The Rise and Fall of NetEase E-commerce

The Forgotten NetEase E-commerce

Recently, NetEase released its 2022 financial report, reporting total revenue of RMB 96.5 billion for the year, up 10% year over year, and net profit of RMB 19.8 billion, up 17% year over year.

Specifically, NetEase's revenue comes from four business segments: games and related value-added services, Youdao, Cloud Music, and Innovation and Other Businesses.

(NetEase earnings report)

Among them, gaming remains NetEase's "bread-and-butter business," generating 74.6 billion yuan in annual revenue, accounting for 77% of its total revenue.

Meanwhile, today we are focusing on the innovation and other businesses, which account for less than 8% of our revenue.NetEase's last remaining e-commerce venture, "NetEase Yanxuan," is right here in this section.

In 2015, NetEase founder Ding Lei once made a bold statement,He said he plans to rebuild NetEase through its e-commerce business within three to five years.

During those years, NetEase's e-commerce business also experienced its peak moments.

In 2015, NetEase's cross-border e-commerce platformKaola Global ShoppingSurpassing Tmall Global, which is centered on a platform model,Climb to the top of the cross-border e-commerce throne.. Launched in 2016NetEase Youxuan, and has also carved out a niche among the emerging middle class through its ODM model,In just four months, it amassed 23 million registered users.。

With the support of Kaola and NetEase Yanxuan, in 2016, NetEase's email, e-commerce, and other businesses saw their net revenue grow by 117.5% year over year. In 2017, NetEase began separately disclosing its e-commerce segment in its financial reports, with e-commerce net revenue reaching RMB 11.67 billion, up 156.9% year over year.It directly accounted for 21.57% of NetEase's total revenue.

With e-commerce poised to become the company's second growth driver, it's a pity that NetEase's e-commerce peak was reached in 2017.

In 2018, NetEase Yanxuan failed to meet its overall revenue target of 20 billion yuan, with the e-commerce business's annual revenue totaling only 19.3 billion yuan. Moreover, due to factors such as the expansion of its e-commerce operations, NetEase's full-year net profit declined by 31.4%.

Ultimately, NetEase still abandoned this low-margin second growth curve. In 2019, NetEase sold Kaola to Alibaba for US$2 billion, and in the same year, its financial reports stopped disclosing e-commerce operations separately; NetEase Youxuan was reclassified under the "Innovative Businesses and Others" segment.

The peak came quickly and went just as fast; after losing Kaola, NetEase's e-commerce ambitions suddenly shrank, and the remaining NetEase Yanxuan is rarely highlighted in financial reports anymore.

But perhaps it's neither tasty enough to eat nor worth throwing away; NetEase Youxuan, the lone surviving sprout, is still struggling to stay afloat.

NetEase Youxuan: From Platform to Brand Building

When NetEase Youxuan first launched, it precisely caught the wave of the premium e-commerce trend and quickly became the leader in this segment.

NetEase Youxuan is China's first e-commerce platform to adopt the ODM model (original design manufacturer), directly connecting with major brand manufacturers through this model.

As its promotional brand philosophy states, "Good living doesn't have to be expensive," NetEase Youxuan focuses onThe product quality rivals that of major brands, yet once brand premiums are stripped out, the price is even lower than comparable items on the market.

Leveraging its premium e-commerce positioning centered on quality, NetEase Youxuan quickly won over the young middle-class demographic in first- and second-tier cities, surpassing 30 million registered users within half a year.

But perhaps the tremendous short-term success made NetEase overly ambitious. In 2018, Ding Lei began pursuing a larger GMV scale, setting a target of 20 billion yuan in GMV for NetEase's Yanxuan. It was also from that year onward,NetEase Youxuan has begun to decline.。

To boost GMV, NetEase Youxuan began significantly expanding its SKU count; when it first launched, the number of SKUs was only in the triple digits, but by 2018, the SKU count had surged to 20,000.

This has led to a problem, because ODM is a relatively heavy model; to ensure quality, NetEase Yanxuan needs to exercise strict control across the entire industrial chain, including factory selection, raw material procurement, production, quality inspection, sales, and after-sales service.

And when the number of SKUs surges, it inevitably becomes difficult to maintain quality across the board, and NetEase Yanxuan's expansion into all product categories also clashes with its earlier boutique‑oriented strategy.It has blurred the user's original perception of the brand.。

In the end, NetEase Yanxuan failed to meet its GMV target; in 2019, it was reported to have laid off employees, and its senior management underwent a major reshuffle.

It was in 2019 that NetEase Yanxuan underwent a major overhaul, with Ding Lei and the new head, Liang Jun, making the decision to…Going forward, NetEase Yanxuan will focus on brand e-commerce as its core and platform e-commerce as a supplementary approach.

NetEase Yanxuan has also established an omnichannel development strategy, opening flagship stores on major e-commerce platforms and tailoring different products to suit the user profiles of each channel.We will build best-selling products and further transform into a new‑consumption brand.

In this process, NetEase Youxuan is also continuouslyExpand into the lower-tier market, not only launched a 9.9-yuan special section on its main site, but also introduced the sub-brand "NetEase Wanjia," which primarily sells daily necessities such as towels, facial tissues, toothbrushes, and umbrellas at prices ranging from about 9.9 to 20 yuan.

Meanwhile, in order to increase brand visibility,NetEase Yanxuan has also entered the hottest live-streaming e-commerce trend of recent years., In addition to sending products to the livestreams of top-tier influencers such as Luo Yonghao, Dongfang Zhenxuan, and the Guangdong couple, Ding Lei has also appeared in NetEase Yanxuan's livestream to promote NetEase-branded products.

According to NetEase's Q2 2022 financial report, NetEase Yanxuan has gradually established a collaborative network involving more than 200 MCN agencies, hundreds of top-tier influencers, and tens of thousands of mid- and lower-tier influencers.

Unfortunately, despite vigorous self-help efforts,But NetEase Youxuan still failed to regain mainstream attention, gradually fading into obscurity.

Of course, after shifting from a platform to building its own brand, NetEase Youxuan has also launched best-selling products such as ergonomic chairs, latex pillows, and cat food.

However, to stand out among the new consumer brands,It will also test NetEase Youxuan's ability to consistently deliver hit products.After all, NetEase Youxuan is committed to building a full-category brand, with thousands of SKUs eagerly awaiting support behind the scenes.

The Declining Boutique E-commerce Sector

As the leader in the premium e-commerce segment, NetEase Yanxuan's decline reflects a broader cooling trend across the entire sector.

When NetEase Youxuan first launched, it was the height of the premium e-commerce boom, with Taobao Xinxuan, Xiaomi Youpin, JD.com Jingzao, and other major players all rushing to enter the market.

But this trend didn't last long; it was extinguished with the rise of emerging e-commerce platforms like PDD Holdings, Douyin, and Kuaishou. More platforms and diverse business models have continually squeezed the room for premium e-commerce to survive.

Apart from NetEase Yanxuan opening high and then falling,Xiaomi Youpin had its business priority downgraded in 2021., integrated into Xiaomi's China retail business;Taobao Xinxuan shifted to an internal‑focused service model last year.It was rebranded as the new brand "Miao Manfen" by Taobao, began offering private-label products through Tmall Supermarket, and completely exited the premium e‑commerce space.

Compared with comprehensive e‑commerce platforms, boutique e‑commerce businesses that lack traffic advantages are confined to niche markets. Meanwhile, once comprehensive e‑commerce platforms reach a certain stage of development, they can already meet consumers' increasingly sophisticated shopping needs.

Meanwhile, the ODM model that premium e‑commerce platforms champion also lacks significant barriers to entry, and the emergence of new strategies such as group‑buying and livestream‑driven sales has made it even easier for manufacturers to connect directly with consumers.

Lacking both traffic and category‑specific advantages, boutique e‑commerce platforms—like most niche online retailers—tend to fade after a brief period of prominence, ultimately becoming little‑known brands that rely on the traffic of mainstream e‑commerce giants.

Author | Li Ying

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