E-commerce agency operation companies have reached a historical turning point

The e-commerce agency industry is facing a historic turning point. With the fading of the Internet dividend and the soaring traffic costs, the traditional business model of agency companies is facing severe challenges. This article deeply analyzes the current predicament of e-commerce agency companies and explores how they can find new growth paths through transformation and innovation.

More than a decade ago, the e-commerce industry rose rapidly with the help of the Internet popularization and consumption upgrades, and online traffic grew exponentially. From Tmall's "Double 11" single-day sales record-breaking to the emergence of various e-commerce platforms, this traffic feast not only created a number of online consumer brands, but also gave birth to e-commerce agency operations, an important role in the industry chain.

E-commerce operation agents initially focused on providing brands with store operation services on the Tmall platform, including store opening, page design, marketing promotion, logistics management, etc. However, with the diversification of the e-commerce ecosystem and the rapid rise of social media, these companies have gradually expanded their business scope to social e-commerce platforms such as Douyin and Xiaohongshu, providing brands with omni-channel operation solutions, helping brands cover a wider range of consumer touchpoints and further enhance their market influence.

The era of "prosperity for all" came extremely fast. In 2019, one year before Alibaba reached its highest market value in the US stock market, e-commerce agency operation company Yiwangyi Chuang was the first to be listed on the A-share market, becoming a representative case of industry capitalization. In 2020, Lily & Beauty and Ruoyuchen were also listed one after another. For a time, such companies became the darlings of the capital market, and their market valuations were pushed to a high level. This not only reflects the strong money-making ability of the agency operation model, but also shows that in the stage of high traffic growth, brands have a strong demand for professional agency operation services.

However, as the traffic dividend gradually disappears and the cost of online advertising soars, the returns that brands can get with the same budget continue to decrease. The reliance on agency companies has also shifted from "full trusteeship" to "detailed cooperation." Some brands have even started to build their own e-commerce teams in an attempt to minimize costs.

From glory to challenges, the transformation pressure of agency operation companies is increasing day by day. Whether it is the change in customer demand or the adjustment of e-commerce platform rules, it has brought this industry to a turning point.

Yilan Business reviewed the third quarter financial reports of six domestic e-commerce agency listed companies in 2024 and found that the revenue/net profit of most companies are decreasing.

Lily & Beauty, Kaichun Holdings, and Yiwang Yichuang decreased by 46.91%, 32.86%, and 8.84% year-on-year, respectively. Ruoyuchen had the largest revenue growth, up 54.62% year-on-year to 367 million yuan, followed by Qingmu Holdings, up 32.26% year-on-year to 264 million yuan.

It is worth noting that Alibaba, which was once the financial sponsor of Baozun E-Commerce and Lirenli Makeup, "cleared out" the two companies in May and November this year. These two companies happened to be the only two e-commerce agency operators that suffered losses in the third quarter.

In terms of absolute revenue, although Baozun E-Commerce has a revenue of 2.057 billion, far exceeding its peers, its marketing and logistics costs are extremely high, with sales and marketing expenses as high as 637 million and fulfillment costs as high as 513 million. In the end, Baozun lost 88.07 million in the third quarter. This is the 13th consecutive quarter that Baozun E-Commerce has been in the red since the third quarter of 2021.

Lirenlijuan, which suffered a loss of 30.4904 million yuan in the third quarter, is also in the difficult situation of "internal and external troubles".

On the one hand, the founder's divorce lawsuit and the major shareholders' successive share reductions have caused the capital market to lose confidence in the company. On the other hand, some brands such as L'Oreal and Lancome have terminated their cooperation with Liren & Beauty or changed their operating models, which has also led to a decline in revenue.

Judging from the main business statements of several companies, there are two most common ways of e-commerce agency operation: one is the agency sales model, that is, the agency operator only provides operation services for the brand, with relatively small operating costs and capital investment; the other is the e-commerce retail model, which requires the agency operator to buy out the goods from the brand. This model requires a large investment and has extremely high requirements for product selection and inventory management.

The latter is the main source of revenue for Liren & Beauty. Yilan Business found that in the past three years, Liren & Beauty's e-commerce retail revenue has decreased year by year, from 2.993 billion in 2022 to 885 million in the first half of 2024. Even so, e-commerce retail business is still the most important part of Liren & Beauty's revenue. In the first three quarters of 2024, Liren & Beauty's e-commerce retail business revenue was 1.112 billion, accounting for 90.6% of total revenue.

In comparison, the business revenue ratio of Ruoyuchen and Yiwangyichuan is more balanced. Ruoyuchen's revenue from agency operation business, brand management business and own-brand business in the first half of 2024 was 391 million, 220 million and 176 million respectively, while Yiwangyichuan's revenue from brand online marketing, brand online management and brand distribution in the same period was 131 million, 178 million and 255 million respectively.

In the third quarter, Yiwangyi Chuang's revenue and gross profit margin decreased by 8.84% and 0.33% respectively. Combined with its business situation since 2023, the negative growth of online management business and online marketing business is the main reason for the above data.

The agents whose main businesses are declining are naturally unwilling to sit and wait for death, so they start a new business.

In the past period of time, they have expanded their business internally. First, they have transformed from agency operation to management, aiming to provide more diversified services for brands; second, they have focused on their own brands and tried to tell more brand stories about the company itself.

What is the difference between brand management business and agency operation business?

Judging from the financial reports of several companies, brand management services refer to a series of services provided to enterprises related to brand image building, product design planning, integrated marketing planning, big data analysis, and visual design. Compared with the agency operation model, under this business model, the e-commerce agency operation company is more like a 4A advertising company.

In comparison, it is easy to understand why they want to focus on their own brands. E-commerce operation companies have accumulated a large amount of samples and data in the process of brand services. At present, online is still the main battlefield for beauty and other categories to produce big hits. If they are good at playing with online traffic and can incubate a brand, they can use the brand potential to have more bargaining power.

But judging from the results, the business of brand management and incubating private brands also has its ups and downs.

The financial report shows that Yiwang Yichuang's brand management business is shrinking, with revenue down 41.98% in 2023 and down 18.07% year-on-year in the first half of this year. As early as February 2021, Yiwang Yichuang's first self-owned brand Meixianshuo was launched, but after the adjustment and reshaping of its flagship product, in just over a year, Meixianshuo has been sold by Yiwang Yichuang due to poor management and other reasons.

In contrast, the growth rates of Ruoyuchen's brand management business and its own brands are very impressive. In 2023, Ruoyuchen's annual brand management business revenue was 160 million. In the first half of 2024, Ruoyuchen's revenue from this business reached 220 million, becoming the second growth curve after the agency operation business. In 2023, Ruoyuchen's own brand revenue increased by 63.63% year-on-year to 263 million, and this growth trend was maintained in the first half of this year. The revenue of its own brand increased by 67.11% year-on-year to 176 million, accounting for 22.39% of the total revenue business.

This is mainly due to the performance of Zhanjia, a subsidiary of Ruoyuchen. According to Liandanlu and Chanmama, Ruoyuchen's Tmall official flagship and Douyin channels achieved year-on-year sales growth of 97% and 92% respectively in the first ten months, and the performance of both channels nearly doubled; offline, Zhanjia entered Sam's Club, Hema, etc., and offline sales in the first half of 2024 increased 15 times year-on-year.

In addition, Lily & Beauty has also developed its own brands, including the emotional skincare brand "Yurongchu" and the functional skincare brand "Meiyitang". It has also started to engage in the pre-prepared food business and launched the regional food brand "Xunwei Archives". However, Lily & Beauty has not disclosed the specific data of its own brand revenue until this year. The external business statement is still "the growth rate of its own brand is relatively fast, but the specific revenue data is relatively small."

According to the official public account, on this year's Double 11, the GMV of its brand Yurongchu increased by 1079% year-on-year.

Comparing the above-mentioned companies' agency-operated brands and own brands, Ruoyuchen and Lirenlijuan are both incubating brands in their own areas of expertise and have developed new growth curves.

In addition to expanding their business internally, e-commerce agency operation companies have also begun to deploy AI across industries. 3 Looking at AI, what are the chances of success for e-commerce agency operation companies?

Even when looking at AI, the cross-border logic of e-commerce agency companies still extends around the company's original business.

Ruoyuchen is an investment enthusiast in e-commerce agency operation companies. Since 2022, Ruoyuchen has invested in dozens of brands, covering multiple industries such as health, food, and beauty.

The latest investment this year took place in November. The company invested in MetaNovas, a company that focuses on using AI + knowledge graph technology to empower the development of functional raw materials and formulas. Currently, MetaNovas has built a full-chain AI technology platform for raw material formula, biological mechanism, molecular design, and product development, providing new raw material development and product solutions for many well-known domestic and foreign leading consumer goods and cosmetics companies.

A person close to Ruoyunchen told Yilan Business that in the future, the two parties will deepen their strategic cooperation, and Metanovas may provide Ruoyunchen with raw material support using innovative raw materials developed using AI technology for specific functional effects.

More and more companies are choosing to integrate AI into e-commerce. The more common term is: AI solutions applied to marketing processes.

Overall, they can be classified into three categories: the first is large-scale model training based on the accumulation of digital assets such as pictures, which is simply an automatic generation type of AI tool. The second is the use of AI to extract and analyze documents and data. The third is the company's internal application in the areas of dealer management.

For example, Qingmu Technology has gradually upgraded its AI image processing, large language model, and AI labeling to an intelligent product and image automatic processing platform, and used its self-developed Qingling AI middle platform as a digital assistant for internal data sharing. Lily & Beauty uses AI in short videos and design drawings. The main application is still focused on AI generation and operation process optimization.

Ruoyuchen is further expanding its layout to the industrial chain. With the strategic cooperation of MetaNovas, Ruoyuchen will extend the capillaries of its business to the raw materials and R&D levels, empower the product development of its ecological brands, open up the business closed loop of the brand R&D port, maximize bioavailability, and avoid antagonism between ingredients.

The e-commerce agency industry has passed the period of wild growth and it is difficult to find new growth poles in the original business sector. AI+ is only applied to content creation or creative design to reduce costs and increase efficiency, and it still cannot solve the fundamental problems that restrict the growth of agency companies, such as high traffic costs and fierce competition.

However, if we break away from the traditional e-commerce operation thinking and work with AI from the perspective of branding, we may be able to produce a stronger chemical reaction. AI's energy efficiency starts from the upstream of the industry, which can drive the process development of the entire value chain. The efficiency is fully transmitted from top to bottom, running through the entire chain of raw material development, product development and marketing operations, supply chain management, etc., and effectively breaks through the constraints of the reserve scale of high-end and diversified R&D talents in the early stage of brand incubation.

The Internet dividend continues to fade, and the agency operation industry has entered a deep water zone. If e-commerce agency operation companies cannot break the existing stock market dilemma, actively expand business boundaries, and find new growth paths, they will inevitably be doomed to "be born in adversity and die in comfort." Only through reform and reshaping can the only way to long-termism be opened.

Li Yan丨Author Muyu丨Editor