A prescient insight into the urgent need to change.
I’ve been following the demise of a high-profile retailer here in Hong Kong in the infant-to-child market, Bumps-to-Babes (“BtB”). Those who live in Hong Kong and have small people in their lives are well aware of BtB and their visible, high-street rivals – collectively and colloquially known as “Big Baby.”
Many people who fell into the target market for these companies sang the same tune. The prices were high. I can speak from experience that some essential items for the newest family members (infant bottle systems for example) were 40-50% more expensive in Hong Kong than the US, and Hong Kong doesn’t have import or sales taxes.
Historically, these were great businesses. Few had the scale to offer the range of products needed and a ready supply of cashed-up expats ensured that prices were kept high and margins were healthy. Before the internet, there were few options, so customers just “sucked it up.”
This business was so great, that a Hong Kong public company acquired 74.9% of the business in May 2015. This company, BAIOO Family Interactive Limited announced in February 2018 that they were taking an HK$55m (US$7m) impairment charge on the business, relating to their near 75% interest. In March 2018, the Board of Directors appointed administrators and the doors were closed, with 40+ staff losing their jobs.
The founders, and minority shareholders of BtB posted this notice, stating:
“In recent years many challenges have arisen which have directly affected us as retailers.
International online providers do not face the challenges of high rents from Hong Kong landlords, and have offered reduced prices and shipping on many of our best-selling lines. Hong Kong landlords have yet to react to this and rents remain unsustainably high.
The challenges we have faced have unfortunately made it impossible for us to continue with the business, and more than 40 professional and caring staff have lost their employment.”
These people have chosen to point at two external factors for the demise of their businesses; that international online competitors could sell at a lower price, and a lot of this was due to the high rents in Hong Kong.
In my opinion, there is more to this than just these external factors. The real question is “How does a successful business go from a valuation of around US$10m to zero in three years? I’m not privy to the internal workings of this particular company, so I’ll offer two generic observations:
- This company did not embrace digital quickly – We were customers of this company and tried many times over the years to buy offline. Both busy professionals, we would have preferred to get all the things we needed delivered, but the BtB experience was poor. For a long time, one was unable to order through their website. It was merely a catalogue of things you could buy in store.
- This company didn’t respond to new competitors – Frustrated by the in-store only offer, we looked for new options and found them. They were (are) terrific. Several international players now service Hong Kong and nimble, service-oriented competitors are emerging in the local market. They offer simple online ordering and FAST delivery. We often order in the evening and have products delivered the next day.
In all cases, the companies that we choose to deal now with are very clearly of the “if we were to build this company today, we wouldn’t build it as it is.” These are either new companies being built for the digital economy, or existing players who have committed to change. In the latter case, they are doing it with a real commitment, a real budget and a real willingness to shake the business up to thrive in the digital economy.
What strikes me most about this story is how quickly this happened. This company saw US$10m in value evaporate in three years – that is about $275,000 a month, about $60,000 a week.
There is likely much more to this story and more we can draw from it, but It is a prescient reminder that change is happening, and business must react. Markets and businesses which once thought they were immune are facing new pressures. Inaction is not an answer.
Our mission at Pangolin is to partner with businesses which need to respond to this urgent need to transform for the digital economy. From strategy, to investment to helping to operate your digital economy business, we have the experience and the experts to help.