prospect but stays in the storage for over 30 days. In the second quarter of this year, Mike Chou successfully reduced the inventory turnover period from 30 days to 10-20 days through a series of sales-promotion strategies.

In his opinion, the loss of ecommerce companies should be attributed to either the price difference between buying and selling products or the high operating cost.

New Egg China is haunted by the latter. Though the optimization of purchasing process improves the gross margin by 3%-4%, the operating cost takes 6% of the total revenue, leading to the -2% profit margin of New Egg China.

How to lower the operating cost is another big concern of Mike Chou. For example, presently New Egg has storage bases in Beijing, Shanghai, Chengdu, Wuhan and Guangzhou and the delivery in Beijing, Shanghai and Guangzhou is entrusted to Aoshuo Express under New Egg while the delivery in other provinces is given to the third-party logistics companies.

However, compared with the matured ecommerce consumption environment in Beijing, Shanghai and Guangzhou, the two bases in Chengdu and Wuhan have not benefited from the drive of ecommerce-generated effect. What’s worrying him most is that large inventory will emerge in the bases of Wuhan and Chengdu if New Egg China has no obvious growth in West and Central China. This will undoubtedly drastically increase the loss of inventory falling price according to New Egg China’s measure of clearing out inventory.

What Mike Chou could do is increase the investment in marketing to bring up the sales.

“We plan to increase the proportion of marketing investment in sales revenue by 1%, hoping to increase the users’ conversion rate from current 1.5%-1.6% to the standard 2%-3%,” Mike Chou said. He once thought about cooperating with rebate network, hoping to increase the users’ conversion rate through providing better favorable conditions.

Guess of CCOSS

For Mike Chou, a streamlined and thin company is not enough to make New Egg stand ahead of other ecommerce companies in China. Therefore, he needs breakthroughs based on differentiation.

In order to get this, New Egg recently sets up the Cross Country Online Shopping and Selling(CCOSS for short), which inspired him a lot.

The said CCOSS means to break the borderlines of different countries in New Egg’s global business map. The commodity purchasing is controlled by the group headquarters and the distribution channels in China, United States and Canada will work together to promote the sales of products. Actually, this measure was considered a way of New Egg America’s taking the purchasing right of New Egg China.

New Egg China has been long thought of as the subsidiary branch of New Egg’s American business and is widely criticized for “having insufficient flexibility” in sales promotion, product expansion, logistics solution and commodity purchasing. In Mike Chou’s opinion, the setup of global commodity purchasing platform can lower the purchasing cost for New Egg China and connect New Egg China with the world-class suppliers. Previously, when New Egg China purchased the famous 3C products, employees could only contact the regional representatives and agencies. However, information mismatch might exist in that process, causing the late delivery of purchased commodities and putting New Egg into the dilemma of having no supply of bestselling products.

“If the group headquarters can directly build strategic cooperation with suppliers, New Egg China can form better and closer communication with the agencies of these suppliers in China to ensure the on-time delivery of our purchased products,”said Mike Chou.

He is bullish on the global purchasing platform of New Egg because the platform has the concept of cross-border commodity flow. For example, some popular products in Europe and America can get into China’s ecommerce system through CCOSS and vice versa. New Egg China can cooperate with suppliers in multiplied forms, including the entering of companies and selling agencies.

“With this New Egg can have the exclusive rights of selling some products in China, which is the advantage that other Chinese ecommerce companies do not have.” According to Mike Chou’s plan, the first products based on cooperation are to be sold in China in August and the proportion will grow in the following year and contribute to 205 of the annual income of New Egg China.

Mike Chou will choose the 3C products and clothes that are sold well in China and shelve them in New Egg China before formulating relevant sales promotion strategies and providing delivery services. New Egg China can get 10% of the sales of the clothes as the commission and 4%-5% from the 3C products.

Then he has to face a big test about the genu- ineness of foreign products sold by New Egg. Mike Chou believes that this is based on New Egg’s credit and the accreditation letter from suppliers.

It is necessary to mention that New Egg’s combination into CCOSS has already started. At the beginning of this year, New Egg America moved 6 people to China to take charge of integrating New Egg China’s purchasing and selling network into its global platform. Zhong Shaoming is the leader of the team. In his opinion, New Egg China still needs to overcome the shortage in user information/feedback system if it wants to grab the opportunity generated by the global product purchasing platform.

With years’ working experiences in the United States, he has his interpretation of New Egg’s profit pattern. For example, New Egg America will publish the information and features of a new product it is going to sell and allow users to comment on this product. Then New Egg America will send valuable comments and feedback to the suppliers, which will decide whether to change the design of these products or not.

“Users can interact with manufacturers through information feedback. This is based on the fact that New Egg has a lot of loyal users in the United States,” Zhong Shaoming stressed. But in China, the furious competition in ecommerce makes users pay more attention to price and delivery time and no user information/feedback system or active interaction are formed.

The main responsibility of Zhong Shaoming is to provide supporting services for the debut of some 3C products in New Egg’s global purchasing platform and improve the user information feedback system for New Egg China.

It might take a while for New Egg to see the result of these changes. “We hope to borrow some elements from the success of New Egg America. The localized management of New Egg China does not mean to drop the management pattern in the United States,” said Mike Chou. “I do not expect New Egg China to grow 200%-300% a year. This year we want to increase our business by 50%. We believe that the ecommerce companies focusing on stable growth have a better outlook than the ones liking fast development.”