Larry Kung’s career path has had two distinct branches: he used to sell routers and switchboards in China, but now he sells baby products to millions of Chinese households. Kung was one of the original founders of Cisco China. But the former senior IT professional can now list all baby diaper brands without hesitation. He can even tell you which brands are bestsellers, what types of nursing bottles and nipples are on the market, and how to choose the correct products depending on the age of a baby. In addition to electronic engineering, Larry Kung has become an expert in mother and baby products.
As the COO of Beijing Leyou Dakang Technology Inc., Kung now runs a chain store that sells more than 10,000 different products, including maternity dresses, diapers, milk powder, nursing bottles, toys and clothes. Leyou has about 40 stores spread out across Beijing, Tianjin, Shenyang and Xi’an. But Kung expects to have 100 stores in ten cities by the end of the year.
Two years ago, this plan would have seemed impossible even to Kung himself. However, two years is long enough to change a company. In 2006, the mother and infant product market suddenly exploded thanks to the baby boom in the year of “golden pig”, and big new sources of cash. In July of 2007, seven years after its first investment, Leyou received another cash injection of US$11 million from AsiaVest Partners. Thanks to the booming market and the investment, Leyou’s revenues soared by over 300% in 2007. As a result, the company was able to add more stores in cities other than Beijing. This, however, is only the beginning of the company’s plans for the Chinese market.
“Golden Pig Babies”
China’s zodiac is represented by twelve animals, which represent the twelve earthly branches and are used to symbolize the year in which a person is born. The year of pig represents good luck, and the most recent year of pig was 2007. However, that particular year was dubbed the “golden pig” year, a rare event that also means a large fortune. According to AC Nielsen, the first quarter of 2006 saw the largest number of newly-weds in China in 20 years. Accordingly, this has led to an increased birth rate for the following year. Consequently, Leyou’s revenues crossed the RMB100 million (US$14.6 million) mark.
This past July, Leyou received a third round of investment totaling US$37 million from AsiaVest Partners and Deutsche Bank, making it the largest investment recipient in China’s baby product industry.
For Leyou, the decision to shift its marketing focus from online to offline sales has turned out to be both lucky and fortuitous.
Ahead of Time
Larry Kung and his wife, Hu Chao, founded Beijing Leyou Dakang Technology Inc. in 1999. They were hoping to find a way to take advantage of the booming Internet industry. A year later, leyou.com was launched. Kung had hoped that his company could profit from the seemingly large baby product market on the strength of e-commerce. Unfortunately, that same year turned out to be a disaster for the Internet economy. After pulling in its first round of investment, US$3.4 million, leyou.com suddenly found itself on the verge of bankruptcy.
Unlike many Internet sites, Leyou’s e-commerce profit model was specifically positioned: it provided low-priced, convenient products and services. But Kung soon discovered his expectations might have been a little premature. In 2000, the first Internet users in China were mostly in colleges. “Most of the Internet users were not old enough to get married, and those who were old enough for marriage seldom went online. This meant that we had an extremely small customer base,” recalls Kung. Back then, Leyou often had days when it only received a few dozens orders.
While sales remained low, costs remained too high, and customer loyalty was almost nonexistent. If the advertising was stopped, visits to the website would drop significantly. What troubled Kung even more was that customers normally prefer to purchase only well-known brands of diapers, milk powder and other products. However, the more famous the brand is, the less reliant the supplier is on the channel, which left less profit room for Leyou. E-commerce tends to rely on low prices, which results in lower profit margins.