Burning financial (ID: rancaijing) original
Author: Dawn, Editor: Wei Jia
NetEase is a company that can continue to create surprises. From 163 mailboxes to Fantasy Westward Journey, to Netease Cloud Music and Netease Koala, many people remember this company through Netease products.
Most of the other companies that were born at the same time as NetEase have closed or declined. But the 22-year-old veteran Internet giant has been active in the middle of the stage.
In the era of portals, NetEase is the king of the Internet. After the rise of BAT, NetEase has been in the second camp. Its market value follows BAT, it can't challenge the Big Three, and it's not easy to fall behind.
In the core business, NetEase is also difficult to win first. In terms of games, Netease has Tencent's extremely powerful opponent; in advertising, Baidu and today's headlines have snatched all the limelight; in education, the giants are standing on top of the mountain.
E-commerce, originally became the next highland targeted by NetEase, NetEase Koala and NetEase were carefully selected, and Ding Lei placed high hopes. Ding Lei said that he wants to pass the e-commerce, "re-create a NetEase".
Five years have passed, how is the development of Netease e-commerce? Can the e-commerce business regain the throne of Netease?
On August 8, NetEase released its 2019 Q2 earnings report after the US stock market. Overall, Q2 net revenue was 18.77 billion yuan, up 15% year-on-year; net profit was 3.07 billion yuan, up 46% year-on-year. Among them, the e-commerce net revenue was 5.25 billion yuan, a year-on-year increase of 20%. Affected by the positive earnings factors, NetEase shares rose 1.5% after the market.
First, where does NetEase e-commerce come from?
From the revenue structure, let's take a look at what kind of company Netease is.
Before 2014, Netease's revenue mainly came from three aspects: games, advertising, and innovative business.Among them, the game business accounted for a large proportion, accounting for 90% of the total revenue. Similar to Tencent, NetEase was once a game company.
In contrast, NetEase portal, 163 mailbox, NetEase cloud music, a dictionary, and a cloud note, which are widely loved by users, did not contribute much cash flow to NetEase. The revenue contributed by these lines of business is packaged in advertising revenue and innovative business revenue, with a long-term share of less than 10%. Although NetEase continues to incubate new projects and the advertising business continues to grow, it has not shaken the core position of the game business.
This situation began to change in 2014.
At the beginning of 2014, NetEase began to work as an e-commerce provider, and in a year, it squeezed the game's revenue ratio by nearly 8 percentage points.
Netease's early e-commerce business has a strong sense of exploration, and it means a little bit of shooting. In this e-commerce basket, which is known in the industry as “the hodgepodge”, NetEase has launched Internet lottery, precious metal trading, insurance, wealth management and other products as a platform. Starting from Q2 in 2014, Netease's innovative business revenue grew by more than 200% in four consecutive quarters due to the e-commerce business.
However, this informal e-commerce force is obviously not explosive enough.
Cartography / Burning Finance
What is reflected in the financial report is that the proportion of revenue from the innovative business of e-commerce, which has increased from 5% in Q1 2014 to 12% in Q3, has stopped growing, and the proportion has been hovering. 12% or so. It was not until the Q3 in 2015 that the Netease koala began to show the scale effect, and this ratio began to increase again. The smash hit Internet lottery was also stopped shortly after.
Until the cross-border e-commerce winds blowing.
In July 2014, the “No. 56” and “No. 57” documents for the cross-border e-commerce industry were issued, eliminating the large amount of taxation on the import link and clarifying the industry regulatory framework. This move ignited the fire of entrepreneurship of cross-border e-commerce. Ding Lei keenly sniffed the business opportunity and immediately established Netease Koala. At the beginning of 2015, NetEase Koala was officially launched, and was subsequently upgraded to a strategic product within NetEase.
According to data released by Ai Media Consulting, NetEase Koala has occupied the first place in the cross-border e-commerce market for three consecutive years since 2016. In the first quarter of 2019, NetEase Koala ranked first among cross-border e-commerce companies with a market share of 27.5%.
After the successful cross-border e-commerce test, Netease officially launched the self-operated lifestyle e-commerce NetEase in April 2016. Born with a gold spoon, Netease made a strong choice. In the same year, Ding Lei announced that it would take another three to five years to build a Netease business through e-commerce business such as NetEase Koala and Netease.
Reflected in the financial report,The proportion of innovative businesses including e-commerce in Netease's total revenue increased from 9% in 2014 to 37% in 2018.The share of game revenue is further reduced to 60%.
Cartography / Burning Finance
Netease split the e-commerce business from the financial report in 2017 and conduct independent disclosure. Data show that in 2017 and 2018, Netease e-commerce accounted for 22% and 29% of revenue, respectively. In 2019, Q2, NetEase's e-commerce revenue accounted for 28%. E-commerce has become the second largest growth engine after games.
Second, can e-commerce reshape Netease?
The situation seems to be a good one. Can Netease E-commerce really have peace of mind?
One must face the fact that it is necessary to reshape NetEase with e-commerce.In addition to looking at the scale of revenue, it depends on profitability and growth.However, on these two core indicators, NetEase's financial report conveyed some unfavorable signals.
First of all, in terms of profitability, Netease e-commerce has dragged down the overall profitability of Netease.
From 2010 to 2013, Netease's gross profit margin was 69%, reaching a peak of 73% in 2013; the average net profit margin was 44%, reaching a peak of 48% in 2013. Moreover, both of these indicators are increasing year by year. However, after NetEase invested heavily in e-commerce in 2014, NetEase's overall profit margin declined year by year. The gross profit margin decreased from 72% in 2014 to 42% in 2018, and the net profit margin decreased from 41% to 9%.
Cartography / Burning Finance
In 2017, after Q4 Netease disclosed the e-commerce business independently in the financial report, we were able to know its true profitability.
According to the earnings report, from the Q4 of 2017 Q4 to 2019 Q2, Netease's average gross profit margin was 63%, advertising was 62%, and e-commerce was only 9%. Among them, e-commerce set a quarterly minimum in Q4 in 2018, with a gross margin of only 4.5%. And this is only the gross profit margin. If the operating expenses and distribution costs are deducted, Netease e-commerce is basically free of money.
Compared with Jingdong, Jingdong's gross profit margin has remained at around 14% year-round. Under the self-operated model, Jingdong has suffered losses all the year round. However, Jingdong is constantly expanding the profit model of third-party sellers, from purely self-operated to platform. Increase gross margin through a combination of merchandise sales + services. In 2019, Q1, Jingdong's higher-margin platform services achieved a net income of 12.4 billion yuan, a year-on-year increase of 44%. Jingdong achieved full profit in Q19 in 2019.
Cartography / Burning Finance
For the current stage of NetEase e-commerce, in the self-operated mode, it seems to be developing rapidly, but the profit margin is limited.
Loss is not a fundamental problem. In the e-commerce circuit, it is not uncommon to seize the market through strategic losses and increase the valuation through high growth rate. Whether it is Jingdong or a lot of fights, it has been a model of huge losses. Jingdong has developed for more than a decade and has not completely torn the label of loss. The logic of investors' willingness to pay for losses is that short-term losses are not a problem as long as they can continue to grow.
However, for NetEase, on the issue of speed increase, it has now encountered a bottleneck. NetEase e-commerce has already bid farewell to the high-speed growth stage.
In the first three years of its inception, Netease's innovative business revenue growth including e-commerce was 205%, 252%, and 117%, respectively. In 2017, revenue growth slowed to 92%, and for the first time it was below 100%. In 2018, it was further reduced to 59%, the lowest growth rate in the past five years.
From Q4 in 2018 to Q2 in 2019, Netease's e-commerce revenue grew by 44%, 28%, and 20%, respectively, and continued to decrease quarterly. From 2014 to the present, the development of NetEase's e-commerce is obviously insufficient in terms of growth rate.
Cartography / Burning Finance
A retired Netease middle-level Fang Dongfei told the Finance and Economics that Netease e-commerce was in the initial stage, relying on Netease's own traffic, so the opening development is very fast. However, when the self-owned traffic is used up, the cost of obtaining traffic from the outside is high, which will reduce the speed of e-commerce development.
At Netease's 2016 Q4 earnings conference, Ding Lei released his words, Netease strictly selected GMV of 7 billion yuan in 2017, and reached 20 billion yuan in 2018. It seems that although it is impossible to confirm whether NetEase is up to the standard in 2017, it is clearly not achieved in 2018. According to the financial report, Netease Koala and NetEase's consolidated revenue in 2017 were 11.7 billion yuan, and in 2018 it was 19.2 billion yuan.
“The rapid development of Netease E-commerce in the past two years has covered up some problems. When the traffic problem is exposed, many problems arise. & rdquo; Fang Dongfei said.
The tightening of policies has also caused certain impact on Netease e-commerce.
In March 2016, the Customs announced that it would cancel the tax concessions in the bonded area from April 8, 2016, and impose a tax increase of 11.9%, which directly led to an increase in the cost of cross-border purchases. In Q4 2016, Netease included the revenue from the innovation business of e-commerce, which was directly reduced from 107% to 38%, and then remained at around 60%.
Cartography / Burning Finance
Ding Lei tried to recreate a NetEase through e-commerce. However, is this the new Netease that Ding Lei wants?
Third, Netease e-commerce still needs three levels
“In the e-commerce business, Netease chose the most difficult road. ” A person close to Netease said to the burning of finance.
NetEase e-commerce has adopted a heavy asset model. Whether it is NetEase koala or Netease's strict selection, they all adopt the self-operated mode. The biggest benefit of this model is that product quality and user experience are guaranteed. Take Netease Koala as an example. When Ding Lei decided to do cross-border purchase business in 2014, the first thing was to let Netease Koala CEO Zhang Lei take the team and ran through the mature bonded warehouse in China within one week and won the biggest one. Storage area. Netease established a large number of bonded warehouses at that time, and it is in the hands of its own overseas supply chain, platform sales, warehousing and distribution.
Netease's idea of doing cross-border e-commerce has certain similarities with Jingdong's self-built warehousing and self-built logistics. Liu Qiangdong’s slogan in the early days of Jingdong was that there were no fakes. Ding Lei’s label for Netease koala was also of quality and no fakes.
However, when Netease koala expanded the platform's merchandise category from 100 to 1,000, and the sales channels covered Jingdong, Tmall, and even more, the problem arose.In addition to the occasional exposure of fakes, inventory becomes a more difficult problem.
According to the financial report, from Q4 in 2017, NetEase announced the inventory data of e-commerce. In the past seven consecutive quarters, the average inventory of NetEase e-commerce was 5.1 billion yuan, of which 5 quarters, the amount of inventory was higher than the amount of cash and cash equivalents. In 2018, Q3, the inventory of Netease e-commerce reached a peak of 6.3 billion yuan.
Cartography / Burning Finance
So at the end of 2018, Netease began a wave of continuous inventory operations. The same down jacket, Netease carefully selected APP to maintain the original price, other platforms to do promotions, after the preferential reduction, the difference between the two can reach 40 yuan.
This wave of promotions soon saw results. In Q18, Q4, NetEase's e-commerce inventory was reduced to 5 billion yuan, and Q1 was reduced to 4.3 billion yuan in 2019. But this also affects the gross profit margin of Netease e-commerce. In Q18, 204, the e-commerce gross margin was only 4.5%.
Netease's determination to continue to reduce inventory is still there. In 2019, Q2, Netease's inventory amounted to 4 billion yuan, the lowest in history. However, with the continuous expansion of the scale of NetEase's e-commerce, the inventory problem can not be ignored.
Another tricky issue is traffic.
In the eyes of the industry, Netease e-commerce is "to rely on the big tree to enjoy the cool". Whether it is NetEase koala or NetEase's strict selection, it has obtained the traffic support of the entire Netease Group in the early stage of development. Netease portal, games, news client, cloud music, mailbox, these huge user bases have become the source of traffic for Netease e-commerce. In terms of departmental affiliation, Netease's strict selection is an internal incubation project of the mailbox department, and the entire mailbox system can be strictly selected.
“Koala is a group strategy of NetEase in the next 3-5 years and has a very high project priority within the company. & rdquo; Koala's CEO Zhang Lei also said so.
With the support of the whole group, Netease e-commerce directly crossed the difficult cold start stage. But when most of these traffic has been converted, NetEase e-commerce needs to find new sources of traffic.
“Netease’s initial intention of doing e-commerce is very good. The topic at the beginning was also very good, but it also fell a bit. If Netease is not in the background, these businesses may have died 10,000 times. Only a company like Netease can do this. & rdquo; Fang Dongfei said.
Earnings are the third biggest difficulty.
With a gross margin of less than 10%, NetEase's e-commerce profitability is nowhere in sight. The story of Jingdong has proved that it is feasible to make profits by self-employment and third-party platforms. If NetEase wants to open a third party, it means having to reduce the quality and user experience. This is a double-edged sword.
Figure / Vision China
In June 2018, NetEase Koala Haibin announced the change of name to “Netease Koala” and announced its entry into the integrated e-commerce market. Its self-promotional language has also quietly turned into a comprehensive e-commerce platform based on cross-border business. Transformed into a comprehensive e-commerce, Netease stands in front of big players such as Tmall and Jingdong.
In the carefully selected track, Netease not only faces the challenge of creating goods from Xiaomi and Beijing, but also faces an extremely powerful opponent ——
In 2019, Q2, NetEase's e-commerce gross margin was 10.9%, the highest in history. After the lowest point of Q4 in 2018, NetEase's follow-up improvement measures have clearly begun to play a role.
But this gross margin is still not high. Relying on e-commerce, let NetEase return to C position, the road is far and difficult.
Fourth, Ding Lei's patience
“How long does Netease e-commerce run? It depends to a certain extent on the support and patience of Ding Boss. ” A Netease employee was revealed to the fuel economy.
Ding Lei has expressed his concern for NetEase e-commerce more than once in public. He became a diligent and hard-working salesman and spared no effort to promote it. The annual Wuzhen World Internet Conference has become an excellent opportunity for Ding Lei to endorse and promote Netease e-commerce for his own products.
Ding Lei’s dedication even infected Zhou Hongyi. During the Wuzhen World Internet Conference last year, Zhou Hongyi gave Ding Lei a 360 children's watch, and also made a wave of advertising for his own products.
Within the Netease Group, the office area of Netease Koala is in the area closest to the office of Ding Lei, which was once the site of Netease games and Netease cloud music. This reflects the importance attached to the top leaders of the group.
On the other hand, this has also put pressure on the employees of the e-commerce sector.
"Electronics is one of Netease's main waterways, and the boss is also supporting, so the e-commerce department's performance pressure is also great, they have to shoulder this responsibility. ”The above Netease employees said.
In February 2019, NetEase employees broke the news on the pulse, and Netease strictly selected layoffs, up to 30%. At that time, it was a critical period for Netease to reduce inventory. A month later, NetEase Koala was also exposed to cut 20% of its employees.
In Fang Dongfei's view, layoffs are not a big problem for Netease. “The layoffs are the performance of the company to improve, strengthen management and improve efficiency. The money lost by e-commerce is not too bad for Netease. ”
But Ding Lei will also tolerate how long the e-commerce losses?
Ding Lei's business philosophy is to make money. In other words, Ding Lei does not make a business that loses money. In the winter of this capital, it is necessary for Ding Lei to take the initiative to slim down and reduce costs and make the company more wolf.
Ding Lei Figure / Vision China
Fang Dongfei revealed that Netease's strict selection is the product of the mailbox department, and now it is independent into the business department. Netease koala is an independent project from the beginning. “Netease's strict selection of corporate atmosphere is more like the style of the old Netease, not so wolf, the product is not bad. Koala is more like Ali's style. ”
The great thing about NetEase is that the company seems to always find a delicate balance between product tonality and business realization. Specific to the operational level, Netease can be less aggressive, less a wolf, but let the product have more temperature.
“Netease is very stable. ” A friend of Netease e-commerce staff evaluated his opponent.
* The title map is from Visual China. At the request of the respondent, the text Fang Dongfei is a pseudonym.