The Unwavering $1.50 Costco Hot Dog Combo: How It Has Defied Inflation for Over Three Decades

 

Source from Getty Image

Costco's colossal $216 billion retail behemoth is renowned for its sprawling warehouse stores, bulk products, and unbeatable prices. However, one menu item has achieved legendary status — the $1.50 hot dog combo.

Debuting in 1985, the Costco hot dog combo has maintained its price for over 30 years, resisting inflation and becoming a celebrated pop culture phenomenon. But how does Costco keep its iconic hot dog combo's price so low?

Dispelling common misconceptions, the $1.50 combo is not a loss leader for Costco. In a 2009 Seattle Times interview, Costco co-founder and former CEO Jim Sinegal clarified that the company avoids loss leaders, only selling below cost in cases of necessary markdowns. Nevertheless, Costco caps its margin at 14%, pushing many products towards break-even.

So, how has Costco sustained its hot dog combo's low price for so long? The company has implemented several strategies:

Severing Ties with Top Hot Dog Suppliers

Costco maintains its low hot dog combo cost by ending relationships with major hot dog suppliers, like Hebrew National and Nathan's, who would keep prices the same. Instead, Costco constructed its hot dog manufacturing plant in Los Angeles in 2009, with a second in Chicago.

Producing its hot dogs allows Costco to control the product's quality and pricing, yielding cost savings for the company and its customers.

Improved Ingredient Pricing

Costco also secures better pricing on essential ingredients like buns, ketchup, and mustard. The company obtains lower prices by purchasing in bulk and negotiating directly with suppliers, passing those savings to customers.

Eliminating Free Condiments

Previously, the Costco hot dog combo included free onions and sauerkraut. To cut costs, the company removed these free condiments.

Customers can still request these condiments, but they now come in smaller, pre-packaged portions at an additional cost. This enables Costco to manage costs while still offering customization options.

Phasing Out Polish Sausages

Besides removing free condiments, Costco discontinued Polish sausages, which were costlier to produce than regular hot dogs. The company can streamline operations and decrease costs by simplifying its menu and concentrating on one product.

Replacing Canned Soda with Refillable Fountain Soda
Another cost-saving strategy involves swapping canned soda for a refillable fountain soda. This reduces packaging expenses and offers customers unlimited refills, adding value to the combo and encouraging repeat business.

Although some customers might prefer canned drinks, fountain soda has proven to be a cost-effective solution for Costco.

Despite increasing inflation, Costco guarantees that the hot dog combo will remain at $1.50 for the foreseeable future. As CFO Richard Galanti explains, success in other ventures like gas and travel enables Costco to aggressively maintain the hot dog combo's price.

Conclusion

The $1.50 Costco hot dog combo isn't a loss leader; it's a meticulously engineered and managed product that maintains low costs while delivering value to customers. By adopting strategies such as constructing its manufacturing plant, negotiating better prices, eliminating free condiments, discontinuing more expensive items, and replacing canned soda with refillable fountain soda, Costco has kept its iconic hot dog combo price at $1.50 for over 30 years.

This accomplishment showcases Costco's dedication to offering value to customers and its ability to innovate and adapt to shifting market conditions. Although the $1.50 hot dog combo is a minor menu item, it symbolizes Costco's brand and significantly contributes to customer loyalty.

CFO Richard Galanti affirms that the success of other ventures allows the company to maintain the hot dog combo's price aggressively. This implies that the $1.50 fee may remain a cornerstone of Costco's menu for years.

The $1.50 Costco hot dog combo stands out as a beacon of value and consistency in a world where prices often seem only to escalate. It has become a cultural icon and a source of pride for the company and its customers. While other businesses may attempt to emulate its success, the Costco hot dog combo remains a genuine original that defies inflation and stays accessible for all.

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Domestic Violence Should Be Criminalized: An Analysis of the Issue

 

The issue of domestic violence has been a controversial topic for years. The recent case in which a man beats his daughter to find his wife’s whereabouts has sparked a heated debate about whether or not domestic violence should be a criminal offense. This article aims to explore this issue and analyze the arguments for and against the criminalization of domestic violence.

Definition of Domestic Violence

Before we delve into the issue, it is essential to understand what domestic violence entails. According to the World Health Organization (WHO), domestic violence refers to “any behavior within an intimate relationship that causes physical, psychological, or sexual harm to those in the relationship.” Domestic violence is not limited to physical violence but also includes emotional abuse, coercion, and controlling behavior.

Current Status of Domestic Violence

In many countries, including China, domestic violence is not considered a criminal offense. Instead, it is often dealt with through mediation, counseling, or civil law. However, this approach has not been effective in addressing the issue. Many victims are reluctant to report domestic violence due to fear of reprisals or social stigma, and those who do report it often receive inadequate protection.

Arguments for Criminalization of Domestic Violence

There are several reasons why domestic violence should be criminalized.

Firstly, criminalizing domestic violence sends a clear message that such behavior is unacceptable and will not be tolerated. It is a way of acknowledging the seriousness of the issue and the harm it causes. This can help to deter perpetrators from engaging in domestic violence.

Secondly, criminalizing domestic violence can provide victims with better protection. If domestic violence is treated as a criminal offense, the police will have the power to intervene and provide protection to victims. This will ensure that victims are not left at the mercy of their abusers.

Thirdly, criminalizing domestic violence can help to change attitudes towards domestic violence. If domestic violence is treated as a criminal offense, it will be viewed as a serious crime, rather than a private matter between two individuals. This can help to change the social norms surrounding domestic violence and encourage victims to speak out.

Arguments against Criminalization of Domestic Violence

Despite the above arguments, there are also reasons why some people oppose the criminalization of domestic violence.

One of the main arguments against the criminalization of domestic violence is that it is a private matter between two individuals, and the state should not interfere in private matters. Proponents of this argument argue that domestic violence should be dealt with through mediation and counseling, rather than through criminal law.

Another argument against criminalization is that it may lead to false accusations. Critics argue that criminalizing domestic violence may encourage people to make false accusations against their partners, which can lead to innocent people being wrongly accused and punished.

There are also concerns that criminalizing domestic violence may lead to the breakdown of families. Some argue that if domestic violence is criminalized, it may result in more divorces and family breakdowns, which could have negative consequences for children.

Conclusion

In conclusion, domestic violence is a serious issue that needs to be addressed. While there are arguments for and against the criminalization of domestic violence, it is clear that the current approach is not working. Domestic violence is a crime, and it should be treated as such. Criminalizing domestic violence will send a clear message that such behavior will not be tolerated, provide victims with better protection, and help to change attitudes towards domestic violence. The government should take action to criminalize domestic violence and provide support to victims to help them escape abusive relationships. It is only by working together that we can end domestic violence and create a safer, more just society.

The Reasons for Netscape’s Failure

 

Introduction

Netscape Communications Corporation, founded in 1994, was a pioneer in the world of web browsing and internet technology. It created the first widely used web browser, Netscape Navigator, and played a significant role in the early days of the internet. However, by 1997, Netscape had lost its position as the dominant player in the market to Microsoft’s Internet Explorer. In this HBR case study, we will use the MECE (Mutually Exclusive, Collectively Exhaustive) framework to analyse the reasons for Netscape’s failure.

Mutually Exclusive, Collectively Exhaustive Framework

In order to identify the reasons behind Netscape’s failure, we will use the MECE framework, which is a structured approach to problem-solving that ensures that all possible options are considered and avoids any overlap or duplication. We will use the MECE framework to break down the factors that led to Netscape’s downfall into mutually exclusive and collectively exhaustive categories.

Reasons for Netscape’s Failure

Failure to innovate

Netscape’s biggest mistake was its failure to innovate. After the initial success of Netscape Navigator, the company failed to keep up with the changing market. Microsoft, on the other hand, invested heavily in research and development and came up with better versions of Internet Explorer, which eventually led to Netscape’s downfall.

For example, Netscape Navigator 4.0, released in 1997, was a disaster. It was slow, buggy, and lacked many of the features that were becoming standard in web browsers at the time. In contrast, Internet Explorer 4.0, released in the same year, was much faster and more feature-rich than its predecessor.

Poor management

Netscape’s poor management was another major reason for its failure. The company’s management was focused on short-term gains rather than long-term strategy. It failed to anticipate the threat posed by Microsoft and did not take the necessary steps to protect its market position.

For example, Netscape’s decision to give away its browser for free in 1998 was a mistake. The move was intended to increase market share, but it backfired. Microsoft responded by bundling Internet Explorer with its Windows operating system, making it difficult for users to switch to Netscape Navigator.

Lack of focus

Netscape’s lack of focus was another contributing factor to its failure. The company attempted to diversify into other areas, such as e-commerce and web-based email, but these efforts were not successful.
For example, Netscape’s attempt to compete with Amazon by launching its own e-commerce site, Netscape Shopper, was a failure. The site lacked the range of products and the user-friendly interface that Amazon offered. Similarly, Netscape’s web-based email service, Netscape Mail, failed to gain traction in the market.

Legal battles

Netscape’s legal battles were another factor in its failure. The company was embroiled in a long-running legal battle with Microsoft, which accused it of anti-competitive behaviour. The case was eventually settled in 2003, but it had already done significant damage to Netscape’s reputation and market share.

For example, during the legal battle, Microsoft used its dominance in the operating system market to make it difficult for users to access Netscape Navigator. It also used its market power to force PC manufacturers to bundle Internet Explorer with their computers, further reducing Netscape’s market share.

Lack of financial resources

Finally, Netscape’s lack of financial resources was another reason for its failure. The company was not as well-funded as its competitor Microsoft, which allowed Microsoft to outspend it on research and development and marketing.

For example, Microsoft spent millions of dollars on advertising and marketing for Internet Explorer, while Netscape had limited resources for marketing its products. Additionally, Netscape’s decision to give away its browser for free in 1998 further reduced its revenue stream, making it difficult for the company to invest in new products and technologies.

Conclusion

In conclusion, Netscape’s failure was a result of several factors, including its failure to innovate, poor management, lack of focus, legal battles, and lack of financial resources. The company’s decision to give away its browser for free in 1998, which was intended to increase market share, ultimately backfired and allowed Microsoft to solidify its position in the market.

Overall, Netscape’s failure serves as a cautionary tale for companies that want to stay competitive in rapidly changing markets. It highlights the importance of investing in research and development, having a long-term strategy, and remaining focused on core competencies. Additionally, it demonstrates the need for companies to be financially stable and to anticipate potential threats from competitors.

References

HBR Case Study: How Did Netscape Fail? 

https://hbr.org/product/how-did-netscape-fail/an/R0105A-PDF-ENG

Netscape: The Rise and Fall of the Early Internet Leader.

https://www.investopedia.com/articles/investing/062915/netscape-rise-and-fall-early-internet-leader.asp

The Story of Netscape. 

https://www.nytimes.com/1998/11/22/magazine/the-story-of-netscape.html

The Rise and Fall of Netscape.

https://www.wired.com/2005/03/netscape/

How Netscape Won and Then Lost the Browser Wars. 

https://www.howtogeek.com/353788/how-netscape-won-and-then-lost-the-browser-wars/

Haidilao, an Internet Company Serving Hotpot

With profound user operation, complete supply chain, long dwell time, and rapid expansion strategies, China's largest hotpot chain Haidilao is essentially an internet company.

Xiaomi's founder Lei Jun once said that Haidilao was basically the same as tech giants like Xiaomi, Toutiao and Tencent. 

Founded in 1994, Haidilao is now a world-famous catering enterprise. Its founder, Mr Zhang Yong, is the fourth-richest person in Singapore in 2021, with a net worth of US$16 billion. In China's restaurant sector, Haidilao has always been imitated but never surpassed. Even Xiaomi's Lei Jun once said that he learnt from Haidilao at the beginning of Xiaomi. By a deep dive into its operation model, we found that Haidilao is an internet company rather than a restaurant chain.

User Operation 

·       Customer-centred Services

Haidilao is best known for its services beyond a typical Chinese diner's expectations. Their excellent and sometimes overzealous services have made headlines and trending topics across China's social media. On Zhihu, the Chinese version of Quora, under the question "What are some unforgettable services you experienced at Haidilao?" there are more than 5,000 answers. Haidilao customers shared their heart-warming memories with Haidilao, from babysitting to receiving free teddy bears when dining alone in case they are lonely.

As early as 2010, Haidilao has put information technology into its enterprise management, simplifying the internal process and bringing more convenient and personalised service. Customers can order food on Haidilao iPads or their phones through WeChat, Alipay, Haidilao website and App. The ordering system saves the customer's information, records the customer's preference, and analyses the customer's consumption ability. Waiters also put in remarks in the system if they receive any special requirements. When customers walk into Haidilao again, they will receive more personalised services and promotions. Haidilao's smart soup base machine and DIY soup base system allow customers to customise the soup. "Single customer" menu set designed for solo dinners supports cancelling and returning any untouched plates, lowering sales but increased potential return customers.

Haidilao has more than 71 million registered members and has served over 250 million customers as of 2020. Even under the impact of Covid-19, the table turnover rate at Haidilao is way above average, 2.25.

They have been working with food delivery giant Eleme during the pandemic. Their "little hotpot" delivery service allows customers within three kilometres to receive the meal in less than an hour. In 2020, Haidilao's takeout revenue reached RMB718 million (US$112.2 million), up 160% year on year. For customers who live too far from any Haidilao restaurants, Haidilao provides more than 20 kinds of ready-to-cook hotpot on e-commerce platforms and self-collect locations.

·       Online Operation

Haidilao launched its website in 2003 when none of its competitors is scaling up using the power of the internet. Its marketing strategies focus on social media and search engines. More than 254,000 Weibo users have posted under hashtag #haidilao, and it gained over 520 million views as of August 2021. In 2015, Haidilao opened an "internet experience store" at a location gathered with countless internet and tech companies in Beijing, providing an open social platform combining traditional catering with mobile internet. They introduced activities such as "programmer's day" and provide a forum or event venue for We Media and O2O companies, moving the online social activities to the dining place. Thanks to its online marketing strategies, every move of Haidilao can become a hot topic. There are good and bad public opinions, but what remains unchanged is netizens' attention.

Powerful Supply Chain Ecosystem

Haidilao is considered one of the most outstanding Chinese enterprises in catering supply chain orchestration. Backed with Zhang's "don't put all your eggs in one basket" strategy, Haidilao refuses to keep the entire supply chain in the back. It acts as a platform, with each sector in the supply chain operating independently. Besides being a part of Haidilao's kingdom, these companies serve and empower the whole F&B industry. Some of them are even listed.

Long User Dwell Time

Internet companies try to keep users on their products as long as possible, which Haidilao has done. Most Haidilao restaurants are open from 10 am to 10 pm. Some are 24/7 and offer 12%-25% off during night times.

·       Offline

A typical meal at Haidilao starts with a two-to-three-hour queue. To calm the anxious and hungry customers, Haidilao put a lot of thought into the waiting areas. Free and unlimited snacks and drinks are standard. Board games are a must. Free manicures make a trip to Haidilao complete. The longer people wait, the hungrier they are and the more they will order later.

·       Online 

Besides the basic functions such as queuing and ordering, Haidilao App offers a community that allows users to share videos, shop online and play games to collect "Lao Coins", which they can spend in the marketplace. The total number of downloads of the Haidilao App on Android phones is about 32.5 million, and the average daily downloads on iPhones in the past month (July 2021) is 8102.

Rapid Expansion

Rapid expansion helps a brand to occupy a distinctive place in the mind of the target market. In Haidilao's case, a large scale has another perk: it helps keep the rent down. It brings more customers to the malls, so Haidilao can always get much lower rent than its competitors. In 2020, Haidilao spent RMB236 million (US$36.9 million) on rent, accounting for 0.6% of its income. The numbers of Xiabuxiabu, the second player in the market, are RMB220 million (US$34.4 million) and 4.0%. Hotpot can be a standardised dish and does not require many skilled chefs, making it possible for rapid expansion and scaling up.

According to Guosheng securities, the distribution of the Chinese restaurant industry is relatively fragmented. As of 2019, only 10.3% of China's restaurants are chains, and the number is 54.3% in the US and 49.7% in Japan. A report by Frost & Sullivan shows that the size of China's hotpot restaurant market is expected to reach RMB707.7 billion (US$110.6 billion) by 2022. According to ASKCI Consulting, China's hotpot restaurant market's top five concentration ratio (CR5), the percentage of the total market share of the top five companies, was 5.5% in 2020. Even a giant like Haidilao takes less than 3%. In addition, the accelerating urbanisation process in the country provides more opportunities for Haidilao with its "central kitchen + chain restaurants" fast food model and advantages in supply chain management. In 2019, Haidilao's leaders claimed that the country has enough room for 3,000 Haidilao restaurants nationwide.

To achieve rapid expansion, a restaurant chain that adopts an all-direct-sale model needs at least four key factors: a complete restaurant supply chain system, a standardised management system, a talent training system, and substantial capital. With all those in place, Haidilao was able to scale up fastly. According to Haidilao's 2020 financial report, the total number of restaurants was 1,298 by the end of 2020, an increase of 178.5%. There were 544 new locations opened in 2020, almost 1.5 new ones each day.

Despite the rising costs and declining profits due to the pandemic and a drop in Haidilao's share price, securities agencies still recommend buying. It indicates the market's recognition for Haidilao and its expected bullish long-term development.

Summary

Although the founder, Mr Zhang Yong, claims not to understand the so-called "Internet thinking", Haidilao has always been the first to leverage new business models and technologies and keeping up with the trend. Haidilao's nature as an internet company is essential for its unprecedented success.

Can Highly Indebted China Evergrande Break the Game?

China Evergrande rushes to keep its interest-bearing debt ratio down under Beijing's "three red lines" policy, causing more problems.

The ordeal faced by China Evergrande has made headlines in the past month. As China's most indebted property developer, it urgently needs to cut its debt pile to bring its finances into compliance with "three red lines" set last year by the country to restrict further borrowings by property developers.

What are the "three red lines"?

The Ministry of Housing and the People's Bank of China drafted the rules in August 2020.

·       The debt-to-assets ratio should be less than 70%, excluding advance proceeds from projects sold on contract.

·       The net debt to equity ratio should be less than 100%. 

·       The cash to short-term borrowing ratio should be more than 100%. 

Under the three red-line policy, property developers are scored as green, orange, yellow or red based on how many of the "lines" they cross, and their debt growth will be capped accordingly. If categorized as red, the company will not be allowed to increase its debt in the following year, which was Evergrande's case.

Why is Evergrande so Debt-ridden?

Although a high debt ratio is expected in real estate, Evergrande's problem is more than that. It owns businesses in eight major industries, including real estate, property services, streaming service Hengten networks, online automobile marketplace Fangchebao, electric vehicle maker Hengchi, Evergrande Fairyland, Evergrande Health and Evergrande Spring.

·       Main business - Property Development 

In the early years, the government, enterprises, and people were keen on real estate development as it was profitable. Later the market gradually returns to rationality with the tightening policies and the retreat of investment enthusiasm. For example, in the past three years, the best-selling houses located in urban core areas and mature industrial clusters in the Yangtze River Delta and Pearl River Delta. People prefer the new Chinese style and minimalistic style. Even though Evergrande claims that 67% of its land is in first and second-tier cities, few are in the core area. Product development is also outdated, resulting in poor sales that need discount promotion to boost. 

·       Diverse Trend

Evergrande has been trying to diversify and broaden its territory. Since 2009, Evergrande has entered the fields of department stores, supermarkets, mineral water, agricultural products, animal husbandry, dairy, orthopaedics, health care, tourism, sports, film and television, automobile and so on. Yet, they have achieved so little from all these businesses after these years.

How Does Evergrande Reduce Interest-bearing Liabilities? 

A key factor affecting the "three red lines" policy is interest-bearing liabilities. At the end of 2019, Evergrande's interest-bearing liabilities were RMB799.9 billion (US$125 billion). It rose to RMB874.3 billion (US$136.6 billion) in Q1 2020. According to Evergrande's 2020 financial report, by the end of 2020, its total interest-bearing debt was RMB716.5 billion (US$112 billion).

At Evergrande's earnings conference in March 2021, Xu Jiayin gave a downgrading plan for the next three years:

·       Reduce the net debt ratio to less than 100% by 30 June 2021.

·       Bring the cash to short-term borrowing ratio above one by 31 December 2021.

·       Keep the debt-to-assets ratio less than 70% by 31 December 2022.

 

At the end of June, Evergrande announced it had reduced its interest-bearing liabilities to about RMB 570 billion (US$89 billion). In other words, Evergrande reduced its debt by RMB146.5 billion (US$22.9 billion) within only half a year.

There are usually three ways to reduce interest-bearing liabilities: one is "selling more, collecting more money and investing less" at the operational level, and at the same time paying the debt through equity financing; One is to hide interest-bearing liabilities at the financial level; The last is to occupy non-interest-bearing commercial bills. 

In the first half of 2021, Evergrande's sales were RMB356.8 billion (US$55.7billion), and its payment collection was RMB321.2 billion (US$50.2 billion), up only 2.9% year on year. 

According to statistics from Focus Finance and Economics, Evergrande raised about HKD62.7 billion (US$8.2 billion) in the first half of this year through rights issue financing, strategic investment, and asset sales. 

In terms of investment, Evergrande did not appear on the TOP 100 List of Real Estate Enterprises' Land Reserving in the first half of 2021, whose threshold is RMB 3.7 billion (US$0.6 billion). It acquired RMB63.3 billion (US$9.9 billion) worth of land in the same period last year. 

In general, operational methods are not enough. Evergrande does not release its financial statements for the first half of 2021 till now. Thus, we are unable to know the details.

The non-interest-bearing notes are payments to upstream suppliers that Evergrande can only temporarily defer at present. In April 2021, Evergrande released its annual report on corporate bonds in 2020, showing that its notes payable balance exceeded RMB205.7 billion (US$32.1 billion), accounting for 13.51% of the total liabilities. This amount is equivalent to more than ten real estate enterprises such as China Resources, Greenland and Sunac.

Bad News Continues 

As the first red line being successfully crossed, Evergrande should be able to breathe a sigh of relief. However, Evergrande's behaviour of robbing Peter to pay Paul triggers a series of vicious chain reactions. 

On 27 May, Caixin reported that the China Banking and Insurance Regulatory Commission was investigating related party transactions of over RMB100 billion (US$15.7 billion) between Evergrande and Shengjing Bank. 

On 20 June, the Yuelongtai project in Xuchang was suspended. The China Railway Construction Group, which is building the project for Evergrande, claimed that it was unable to pay the workers since Evergrande owed it more than RMB20 million (US$3.1 million).

On 29 June, the listed company SKSHU Paint Co., Ltd. announced that the company's bills receivable from Evergrande were overdue. As of the end of March, the company's outstanding bills amounted to RMB53.6 million (US$8.4 million). That evening, Evergrande quickly responded that they had paid the bill in June. Later SKSHU confirmed this news. 

On 30 June, Moody's downgraded Evergrande's rating to B2, saying further downgrades may be on the way.

On 19 July, according to Wuxi Intermediate Court, Guangfa Bank requested to freeze RMB132 million (US$20.6 million) of bank deposits from Yixing Hengyu Real Estate Co., Ltd. and Evergrande Real Estate Group Co., Ltd. or seize other equivalent assets. Soon the two sides reconciled.

On 19 July, the Housing and Urban-Rural Development Bureau of Shaoyang, Hunan province, announced the suspension of the pre-sale license, online registration and pre-sale fund allocation of the Evergrande Future City project and the Evergrande Huafu Project. It found the supervised amount was not in line with the actual sales amount. Soon Evergrande paid RMB120 million (US$18.8 million), and the projects resumed.

On 22 July, the Lanzhou Municipal Bureau of Natural Resources issued a notice urging 41 developers, half of whom are Evergrande subsidiaries, to pay land-transferring fees. 

On 26 July, S&P Global downgraded Evergrande and its affiliates from B+ to B- with a negative outlook. In response, Evergrande said that it did not rule out the possibility that foreign institutions deliberately shorted Evergrande's shares by repeatedly creating public opinion. 

On 28 July, the Housing and Urban-Rural Development Bureau of Heze, Shandong province, received reports that some Evergrande projects sold at unfairly low prices.

On 28 July, Fitch Ratings again downgraded Evergrande Group and related companies to CCC+. 

On the evening of 28 July, Huaibei Mining sued three Evergrande companies. It said Lu'an Hengda owed RMB401.3 million (US$62.7 million) for the completed project and liquidated damages, and that Evergrande Real Estate Group Hefei Co., Ltd. and Evergrande Real Estate Group Co., Ltd. were liable for the settlement. Evergrande responded that Evergrande Real Estate Group Co., Ltd. was not the subject of the contract and should not be involved in the lawsuit, and it had filed an objection to the court. 

On 29 July, Langfang Development announced at night that the judiciary department froze all shares held by Evergrande Real Estate Group Co., Ltd. The frozen shares were 76.032 million, accounting for 20% of the total share capital. 

Can Evergrande Survive the Crisis? Or Will It Go Bankrupt?

As early as October 2016, Evergrande tried to return to the A-share listing through a backdoor. Later it got an investment of RMB130 billion (US$20.3 billion). Under the contract, Evergrande must repay the debt and payout RMB13.7 billion (US$2.1 billion) in dividends to investors by 31 January 2020. However, in September 2020, Evergrande's IPO plan was declared a complete failure. With bankruptcy as a threat, Evergrande successfully converted this 130 billion debt into shares. The money continued Evergrande's life but put Suning on the path of change of ownership. Evergrande is on the blacklist of financial institutions and investors from then. 

Suppliers are angry about the delay of commercial bills. On the trading floor of the Shangpiaoquan, there are 84 commercial bills with Evergrande companies as acceptors, totalling RMB101.4 million (US$15.9 million), most of which have an APR of over 30%. 

According to Fitch Ratings, Evergrande raised only RMB8.2 billion (US$1.3 billion) by issuing domestic bonds in 2021. 

The share price of China Evergrande (03333.HK) has dropped to HKD5.26 from HKD28 in July last year. Evergrande has difficulty raising money from the stock market now. 

Touching too much bottom line, Evergrande is under siege on all sides. Rumour had it that the company was going bankrupt because of its capital problem in 2017, yet it survives successfully. Will it break the ice successfully like four years ago?

"Brushing" Method led to Massive Crackdown by Amazon on Chinese Sellers

Amazon bans more than 50,000 Chinese sellers for alleged fake reviews and other violations. Chinese netizens: Well done! 

2021 is a challenging year for Amazon’s Chinese sellers. A crackdown by the US-based e-commerce platform against Chinese companies has been in progress since April. According to the Shenzhen Cross-border E-commerce Association, Amazon has banned more than 50,000 Chinese sellers as of July 2021, leaving multi-billion-dollar revenue losses for top sellers and bankruptcy for midsize ones. Shenzhen Youkeshu Technology co., Ltd., one of Amazon’s largest Chinese retailers, has 340 stores banned or frozen with more than RMB130 million (US$20 million) frozen in their accounts, according to its Shenzhen-listed parent company TIZA Information Industry Co., INC.

A statement by TIZA provided a list of Youkeshu’s violations that led to the massive banning, including low fulfillment rate, fake reviews, unauthorized listings, counterfeit, etc., which reveals some typical “Chinese e-commerce practices” that Chinese consumers have condemned for a long time.

Companies like Youkeshu operate in a model of massive stores or dianqun, which means they list up to a million products in thousands of stores they bought. With that much amount of SKU, it is hard to keep a good performance for each store, which brings terrible experiences for buyers.

“Brushing”, known as shuadan in China, is a process that “brushers” place fake orders to help sellers build higher sales that can bring better placement on e-commerce platforms, leading in turn to more sales.  Brushing and paid review are almost standard practices to trick the algorithm of e-commerce marketplaces and boost online sales in China. Amazon’s Chinese merchants did not give up that shortcut. There is a whole value chain of brushing and selling reviews: countless Facebook groups filled with “reviewers” buy off Amazon, leave a nice detailed review, and get refunded via PayPal from the seller later; websites that offer reviews in bulk; and most commonly, vouchers come with the packages that provide cashback for good reviews. Companies even set up dedicated job positions for fake reviews on their listings.

Illegal But a Norm in China

In China, it is an open secret or a hidden rule that to succeed in e-commerce, sellers must buy reviews. Despite regular crackdowns by the state, cheating is so common in e-commerce businesses that consumers just stopped to read the reviews. To make it seem more legit, sellers even pay for some bad reviews, focusing on not so essential flaws such as logistics. And then, the shop owner would reply and solve any of the problems mentioned in the bad reviews on the thread to show good customer service. They also buy bad reviews that seem real for their competitors’ listings. There is a whole industry of fake transactions and fake reviews that supports any product or service listed online. To improve the ranking of your listings on a famous hotel booking platform, you can order fake orders for RMB20 (US$3) each. A good review takes an extra RMB5 (US$0.8). There is no official number, but a report by iiMedia Research indicated that the fake sales industry is worth more than RMB600 billion (US$92.9 billion) by 2016.

How it Works

The most common process of brushing:

• the seller sends the requirement to the brushing organization
• the organization dispatches the task to brushers
• the brushers search for the product, pretend to compare, chat with the seller, add the product to the cart, place orders, leave five-star reviews, and get refunded plus commission outside the e-commerce platform

Is an Honest Market too Good for Chinese Consumers?

Another iiMedia Research report suggested that nearly 70% of China’s live streaming e-commerce users believe there is data fraud in this business. The e-commerce platform showed more than three million views on some live streaming, but only 110,000 of them are real users.

The Amazon crackdown has caused a stir in China. Even though thousands of workers lost their jobs overnight when companies decide to close down after Amazon banned all of their stores, Chinese consumers showed their understanding and support and even wished Chinese e-commerce giants would do the same. The topic was trending on Zhihu, the Chinese version of Quora, for days. The question “How do you feel about Amazon’s harsh banning of 50,000 Chinese sellers, causing losses of over 100 billion?” received thousands of answers and comments, most of which are supportive of Amazon. An anonymous user who claims to be an old Youkeshu employee put in the thread that “they deserve it. They used nice product pictures in their campaigns and on their websites, but the products they sent to buyers are nothing like what they advertised. It is a complete fraud. I left because I felt bad for the buyers and did not see any future in that company”.

Chinese Fashion E-Commerce Brand SHEIN - a Hidden Dragon Aims to Take Out ZARA

Relying on supply chain integration capability and pioneering marketing strategies, SHEIN has conquered Gen Z with affordable prices and massive daily new arrivals.

A report from Latepost in August 2020 brought Chinese e-commerce brand SHEIN under the spotlight. Since then, the company has frequently made top stories in domestic media, despite their intention to keep a low profile. At the same time accordingly, SHEIN is preparing for a US IPO.

What is SHEIN? 

As a direct-to-consumer (DTC) retailer specializing in women’s fashion, the company SHEIN owns the fast-fashion brands SHEIN and Romwe, which are available on two global sites, 16 subsites in different languages, and mobile App SHEIN. It has 120 million registered users from 220 countries and regions. 

According to App Annie, SHEIN is the most downloaded shopping app on iOS and Android in the United States and 12 other counties and the second in 54 countries. In the Top 50 Kantar BrandZ ™ Chinese Global Brand builders 2021 released by Google and Kantar on May 10, SHEIN ranks No.11, higher than Tencent.

SHEIN’s sales reached $10 billion in 2020 and have grown by more than 100% each year for the past eight years, while ZARA owner closes 1,200 worldwide stores.

The Rise of SHEIN 

Founded in 2008 by SEO expert Xu Yangtian, the company sold wedding dresses, one of the most popular e-commerce products from China to the world back then. After Xu realized that the competition in the wedding dress race was getting fiercer, he made a bold move to enter the fast-fashion sector, trying to take a slice of the pie with ZARA, H&M and Forever 21.

In the early days when they did not have their supply chain, SHEIN first put up the pictures on the website and placed the order at the suppliers after receiving orders from the customer. In this way, the sampling process was shortened to as fast as seven days, while the best ZARA could do was 14 days. The speed helped SHEIN win the first battle. They decided to build their supply chain in 2014, which gradually developed into an industrial cluster in Panyu District, Guangzhou, with hundreds of suppliers, like the ZARA production headquarters in La Coruna, Spain. 

By subsidizing the suppliers, SHEIN managed to place 100-unit small orders, while ZARA’s suppliers have a MOQ of 500. This model of small orders and quick feedback, in which they produced small batches, tested the market and mass-produced the popular ones, helped SHEIN maximize sales and profits and reduce inventory risk.

During these years, SHEIN also raised a lot of money. In 2013, the company received a US$5 million investment from JAFCO. In 2015, it raised US$46 million from Greenwoods and IDG. Sequoia China invested in 2018 at a valuation of US$2.5 billion. Accordingly, SHEIN’s value is now US$15 billion with a Series E funding.

Gen Z’s Fave

While it kept a low profile in China throughout the years, SHEIN is very popular on social media platforms abroad. “#Addicted to SHEIN” made Twitter trending topics. With affordable prices, massive daily new arrivals, and its mysterious origin, SHEIN have conquered Gen Z customers.

• The Price

SHEIN’s average unit price is about half of ZARA’s, while they provide the same quality. Their Gen Z fans loved 6-dollar shirts and 12-dollar dresses.  

• Massive Daily New Arrivals

SHEIN puts on thousands of new arrivals daily, which means they can achieve ZARA’s annual goal in just one or two months. Speed is the key to win the fashion-seeking young customers.

• Mysterious Origin

SHEIN has no physical store as of July 2021 except for temporary pop-up stores in Paris, Lyon, London, Las Vegas, and other cities. These events are always irregular and short notice, which serves young people’s desire for mystery and excitement. The fans have to follow closely on their updates to get notified.

Critical Factors of SHEIN’s Success

Fashion and affordable, this winning combo of fast-fashion brands may not be easy to achieve as it might sound. SHEIN’s superb supply chain integration capability and pioneering marketing strategies contributed the most to their success.

• Supply Chain Integration 

1. Design

SHEIN developed a trend-tracking system that grabs product data from various websites to analyze colours, prices, and patterns in real-time. After finding out the potential trend, a team of nearly 400 designers and buyers start to design or source for samples.

2. Production

SHEIN adopted the customer to manufacturer (C2M) model of “small orders and quick feedback” in production. They produce 100 units for each product to test the market and start mass-producing the popular ones, while the unpopular ones go back to the design department for modification. This model allows SHEIN to produce more hit products and reduce inventory pressure.

To become one of SHEIN’s suppliers, you

• have to be somewhere within a five-hour drive from SHEIN headquarter
• better be a small or medium-sized factory with a total capacity of R&D, manufacturing and sales
• have to ship out ready stock within 40 hours and pre-orders within five days

When working with SHEIN, suppliers face strict KPIs in lead time, on-time delivery rate, defective rate, etc. At this moment, SHEIN’s lead time requirement is 10 to 15 days for new products and seven days for old products, which is far shorter than ZARA’s three weeks and traditional brands’ three to six months. 

In return, SHEIN subsidizes the suppliers, covers the sampling fee, never defaults on the payment, and even leaves inventory pressure to themselves. 

SHEIN uses an ERP to track every order and production status at each supplier. The system starts to capture and analyze user behaviour, such as views on the product details, add-to-cart rate, etc., soon after launching a new product. Then it automatically places orders to the suppliers.

• Pioneering Marketing Strategies

According to SimilarWeb, in June 2021, SHEIN’s website received 160.8 million visits with a bounce rate of less than 40% and an average visit duration of 10 minutes. SHEIN’s main markets are North America and Europe. 39.6% of the site’s traffic are from the US. Specifically, the primary sources of its traffic are direct traffic 36.88% and search traffic 39.69%. Paid traffic accounts for 27%. 

1. Paid Ads

Being the largest Chinese customer of Google, SHEIN is burning a lot on paid ads at Google, social media platforms, YouTube, and even on TV.

2. Influencer Marketing Pioneer

As early as 2011, SHEIN began cooperating with influencers or Key Opinion Leaders (KOLs) to promote the brand. Almost 100% of SHEIN’s traffic came from influencers’ references with a 300% ROI back then. However, as the influencer community grow, the traffic was also getting expensive, while it used to be free. A YouTuber SHEIN used to work with would charge US$50,000 instead of US$30 when they first began six years ago. So SHEIN started to partner with Key Opinion Consumer (KOC) and launched its affiliate programme. An ordinary customer can get a 10%-20% commission on sales and free products by promoting SHEIN’s products. According to an April article by Jing Daily, #SHEIN has gained 6.2 billion views on TikTok alone.

Now, SHEIN has formed an influencer marketing mode of working with fans and small KOCs to gain traffic to the site, medium KOCs for product sales, and KOLs for branding. 

3. Social Media

SHEIN is all over social media. As the brand grows, contents on their accounts are not just discounts and promotions anymore. They are now trying to sell a lifestyle. Currently, SHEIN has 15 million followers on its main Facebook account and 11 million on Instagram.

4. Focus on mobile App

Powered by tech talents and experience on mobile e-commerce in China, SHEIN has been promoting its App since 2013 and selling through live-streaming since 2017. According to Sensor Tower, SHEIN App has been downloaded eight million times on Google Play and six million times on the iOS App Store as of June 2021. Now traffic from the App accounts for 72% of total traffic, higher than any US competitors.

Besides online marketing, SHEIN has also planned for offline activities, such as pop-up stores, campus ambassador programmes, music festivals, public welfare activities, etc. SHEIN misses no marketing opportunities to reach its customers online and offline. 

There is No Slack in the Future

Valued at US$15 billion, SHEIN is not far from its goal of surpassing ZARA. Yet SHEIN’s future is not a rosy one. There are still many problems to be solved. 

• Plagiarism accusation

Plagiarism seems to be endemic in the fashion industry. YouTube videos comparing products from ZARA and SHEIN pointing out its plagiarism problem keep coming out, and more and more designers started to speak up, which costs a lot to settle.

• Quality Issue

To ensure its low cost, SHEIN uses cheaper materials like nylon and polyester to make the clothes.  Some customers complained that the products they received look nothing like the online pictures, and they are almost disposable clothes. On the other hand, with the rising environmental awareness, such materials are bound to attract a lot of criticism. 

• Logistics

Compared with SHEIN’s high-speed domestic supply chain, its delivery speed abroad has a lot of space to improve. Even if Amazon’s next-day delivery does not exist, SHEIN’s more-than-10-day delivery time still has no advantages on the market.

• Culture

As a global fashion brand, SHEIN needs to be familiar with different cultures and customs to avoid another incident like the Muslim prayer mats in July 2020.

• Data Security

SHEIN suffered a massive data breach in September 2018 and exposed the personal information of 6.4 million users. Luckily for SHEIN, the incident did not draw much attention from American politicians or the Western media. If it happens again, no one can guarantee good luck furthermore.