Letter #63: Lei Zhang (2017)
Founder of Hillhouse Capital | Speech to Belle International Employees
Hi everyone! Due to popular request (and a few persistent individuals), I’ll be restarting this newsletter, but with a few changes. Most notably, rather than sending “A Letter a Day”, I’ll be sharing a letter or transcript twice a week, once on Tuesday afternoon (2:22pm) and once on Saturday morning (6:06am). Second, I’m expanding the scope of the newsletter to include a broader range of subjects, but still focused on thought-provoking investors (across venture, hedge funds, and private equity), founders (not just tech), and operators (sales, marketing, product, etc.). Lastly, I’ll be limiting my commentary so it’s a smoother reading experience and you can read the work as is. (If you’d like to see my notes or trade thoughts, shoot me a DM on Twitter!)
Today’s letter is a transcript of the 2017 speech Hillhouse Capital Founder Lei Zhang gave to the employees of Belle International, a struggling shoe retailer that Hillhouse had just taken private. In this speech, Zhang explains why Hillhouse invested in Belle and their plan to turn the company around by adopting new technologies, creating a learning organization, and focusing on consumers.
I hope you enjoy this talk as much as I did!
Transcript
Ladies and gentlemen, I’m very glad to have this opportunity to converse with you. The successful cooperation between Hillhouse and BELLE beautifully illustrates Hillhouse’s dogged adherence to the principle of allocating long-term capital to the best enterprises and entrepreneurs. Now, for all of us, the end of the transaction marks the start of our work. In the next decade, this amazing company has great responsibilities and a long runway ahead of it. If not us, working together to pull this off, then who else might take up this mantle?
As I’ve said in the past, the people you choose to travel with in your life’s journey matters more than reaching the destination itself. In recent times, I’ve spent substantial time with Mr. Sheng (BELLE’s CEO, Sheng Baijiao) and many other of BELLE’s managers — we’ve actually known each other for much longer than just this recent period — and what I feel is that, the longer we know each other, the more I believe that it’s Hillhouse’s great fortune to have a partner like BELLE. You might have heard all sorts of things from various sources about why Hillhouse bought BELLE – that’s why today, I’d like to share some of my real thoughts with you.
First, I’d like to show my gratitude to Mr. Deng (BELLE’s founder, DENG Yao). During the privatization, he said this to me, “I don’t care if I need to leave BELLE, and I’m not interested in money. What I care about is whether the company will be able to work with a good partner, one who can lead its more than 100,000 employees to reclaim its past glory and give the company a new lease of life.” I was moved almost to tears. Mr. Deng is a gentleman who has the will to move forward regardless of how difficult the current situation is. This kind of resilience and determination affected me greatly.
BELLE now sells more than 65 million pairs of shoes a year and more than 35 million pieces of apparel. It generates annual revenues of more than 40 billion yuan in revenue and EBITDA of over 6 billion yuan. Many reports claimed that BELLE was forced to delist, that BELLE was going out of business, the King of Shoes had failed, etc, etc. I just want to ask these reporters one question: Can you point to any failed companies that are still making billions of yuan in cash flow every year? Before the privatization, BELLE was one of the 50 constituent stocks of Hong Kong’s Hang Seng Index, and also the first mainland Chinese company to achieve blue-chip status in Hong Kong.
The manufacturing of shoes is an endeavor that requires one of the most sophisticated supply chains of any consumer category, for the simple reason that everyone’s feet are different. Each of the 7 billion people in the world have a unique pair of feet.
At the same time, even shoes in the same size come in many different styles, different colors. Every link in the chain – from design and raw material procurement, to production, processing, transportation and finally to retail sales – presents complexities that demand the highest level of execution from management.
A retailer that is able to do shoes well – that is a truly amazing retailer. From upstream leather purchasing, to manufacturing and production, and then, in the end, to distribution and sales, BELLE has created a fully vertically integrated business, and we control every stage of the process. At the same time, we cater to more than a dozen consumer groups with brands at different price levels. BELLE achieved this type of scale and market position starting from scratch, in the span of just two decades. It is not an exaggeration to say that BELLE represents a landmark achievement in China’s business history. Globally, there is undoubtedly no other shoe retailer who can hold a candle to BELLE.
Another one of BELLE”s great achievements is the scale of its retail network, which eclipses all other companies in China, and even the world. We have more than 13,000 women’s shoe stores, more than 7,000 sports-shoe stores, the number of which is still growing rapidly. BELLE may be the only company in the world that has 20,000 retail stores! And more importantly, BELLE manages, operates and controls this massive retail network directly. We maintain superb overall operating efficiency and inventory-management capabilities, particularly relative to the rest of the retail industry. Even global brands such as Nike and Adidas are fully aware of the value of our retail network, and their rapid growth in China could not have been achieved without BELLE’s strong retail capabilities. BELLE manages about 120,000 employees, the vast majority of whom are front-line retailers directly facing consumers. We have analyzed many consumer retail companies globally; these execution capabilities required to run this type of business are exceedingly rare.
What outsiders are focused on are likely the most apparent challenges BELLE face at present, but from Hillhouse’s perspective, BELLE has a wealth of latent treasures. We have invested in quite a few technology companies. Whether it is hip media companies or fashionable Internet companies, their managers are amazed when we take them to see BELLE – they quickly realize they could never replicate what BELLE has accomplished – it is far too difficult! All the buzzwords of the Internet age, be it C2M (Consumer-to-Manufacturer), or fast-fashion, or omni-channel – they are actually describing BELLE’s potential, and this opportunity is uniquely BELLE’s to capture.
Do Internet companies have advantages? Of course, they have many good things going for them. But don’t forget, BELLE’s factories, 20,000 directly-operated stores, and brand and retail execution capabilities – these things can’t be built in a day or two. We’ve seen quite a few consumer retailers that have managed to do well both offline and online. However, we’ve discovered, when an online company attempts to go offline, they are in for a long period of hard lessons learned.
By our analysis, BELLE’s retail stores host more than 6 million visitors per day, which, translated into Internet parlance, is 6 million DAU (daily active users). With these kinds of numbers, BELLE would easily be in the top few apps in China! In the current environment, when online users are becoming more and more expensive to acquire and Internet companies are increasingly turning to offline sources to generate traffic, BELLE’s 20,000 stores, which are an impressive channel for consumer traffic, appear all the more valuable. So we must not underestimate ourselves. Instead, we should cherish this opportunity that is uniquely ours, an opportunity to show the world what the BELLE can be when the potential of the talent on this platform is empowered.
There is another point that is very important to me – BELLE’s team created an admirable culture. After having invested in so many companies in China and around the world, one lesson we’ve learned is that culture is important above all. The way I see it, the core of BELLE’s entrepreneurial culture is sportsmanship.
First, sportsmanship is about winning. A team member says, I’m not here just as an observer – I will get involved, I want to give it my all. BELLE already has this culture of winning, of striving to be the first and the best, in its blood. We should recognize the fact that BELLE’s profits are greater than the aggregate profits of the next 10 largest listed Chinese shoe companies. There’s no reason to go bearish on us.
Second, sportsmanship emphasizes a culture of collaboration. No matter how great a player is, he can’t help win a game if his teammates refuse to pass the ball. Great teams win through collaboration, and a company that most definitely incorporates the spirit of collaboration is BELLE. With a diverse collection of teams spanning ladies shoes, sports shoes, numerous brands, upstream and downstream supply chains, BELLE’s teams need to frequently collaborate, which is why collaboration is engraved into BELLE’s DNA.
Moreover, as many colleagues have already experienced for themselves, BELLE has kept a culture of consistently exploring and challenging itself. From the CEO to the most junior worker, everyone speaks freely about their observations, challenges, solutions and ideas, and they are able to find a receptive audience. Think about it for a minute – this is a company with over 100,000 employees! To achieve this type of discourse is no easy task for a company as big as BELLE. The creation of this type of corporate culture is inseparable from the capabilities of management. To be able to work with such an inspiring company and management team at this point in its history is our great honor.
At present, BELLE is facing a number of difficulties. Regarding the current market environment and the essence of what it means to be a traditional business, Mr. Sheng has already thoroughly explored in his presentation. I’d like to re-emphasize his point about how we will apply technology to transform and expand BELLE’s business – this skillset is precisely what we at Hillhouse have spent years honing, and this is how we would like to offer our help and deliver our value to you.
In my understanding of the strategic underpinnings of the retail industry, retail IS service; content is commodity; and you get what you saw. It’s in BELLE’s genes to provide an integrated online-and-offline solution to deliver to the customers what they will get and do so with the best quality and the best experience. Why is this an opportunity that belongs to BELLE and nobody else? Because no other shoe retailer in the world can match our scale and integrated supply chain. Even before the current wave of globalization, most U.S. shoe manufacturers had already outsourced the production of shoes to other countries. These companies have different parts flung all over the world. BELLE’s manufacturing, distribution and logistics supply chain are an integrated whole, and it’s been lying in wait for this opportunity all this time.
And let’s not forget that our customers number in the hundreds of millions, and in registered memberships alone, we have several million customers. In a recent consumer study we conducted, we found that the many brands under BELLE are still the most readily recognizable women’s shoe brands. In China, BELLE’s level of consumer awareness exceeded even that of fast fashion brands including Zara and H&M. Think about it – tens of millions of members! These are numbers that most companies can only dream of. Our priority of priorities is to research how to make the most of such a huge consumer base.
Today, the hottest eco-systems and the hottest Internet products are focused on UI (user interface) and UE (user experience), which revolve around offering the best products and the best services to consumers at the most appropriate time and in the most appropriate environment. BELLE has a natural-born advantage in this respect. We have a strong, well-managed retail network comprising 20,000 self-operated stores, with more than 80,000 front-line retail employees facing consumers directly. Our frontline employees are BELLE’s best UI and UE! What we need to do next is to use technology to empower them, to help them provide the services that consumers most want. We want to help BELLE become a platform service provider with retailing at its foundation. We want to help BELLE become a company with some heat. As long as we focus on this and dig deeper, BELLE is sure to capture the desires and imaginations of consumers.
To accomplish this, we need to build new circles of competence and give BELLE all the tools it needs to succeed – we will not allow ourselves to lack even one. What we are missing at present, I believe that BELLE will soon have if we work hand in hand. BELLE has a great team, great genes, and strong learning capabilities. Hillhouse will work with BELLE to make the most of the traffic dividends as they stand in the era of Internet and create a toolkit that empowers the talent on this platform. We will leverage BELLE and Hillhouse’s existing capabilities, as well as continue to build upon our growing big-data and technology efforts to discover, reach and serve our customers. We will integrate technology and data into BELLE’s organizational makeup, linking our front-line salespeople directly to headquarters. We continue to weave technology and data into BELLE’s daily operating routines, making it the foundation of decisions related to management, strategy, and systematic analysis; these efforts will help further optimize BELLE’s operational efficiency.
Relative to all that I’ve outlined so far, our most imperative goal is to create a true learning organization. The environment we live in is changing in a thousand ways; what we see today may look completely different tomorrow. A learning organization knows how to shift gears, no matter how volatile and dynamic the market environment.
A learning organization possesses several characteristics: First, it is able to adapt and evolve. This is a process of continual change and reinvention. The second characteristic is calmness in the face of chaos. A learning organization is able to think from first principles about the questions of what to do and what is needed. Making it across the shore is important, but the process of that journey perhaps more so. In our journey to embrace innovation, we should face challenges with a Zen calmness and approach solutions with an understanding of their true essence. Finally, the third characteristic, systematic principles, enables the spirit of the organization to be transmitted to every new employee. The spirit of craftsmanship is indeed admirable, but it is useless if it can’t be passed on. Just like the US Army equips frontline soldiers with a combat kit thoughtfully developed by an entire organization whose purpose is to ensure this soldier has the best chance of winning, we need to combine the spirit of craftsmanship with a complete toolkit for our frontline staff. If we can accomplish these goals, BELLE will once again be a giant, however fickle the markets may be.
Standing in front of you today, I couldn’t help but be moved by emotion at times. BELLE is in possession of incredible genes, perenially performing at the top in China’s fashion and sportswear industries. BELLE is a company rich in spirit and culture, it has the best shot of any at making history. Let’s work together to show the world, to show future generations, how to create a truly consumer-centric new retail model!
Thank you all!
Wrap-up
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