January 15, 2018
At the recent New Year Forum hosted by Shanghai Advanced Institute of Finance Institute (SAIF) at Shanghai Jiao Tong University, Lei Zhang described the evolution from “Innovation 1.0” to “Innovation 2.0” and elaborated on the key to empowering traditional industries with “Innovation 2.0” through a case study of the investment acquisition of Belle International. He believes that investors should leverage the power of innovation and capital to help traditional industries with transformation and upgrades, which is an important trend.
The theme of “Innovation 2.0” is about traditional industries
Lei Zhang first summarized the respective characteristics of “Innovation 1.0” and “Innovation 2.0.”
The core feature of “Innovation 1.0” was “connectivity,” whether connecting people with information, goods, services or other people. Lei Zhang pointed out that the outcome of “Innovation 1.0” was that the winners take it all. As a result, the emergence of each successful business means the deaths of many traditional companies, or as an old saying goes, “What millions died that Caesar might be great!”
On the contrary, “Innovation 2.0” is about the traditional industries, and instead of “Internet plus” (Internet +), it should be “plus the Internet” (+ Internet). “Innovation 2.0” aims to make innovation more inclusive and accessible with the goal to enable long-term success.
Citing a few cases where Hillhouse has helped traditional companies to innovate through technology empowerment, Lei Zhang pointed out that Hillhouse has invested in a large number of consumer companies, such as Jovo, Kidswant, Bestore, Peet’s Coffee, among others, and have gained tremendous success.
The key to China’s development is to get more people on the express train of innovation
Lei Zhang elaborated on the case of Belle, stressing that Hillhouse Capital and its partners closed the acquisition and investment deal with Belle, a traditional shoe company, for HK$53.1 billion, making it the largest M&A transaction in Hong Kong in 2017.
He introduced the background when Belle was in urgent need for innovation. He told the audience that Belle accounted for 9.4% of all non-athletic footwear sales in China, which exceeded the combined market share of the second through the ninth player. Belle’s athletic footwear sales also ranked number one, and the two sub-sectors had 20,000 stores and over 100,000 employees in total. Belle was delisted without its past glory as the “King of Shoes.” In the past five years, the company’s sales had declined year by year, and hundreds of thousands of its employees felt lost under the impact brought by e-commerce and the Internet. “After the acquisition of Belle, Hillhouse took a second look at this traditional company, and tried to find a way to help it out with the Internet way of thinking.” He continued to explain in details the specific process of how Hillhouse Capital has helped Belle transform:
“First of all, based on market research data, we found that Belle enjoys a considerable consumer base.” Lei Zhang said that Belle had more than a dozen brands, 300 to 400 million customers, and 4 to 6 million visitors of store traffic per day, which would translate into China’s top ten e-commerce company if measured under the Internet context of DAU. Every day, 600,000 to 1 million customers try on their shoes, and 300,000 to 500,000 customers make purchases, with a retention rate of 25%. “Through such a funnel analysis of the company’s development, we believe that we can leverage the power of technology to improve efficiency.”
“Following that, we tried to identify the problems with Belle.” Mr. Zhang pointed out that Belle has a wide range of brands covering both low-end and mid-to-high-end markets; it enjoys a large market share, occupying over one-third of the shoe department in the stores. Belle’s problems lay in the following two aspects: first, consumers are being pulled away from the department stores as the business models change; second, the low prices and counterfeit goods by e-commerce have brought adverse impacts. The two problems presented great challenges to Hillhouse when it first took over Belle.
Lei Zhang believes that Hillhouse Capital could employ two strategies to approach the challenges: one strategy is to develop terminal empowerment tool kits, and the other strategy is to reposition store managers and salespersons to maximize their potentials.
“One strategy we have adopted is to develop multiple terminal empowerment tools. With real-time data, we can know what is going on at each store and how traffic is of the entire business area, and we introduced the inventory coordinator management system to the company.” He gave two examples to illustrate the idea. For instance, in the past, it was up to the store managers of Belle’s 20,000 stores to place orders. However, as nobody could predict if a specific shoe model would sell, inventory reallocation had been a painful process. Now they have data available to help analyze, say if a particular SKU has been in the stores for 30 days without any customer trying them on, then there must be a problem with this SKU, or maybe it should not be in the store at all.
In another example, if a pair of high heels in the store was tried on by 30 customers in a day, but only one ended up buying, then what the data tells us here is that the shoes may look beautiful, but may not be comfortable to wear. In this way, Belle performs analyses on various SKUs, clears out the inventory of shoes that few people would want to try, and try to find out the reason for shoes that attract many customers to try them on but lead to few sales. Lei Zhang emphasized that “analyzing such problems in the sales process through the help of data can greatly improve efficiency.”
In addition, Lei Zhang believed that the store managers and salespersons of the real traditional companies, especially the traditional retail companies, could be a talent pool with huge potentials. “In the Internet language, the best UI and UE, or user interface and user experience, are Belle’s 120,000 store managers and salespersons. The key is to mobilize the potential of the 120,000 employees by providing them with more empowering kits, so it can free up their time and energy to better assist their customers and become their fashion consultants.”
Lei Zhang continued to explain that Hillhouse Capital has also adopted corresponding strategies to solve the problem of large gaps in order placement among different store managers. “First, we tried to reduce the standard deviation and significantly improve the average level. Next, we would monitor the detailed data of store operation to analyze the operational potential of each store. Following that, we would analyze store types and historical data to understand the impacts of seasonal factors and surroundings on sales.”
“Through these targeted strategies, Belle was able to turn around and achieve double-digit growth this year after declines for the past five years. There was a sharp rebound in earnings and a significant increase in corporate morale.” Lei Zhang stressed that the purpose for him to share the case of Belle was to demonstrate the power of innovation and how it can help traditional businesses.
He concluded, “Although ‘Innovation 1.0’ has made many billionaires, I don’t think it is the solution for China’s development problems. The key to China’s development should be to let more people who have been left behind catch the express train of innovation. I believe that working with dignity is not a problem that can be solved through income redistribution, but through leveraging the power of technology and capital.”