Club Factory recently raised US$100 million, who are they?

Many of you wrote to us asking what is Club Factory – the cross border ecommerce company which recently raised US$100 million C round funding from IDG Capital, Bertelsmann, CMK Capital, Zhen Fund & Frees Fund.

This is a significant achievement for a cross-border ecommerce company of barely 2 years old.

We are glad that this is proving another of our 2018 predictions true.

The model

Club Factory was founded by Aaron Li & Vincent Lou, both alumni of Stanford University.

Although the company operates in the ecommerce space, neither of the founders had background in commerce or supply chain. Instead, Club Factory focuses on data & algorithms.

In the upstream, manufacturers and wholesalers list their Stock Keeping Units (SKU) on the platform; the platform does marketing and growth; and consumers go to the platform and find goods at very competitive prices.

Once an order is made, the platform will arrange freight forwarder, customs clearance and 3PL delivery. While Club Factory spends millions on marketing, it does not hold any inventory.

In a way, they are between pure marketplaces and drop shippers.

Allegedly Club Factory now lists hundreds of thousands of suppliers and tens of millions of SKUs.

What are they piggybacking on?

Club Factory rides on the (very) sophisticated and mature supply chain that contributed much to China’s own economic success over the last two decades.

Over the last few years, as the growth in the domestic market is slowing down (and competition heating up), and traditional foreign trade becomes too burdensome (in terms of information feedback and cashflow), many suppliers start to embark on cross border ecommerce.

Many of the suppliers are export ready, making it really easy for these platform to tap into the market, at least operationally-speaking.

During this process a number of big companies are created, including AliExpress that is part of Alibaba. Offline players such as Miniso are also riding this wave.

Missing Wish

Specifically in the fashion category, Wish, JollyChic and SheIn are some of the big players.

Interestingly they adopt different business models: Wish is more of a pure marketplace; JollyChic focuses a lot on quality, and sells the SKUs as a retailer (rather than a marketplace); while SheIn is really similar to JollyChic in many regards, but focuses a lot more on data.

They also start with different markets: Wish is big in the US; JollyChic is undoubtedly the biggest ecommerce player in Saudi Arabia (though they are now challenged by Amazon ); and SheIn has made its name in Spain.

These companies are actually converging in people (they poach from each other) and markets (SheIn is now targeting Middle East while Wish just hired someone to tackle India).

A saying goes that many investors jumped into investing in Club Factory because they missed both Wish and JollyChic.

Can Data & AI beat an army of buyers?

Alas, this is an over-simplistic assumption. They are betting on the story Club Factory is telling: with data and AI, they are going to solve the problem of quality control.

If you go to the warehouse of Club Factory in India, you will find it piled with returned goods. Unlike JollyChic, which buys and verifies each SKU, Club Factory does only the matching on mobile.

It does not have the process and capacity in place to make sure the quality of the goods. As a result, return rate is very high (we do not know the exact number – but we would not be surprised if it is above 35%).

The data and AI come in place then – the more transactions you have, the more data you capture, the more you know about the sellers and their quality. Therefore good quality ones remain and bad ones get thrown to the end of the listing.

Sounds similar to the self-cleaning mechanism that is built into Aadhaar, India’s Unique ID scheme?

Whether this will work eventually or not – we do not know yet. At Momentum Works we are a bit skeptical at this stage also because of another reason.

India

Although Club Factory’s consumers come from 26 countries, with India being the biggest market, we all know that India is a cutthroat market for ecommerce – and Amazon is exactly their number 1 competitor.

Club Factory’s SKU price typically falls in the range of 4-5 USD, which leaves it hardly any room for profit.

Although in a price-sensitive market, it is really easy to drive up the GMV – you just need to give discounts!

Interestingly, Club Factory’s founders had not been to India even though India already contributed to more than half of its GMV.

Although it definitely helps that both founders are fluent English speakers – it makes it easier for them to manage a multinational team and communicate with foreign investors.

Maybe someone will offer to acquire them soon?