It was all going well for Jumei investors when the stock was reaching the heady heights of $38, but two earnings reports and an Alibaba IPO-related capital flight later have left investors looking at a 50% fall in just three months.
The firm announced that total net GMV grew at its slowest ever pace and gross margin shed 570 basis points from a year ago to 38.0%.
NYSE-listed online retailer Jumei faces plenty of competition from rivals in China's growing cosmetics business. Photo: Thinkstock
The immediate reaction of the share price to Jumei’s earnings on Wednesday evening was to fall around 12% in after hours trading, and was followed on Thursday’s session by a 13.1% fall to $19.32.
Net GMV on a sequential basis declined slightly due to non-recurring events. During the quarter, Jumei suffered negative publicity from a report showing that a third party merchant had been selling fake goods on the site, and this hurt its August 1 sales promotion. In addition, the firm’s entry-level luxury products were temporarily halted during the quarter, which account for 2% to 3% of total GMV. 
At the beginning of Jumei’s third quarter conference call, CEO Leo Chen said that the firm is in a quarter of transition, as the firm moves most of its marketplace sales to merchandise sales, in order to reduce the number of counterfeit goods on the platform.
All online retailers have taken time in their conference calls to state that they are taking a stance against counterfeit goods. But it is more important for cosmetics retailers to do so than apparel retailers, because there could be detrimental health implications. Jumei has been actively promoting its product testing capabilities, and it is not only running tours of certain testing facilities, but in the conference call even invited investors to visit the facilities if they ever happened to be in China.
I personally haven’t visited the facilities. But Jumei does have the top anti-counterfeit policy in the industry, and the Authentic Beauty Product Alliance (ABPA) tracking system is a great marketing point for the firm. The ABPA now covers 60% of all of Jumei’s beauty products, and the shift of cosmetics from marketplace to merchandise has all but eliminated the possibility of counterfeit goods on the site.
Risky move
The transitional period that management has referred to is related to their anti-counterfeit policy. By making the strategic shift to move sales from their third party merchant marketplace to its own first party merchandise store, Jumei is reducing the risk of third party merchants selling counterfeit goods on their platform. The problem is that 30% of Jumei’s cosmetic GMV came from third party merchants prior to the shift, and the majority of its luxury brands, such as Clinique and Lancome, are imported by these merchants, and this poses a real risk that consumers of these higher end products will shop elsewhere if Jumei’s supply is reduced.
This rapid shift from marketplace to merchandise sales has already negatively affected GMV, and the margin fell because the firm was offering coupons to consumers in order to help third party merchants shift inventory. As the strategic shift began in September, the proportion of cosmetic products on the marketplace platform was swiftly cut to single digits by the end of September, and by the end of the shift in the fourth quarter, this will drop further to 1% to 3%.
Management took the time in the second and third quarter to remind investors that the first and fourth quarters are seasonally better for the cosmetics industry because the air is drier. So whilst the firm should be looking at the fourth quarter to be impressive, investors shouldn’t expect a notable improvement from the third quarter, because the firm will finish its strategic shift by the end of the fourth quarter.
For me, it begs the question as to why the firm needed to make this strategic shift in such a short space of time, given the detrimental effect that it has had on performance. What’s more, Jumei is facing competition from LeFeng, which was acquired by VIPshop in February. In its earnings report released earlier this week, VIPshop said it generated $191 million in cosmetics GMV in the third quarter, which is 69.96% of Jumei’s entire GMV for the quarter.
Management expects growth to return in the fourth quarter and first quarter, particularly from its Jumei Global international shipping service. However, it remains to be seen as to how much of this growth is affected by the continued strategic shift.
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