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Lessons from the fall of luxury e-tailer Leflair

Angry suppliers have confronted Leflair, alleging that the newly defunct Vietnam-based ecommerce startup owed them around 6.5 billion dong (US$280,000) in unpaid goods. As a result of these claims, the firm’s chief executive, Loïc Gautier, was summoned by the Ho Chi Minh City police department.

Local media reports say the startup founder wasn’t found in his home in the city’s swanky District 2 when the police came knocking. But Gautier tells Tech in Asia that he isn’t running away and that he has contacted “people close to the matter” to resolve this problem.

“I’m not downplaying my responsibility, and it’s my job to face those accusations,” he says. Due to “visa issues” related to the Covid-19 pandemic, Gautier is now in Paris, away from his wife and child, who are both in the US.

Leflair co-founders Pierre-Antoine Brun (left) and Loïc Gautier (right) / Photo credit: Leflair

Things haven’t always been this contentious. Just last year, Leflair’s prospects were looking more optimistic. The company hit the market hard and fast, offering consumers luxury shopping for less. After debuting in Vietnam in 2015, the startup brought on 2,500 brand partners and expanded its operations to Singapore and the Philippines.

Like many startups, Leflair’s survival hinged on acquiring funding on time. Gautier says the startup was on track to securing its US$40 million series C. But despite discussions progressing to “advanced stages,” investors got cold feet.

“We didn’t see winds changing directions that quickly until we started speaking with investors during WeWorkGate in November,” shares Gautier, referring to the ongoing turmoil at the US co-working startup.

He recalls that by December, some of the existing investors started to say, “We really like Leflair, but if it’s not profitable, it’s going to be very difficult to convince our limited partners. We have to pull out.”

Photo credit: Leflair

Things just kept going south in 2020 as Covid-19 spread across the globe. Leflair’s existing backers became jittery and fell like dominoes: in January, it was investors in China, then in February, it was those in South Korea. By March, the disease had become a full-blown pandemic and all funding discussions were halted.

“We had 15 [existing investors] on the capital table, but all of them had commitments to save their own struggling businesses. And we can’t blame them for this as it was an unpredictable period of time,” shares Gautier.

The startup needed “at least US$2 million” from each investor to keep going. But since its backers are smaller seed investors or corporate venture capitalists, “they didn’t have the cash to fulfill the ticket size needed to keep Leflair afloat,” he notes.

In late January, Leflair retrenched 25% to 30% of its headcount in Vietnam and the Philippines. The company promised to pay their remaining salary, plus a month’s severance. The layoffs were part of its plans to lay low while it searched for a solution. The US$7 million it had raised from its series B had also ran out.

In February, Leflair’s founders had sent out feelers for a corporate buyout. The situation looked promising, as Leflair had garnered significant interest from “bigger ecommerce players in the region” and some private equity firms to support its relaunch.

“We were aiming to tweak the business model to be less high growth and high burn,” says Gautier. But all this was thwarted again – this time, by bad press.

Local reports said the company owed suppliers US$2 million and had less than US$50,000 in the bank. Disgruntled customers complained about not receiving refunds while employees voiced out about not getting paid.

“This scared away a lot of people who were interested in giving a hand during this time,” says Gautier. “We should’ve managed this negative coverage better, especially the distrust with employees.”

Faced with a capital crunch and no lifeline, Leflair had no other choice but to file for bankruptcy in May. “It was disheartening, as our operations were growing by 100% on-year annually since we started out in 2015,” laments Gautier. “We were even making revenues in the early eight digits yearly up till that point.”

Raison d’être

Leflair operated on a flash-sales model, luring customers to purchase items from high-end brands such as Nike, Adidas, Daniel Wellington, and Michael Kors at up to a 70% discount.

The startup marketed itself as an online “outlet store” for brands, allowing them to offload end-of-season or slow-moving inventory into Leflair’s warehouses, helping them “make room” for newer items. In return, suppliers would sell Leflair their products at heavily discounted prices.

Photo credit: Leflair

“We sell large volumes of items in a short time and of a narrower assortment as opposed to marketplaces like Lazada, which sell a few items from thousands of different products. Our capacity to negotiate with brands allowed customers to buy more at the best value,” explains Gautier.

Leflair’s operating model is tried-and-true. It borrowed the tactic from other startups in China, Europe and the US and adapted it to Southeast Asia. One example is China’s Glamour Sales or Mei.com, which sells items “in limited batches, with discounts as high as 90%,” according to its website. Singapore-based Reebonz also stocks leftover goods from luxury brands.

These startups saw early success. Glamour Sales clinched investments from Chinese tech titan Alibaba in 2015, while Reebonz was a poster child among startups in the Lion City as it did big fundraises and listed on the Nasdaq.

Leflair also runs on a consignment model. It’s an arrangement in which a vendor leaves goods in the possession of a third party – Leflair in this case – to sell. The vendor receives a percentage of the revenue from the sale.

The goods sold can range from brand-new clothes to secondhand items. For instance, Reebonz specializes in designer handbags while Mei.com even has luxury yacht packages.

“We don’t buy the merchandise upfront,” says Gautier. “We only purchase what we have sold and return what didn’t sell.”

For example, when Leflair receives a thousand pairs of shoes from a vendor, it stores the products in its warehouses. Then a team photographs the shoes and markets them before they go live on Leflair’s page.

This model ensures that Leflair doesn’t take on excess stock. If 700 pairs are sold after a week-long flash sale, then the retailer returns the remaining 300 pairs to the vendor.

Photo credit: Leflair

“Brands could even put that inventory in our warehouse before we launched the sales. That’s how we managed to speed up delivery times,” says Gautier. Its model saw success, reaping the firm a gross margin of 20% while winning over suppliers with its ease of use.

“Unlike marketplaces, we didn’t have 10 different levels of fees. We gave them a purchase price and we handled the process, from storage to delivery,” he adds.

The consignment model generally favors third-party sellers. Because vendors still own the inventory, they could face losses and other risks if their goods don’t sell.

In contrast, Reebonz ran into trouble because it bought goods from vendors that it couldn’t sell, causing it to be laden with debt.

Competition in Vietnam’s ecommerce space has become increasingly intense in recent times. Tiki and Sendo, two of the so-called “Big Four” platforms, reportedly plan to merge – a move that’s likely to turn up the heat in the industry.

Before this, the country’s ecommerce landscape had seen several instances of companies merging or winding up operations. In 2016, several players including Beyeu, Deca, Lingo, Hotdeal, and Muachung closed down. In late 2019, local conglomerate Vingroup combined its marketplace websites with other units as it shifted to the “new retail” model. South Korea’s Lotte followed suit soon after, shuttering its Vietnam-focused online marketplace to pursue the same strategy.

Competition was not what killed us.

But Gautier stresses that it wasn’t facing off against market rivals that bankrupted Leflair.

“We wouldn’t have been able to grow 100% every year for four consecutive years with such strong competition,” he points out. While Leflair focuses on discounted branded goods, “the Big Four are fighting for the same customers, selling the same products. In their case, the one that wins is the one that can burn more cash [by] giving away incentives.”

Another factor that sets Leflair apart from other ecommerce players is the size of its average order value (AOV), which is also known as basket size. Coming in at around US$50, its AOV is the highest among its peers and nearly six times than that of the average Vietnamese ecommerce company, which is estimated at around 200,000 dong (US$8.60).

Nightfall in Can Tho, Vietnam’s fourth-largest city / Photo credit: 123rf

The US$50 figure is actually large, considering that the average ecommerce revenue per user in Vietnam is still relatively low. Online shoppers in the country spent an average of just US$46 a year (or US$3.83 per month) on consumer goods in 2019.

Gautier explains that Leflair’s high average is linked to the 30% of its customers who spend an average of US$100 every month on the platform. “Competition was not what killed us. And this competitiveness from the Big Four wouldn’t prevent more niche ecommerce players like us from starting their business in Vietnam,” he adds.

So why was Leflair in such a precarious financial situation? Its revenues were in the low eight digits and it definitely didn’t lack funding, as it had consistently closed fundraises year after year.

Gautier tells Tech in Asia that he had put all his eggs in one basket. He thought Leflair had to spend and rev up its expansion engines so it could land the US$40 million round it was targeting.

Leflair’s Phillippine team / Photo credit: Leflair

“Besides hiring 50 people in the Philippines, we upgraded our operations and fulfillment capabilities in Vietnam and Singapore to prepare to make US$50 million to US$100 million in revenues,” he says. “It was a necessary investment that we made, and its purpose was to grow even more aggressively so we could raise a bigger round later.”

Like similar startups, it didn’t matter that Leflair was bleeding money to expand, as long as it was working towards dominating its market.

As such, Leflair wasn’t the only startup to enter 2020 in a low cash position. According to a recent survey, 29% of startups globally started the year with just months of runway left, with Covid-19 putting even more of them in a vulnerable position.

Missteps and regrets

Apart from media scrutiny, Leflair has received its fair share of flak from former staff for allegedly spending beyond its means.

“We all saw it coming. The office rental was too much, [and] so were staff salaries. All these should’ve been lowered. Leflair was paying much higher than market averages,” says an ex-employee who spoke to Tech in Asia on condition of anonymity.

Leflair’s office in downtown Ho Chi Minh City / Photo credit: Leflair

Responding to these claims, Gautier says he wouldn’t have done things differently at all.

“This was all necessary, as we needed to keep competitive with other startups in the region, such as Grab, Sendo, Deliveroo, and Lazada, in securing top talent,” he says. “We reward well as it’s a tough job. We can’t make employees pull 12-hour work days if we don’t pay them well.”

Several other ex-employees supported this view, noting that working at Leflair gave them a certain panache. Not only did they feel they were well-compensated, a few remarked even that it was “the best working atmosphere.”

Leflair’s dilemma is not uncommon to startups, which find themselves in a bidding war for talent with well-financed unicorns. That said, some could argue that fledgling businesses like Leflair should seek talent who prefer making an impact at an early-stage company rather than collecting a hefty paycheck at a big firm.

Photo credit: Leflair

Another ex-staff member places the blame on expensive operations for Leflair’s quick cash burn, saying a startup “shouldn’t be spending so much money on services like DHL to do deliveries.” The person goes on to point out that a decision to commission an Australian company instead of a local one to build Leflair’s mobile app was costly.

However, Gautier says the Australian appmaker “was the clear choice” for Leflair. “We presented ourselves as a premium product, so we had to provide the best.”

Using Facebook and Google is like using hard drugs

But the CEO does admit he could have done one thing differently. He would have reduced Leflair’s “heavy” reliance on Facebook and Google for its marketing needs and focused on balancing the speed of growth and cost.

“Building a brand takes years, not weeks. The faster you want to grow, the more expensive it is,” Gautier observes “Here’s my piece of advice to startups: Find out how to avoid working with Facebook and Google – they aren’t that magical of a tool.”

Startups like Leflair that raise venture capital money face pressure to grow.As a result they may spend a lot on unsustainable marketing efforts.

Instead, Gautier suggests another approach. “It’s much better to have to go through a tough board meeting, where your investors may doubt of your ability to grow the business fast enough for their liking or to get press coverage that questions the value of what you’re working on, rather than having to let dozens – hundreds in our case – of people go and then go back to the beginning.”

He also likened using Facebook and Google to taking “hard drugs.” As Gautier puts it, “It delivers a huge hit – a quick 60% increase – but it comes at a very high cost. And you become very dependent on it.”

Photo credit: Leflair

The company was working on ways to reduce marketing costs through technology. Gautier didn’t go into detail about what the team was working on, but two ex-employees said the main problem that Leflair was looking to solve was how to drive more traffic directly to its site.

Right now, ecommerce sites rely heavily on organic traffic to drive sales. With Facebook hiking up advertising costs by 90% compared to 2018 rates, startups are seeking alternative ways to grow their sales.

Startups should strike a balance between spending for digital ads and spending to build its brand and identity because “only the latter can save you” when things change,” Gautier advises.

“When you have a dependence on paid ads to acquire new customers and get the existing ones to come back, you risk losing it all in a couple of months. [Paid ads] are effective, but are terribly unsustainable if you can’t raise millions of dollars yearly.”

Next moves

Gautier tells Tech in Asia that Leflair still owes its staff the severance it promised, although it’s already paid them their salaries in full. The firm also says it’s still working on paying off its US$2 million debt to former suppliers.

Caption: Leflair’s goodbye message on its website

Gautier also regrets that many shoppers will have “no choice” but to be disappointed if they’re hoping to exchange their items. “We can’t do exchanges as the business doesn’t exist anymore. So we’ll work on refunding them instead,” he says.

Gautier didn’t expect to go from expansion to bankruptcy in a span of five months, but he says the Leflair team has learned “a valuable lesson” from it. He and Brun also won’t be starting another company anytime soon. Instead, they’ll focus on helping other ecommerce firms by doing consulting work.

“We’re entrepreneurs – we will keep building companies together. We just learned a big lesson in financial independence, [so] we need to focus on being able to finance our companies ourselves first,” Gautier concludes.