Overview

Baozun Inc. (BZUN) is an exempted company incorporated under the laws of the Cayman Islands on December 17, 2013. The company changed its holding company’s name from Baozun Cayman Inc. to Baozun Inc. in March 2015.

Baozun is a holding company and operate its business through its wholly-owned subsidiaries and a PRC consolidated VIE. The company commenced operations to provide brand e-commerce solutions in China in August 2007 through Shanghai Baozun, a PRC limited liability company founded by its CEO Mr. Vincent Wenbin Qiu, its COO Mr. Junhua Wu, Mr. Michael Qingyu Zhang and several other individual investors, or collectively, the Founding Shareholders. Shanghai Baozun, its wholly-owned subsidiary, provides integrated brand-e-commerce solutions to its brand partners, including IT services, store operations, digital marketing, customer services, warehousing and fulfillment.

In March 2010, the company incorporated its wholly-owned subsidiaries, Shanghai Bodao E-Commerce Limited, or Shanghai Bodao, and Shanghai Yingsai Advertisement Limited, or Shanghai Yingsai, in China. In December 2011, to further develop its e-commerce solutions business, the company incorporated its wholly-owned subsidiary, Shanghai Fengbo E-Commerce Limited, or Shanghai Fengbo, in China. Shanghai Fengbo and Shanghai Bodao provide brand e-commerce solutions to its brand partners, and Shanghai Yingsai provides marketing services to its brand partners. As the company began to expand its business outside of mainland China, the company established Baozun Hongkong Limited in September 2013, which serves as its operation center in Hong Kong. In December 2013, the company incorporated its holding company, Baozun Cayman Inc., under the laws of the Cayman Islands. The company incorporated Baozun Hong Kong Holding Limited in January 2014 to develop its e-commerce solutions business in Hong Kong and internationally.

The operation of value-added telecommunications businesses in China requires an ICP license, and foreign ownership of value-added telecommunications business is subject to restrictions under current PRC laws, rules and regulations. The company hold an ICP license through its PRC consolidated VIE, Shanghai Zunyi, which is the operator of its Maikefeng platform, to operate its value-added telecommunications services in compliance with PRC laws and regulations. In April and July 2014, through Shanghai Baozun, the company entered into certain contractual arrangements with Shanghai Zunyi and its shareholders under which the company gained effective control over the operations of Shanghai Zunyi. Shanghai Zunyi was a dormant company before July 2014 and began serving consumers through its Maikefeng platform, including its Maikefeng mobile application and mkf.com website, in March 2014.

In October 2014, the company established Taiwan Baozun Corporation, a wholly-owned subsidiary, to expand its provision of brand e-commerce solutions to the Taiwan market.

In October 2015, the company established Baozun (Japan) Limited, a wholly-owned subsidiary, seeking to introduce more Japanese brands to Chinese consumers.

In September 2016, the company established its joint venture, Baozun-CJ, with CJ O Shopping, a division of CJ Group, a Korean culture and lifestyle conglomerate, to introduce highly sought-after Korean brands to Chinese consumers.

In July 2016, the company established a wholly-owned subsidiary, Baotong E-Logistics Supply Chain (Suzhou) Co., Ltd., or Baotong E-Logistics, to provide warehousing and logistics solutions. In March 2017, the company established another wholly-owned subsidiary, Baotong E-Logistics Technology (Suzhou) Limited to substitute Baotong E-Logistics in providing warehousing and logistics solutions.

On May 21, 2015, its ADSs commenced trading on NASDAQ under the symbol “BZUN.”

In December 2016, the company completed a follow-on public offering of its ADSs, in which the company issued and sold an aggregate of 9,000,000 Class A ordinary shares represented by 3,000,000 ADSs at US$12.25 per ADS and the selling shareholders sold an aggregate of 3,000,000 ADSs. The aggregate price of the offering amount registered and sold by it was approximately US$36.8 million, of which the company received net proceeds of approximately US$33.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by it.

As a holding company, its ability to pay dividends depends upon dividends and other distributions on equity paid to it by its principal operating subsidiaries. Pursuant to PRC laws and regulations, its wholly-owned subsidiaries may pay dividends only out of their retained earnings, and are required to set aside a portion of their net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends.

The company's principal executive offices are located at Building B, No. 1268 Wanrong Road, Shanghai 200436, the People’s Republic of China. The company's telephone number at this address is +86 21 8026-6000. The company's agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite 403, New York, NY 10017. The company's Internet address is www.baozun.com. The information on its website is not a part of this document.

Business Overview

Baozun is the leading brand e-commerce service partner in China, with a market share of approximately 22% as measured by transaction value in 2015, according to iResearch. The company help brands execute their e-commerce strategies in China by selling their goods directly to consumers online or by providing services to assist with their e-commerce operations. The company's integrated end-to-end brand e-commerce capabilities encompass all aspects of the e-commerce value chain covering IT solutions, store operations, digital marketing, customer services, warehousing and fulfillment. The company deliver omni-channel solutions to create seamless shopping experience across various touch points online and offline, enabling optimal and consistent branding and generating sales results that reflect its brand partners’ unique e-commerce proposition.

With e-commerce in China growing rapidly in scale, more global brands view e-commerce as a critical part of their China expansion strategy. However, as the industry also grows in complexity, brands rely on it as their trusted partner to provide local knowledge and industry expertise in executing and integrating e-commerce strategies. This helps its brand partners avoid significant investment and risk associated with establishing and maintaining their own local infrastructure and developing their own capabilities.

The number of its brand partners grew from 93 as of December 31, 2014 to 113 as of December 31, 2015 and to 133 as of December 31, 2016. These brands encompass diverse categories, including apparel, appliances, electronics, home and furnishings, food and health products, cosmetics, fast moving consumer goods, insurance and automobiles. Many of its brand partners, such as Philips, Nike and Microsoft, are leaders in their respective industries.

The company believe its brand partners value it for its integrated e-commerce capabilities, dependable services, deep category expertise, market insight and ability to innovate and adapt to the fast-changing e-commerce market. The company's end-to-end brand e-commerce capabilities allow it to leverage brand partners’ unique resources and seamlessly integrate with their back-end systems to enable data tracking and analytics for the entire transaction value chain, making its services a valuable part of its brand partners’ e-commerce functions. The company help its brand partners establish market presence and launch products quickly on official brand stores and major online marketplaces in China, such as Tmall and JD.com, as well as on social media platforms such as WeChat and Weibo. In May 2016 and January 2017, the company were consecutively recognized by Tmall as its six-star e-commerce service partner based on a suite of performance measures, including operational capabilities, brand development capabilities and service ratings. This was the highest ranking awarded to any Tmall e-commerce service partner. The company also help its brand partners devise and execute O2O strategies to integrate their online and offline retail networks.

The company's store operation capabilities, logistics network and warehousing resources are crucial to its success. The company provide its brand partners with customized solutions and dedicated personnel with relevant industry expertise and brand-specific training in operating e-commerce stores. The company partner with leading nationwide and local logistics service providers to ensure reliable and timely delivery. Baozun is recognized by SF Express, one of the largest Chinese express delivery companies, as one of its top five customers in China. Baozun is able to achieve next-day delivery in over 100 cities across China. As of December 31, 2016, the company operate seven warehouses with an aggregate gross floor area of 174,943 square meters and a capacity of 600,000 inbound pieces and 1,100,000 outbound pieces per day. The company's warehouse management system can be customized to accommodate differences in product specifications and handle requirements specific to categories ranging from apparel and consumer electronics to beauty and health products. In September 2016, its wholly-owned warehousing and logistics solutions subsidiary, Baotong E-Logistics, became a partner of Cainiao, a leading logistics data platform operator affiliated with Alibaba Group, which enabled it to provide best-in-class services to a wider variety of merchants through Cainiao’s logistics data platform.

Technology is key to its success and rapid expansion. By leveraging its proprietary and scalable technology infrastructure and systems, Baozun is able to provide integrated e-commerce solutions that synchronize marketing campaigns, centralize inventory management, order fulfillment and customer service, and collect and analyze real-time consumer behavior and transaction data across internet, mobile and offline channels. For example, its ‘‘NEBULA+’’ platform enables it to efficiently set up and operate its brand partners’ official brand stores and WeChat stores and achieve centralized store management. The company's ShopDog O2O merchant tool allows brand partners to tightly integrate their inventories across offline and online channels, and to sell inventory in offline stores through online stores. The scalability of its systems, built on modular implementation and deep vertical knowledge across the e-commerce value chain, allows it to provide customized solutions efficiently across categories and channels, and support a growing array of transactions as the company add new brands, integrate new channels and accommodate peaks and surges in consumer demand. In addition, the company appreciate the importance of information security and have built a solid information security management system as evidenced by the ISO27001 certification awarded to it in December 2015.

The company continue to win brands’ loyalty with its track record of converting their sales and marketing plans into structured solutions that consistently deliver measurable sales results. The company collect valuable consumer behavior data through CRM, its proprietary customer relationship management system. Baozun has also developed its Business Intelligence software, which enables real-time analysis of transaction data across online and mobile channels to make more targeted and insightful marketing recommendations to its brand partners. The company believe that its relationships with brand partners will be further strengthened as the company increase its solution offerings on more channels, launch more marketing initiatives and campaigns and increase the sales of its brand partners.

Depending on each brand partner’s specific needs and characteristics of its product category, the company provide solutions to its brand partners under one or a combination of its three business models: distribution model, consignment model and service fee model. Under the distribution model, the company select and purchase goods from its brand partners and/or their authorized distributors and sell goods directly to consumers through official brand stores or official marketplace stores operated by it. Under the consignment model and the service fee model, the company provide a variety of e-commerce services, such as IT solutions, online store operation, digital marketing and customer service to its brand partners and other customers. Under the consignment model, in addition to these services, the company also provide warehousing and fulfillment services. Baozun has been shifting from the distribution model to the consignment model and the service fee model since 2015, which have enabled it to reduce inventory exposures and enhance its profitability. In 2014, 2015, and 2016, GMV from distribution model, or distribution GMV, contributed 32.3%, 33.6%, and 22.5% of its total GMV, respectively.

The company generate revenues from two revenue streams:  product sales and (ii) services. The company derive product sales revenues primarily through selling products on behalf of brand partners to consumers under the distribution model, and derive services revenues primarily through charging brand partners and other customers fees under the consignment model and the service fee model. For services provided under the consignment model and service fee model, the company charge fixed fees and/or variable fees primarily based on GMV or other variable factors such as number of orders fulfilled.

Beginning in the third quarter of 2015, Baozun has had two reportable operating segments:  the brand e-commerce segment that provides a variety of e-commerce services to its brand partners and other customers, and (ii) the Maikefeng segment that operates its online retail platform.

The company's GMV was RMB4,248.9 million, RMB6,735.3 million and RMB11,264.8 million (US$1,622.5 million) in 2014, 2015 and 2016, respectively. In 2014, 2015 and 2016, its total net revenues were RMB1,584.4 million, RMB2,598.4 million, and RMB3,390.3 million (US$488.3 million), respectively. For the same periods, net revenues from product sales accounted for 74.9%, 74.7%, and 64.2%, respectively, of its total net revenues. The company incurred net loss of RMB59.8 million in 2014, and recorded net income of RMB22.6 million and RMB85.4 million (US$12.3 million) in 2015 and 2016, respectively. The company had non-GAAP net income of RMB25.1 million, RMB47.8 million, and RMB119.6 million (US$17.2 million) in 2014, 2015 and 2016, respectively. See “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Measures.”

Business Models and Solutions

Through its integrated brand e-commerce capabilities, the company provide end-to-end brand e-commerce solutions that are tailored to meet its brand partners’ unique needs. The company's e-commerce capabilities encompass every aspect of the e-commerce value chain, including:

• IT solutions;
• online store operation;
• digital marketing;
• customer service; and/or
• warehousing and fulfillment.

Depending on each brand partner’s specific needs and characteristics of its industry category, its brand partners utilize one or a combination of its solutions under one of or a combination of its business models:

• distribution model;
• consignment model; and
• service fee model.

The company derive revenues under its business models as follows:

• Product sales revenues. The company derive product sales revenues when the company sell products to consumers under the distribution model.
• Services revenues. The company derive services revenues under the service fee model and consignment model.

In 2014, 2015 and 2016, net revenues from product sales accounted for 74.9%, 74.7% and 64.2%, respectively, of its net revenues. Over time, the company work with its brand partners under different combinations of business models to meet their evolving needs and sales objectives. Accordingly, its revenue mix may vary over time.

Business Models

The company believe its brand partners value it for its integrated e-commerce capabilities, dependable services, deep category expertise, market insight and ability to innovate and adapt to the fast-changing e-commerce market. Depending on each brand partner’s specific needs and characteristics of its product category, the company provide solutions to its brand partners under one or a combination of its three business models: distribution model, consignment model and service fee model.

Distribution Model

Under the distribution model, the company select and purchase goods from its brand partners and/or their authorized distributors and sell goods directly to consumers through official brand stores or official marketplace stores operated by it. In order to generate product sales, the company utilize every aspect of its e-commerce capabilities. Specifically, the company utilize its IT and store operation capabilities to set up and operate online stores, including brand stores and marketplace stores. The company utilize its warehousing and fulfillment capabilities to store and deliver goods to its consumers. The company utilize its customer service capability to facilitate sales and ensure its consumers are satisfied. In order to increase its product sales, the company utilize its digital marketing capabilities to boost site traffic and transaction volume. When the company operate stores under the distribution model, the sites will typically indicate that Baozun is the seller of the products and, when the company deliver goods to its consumers, the invoices and tax receipts will typically bear its name instead of those of its brand partners.

Service Fee Model

Under the service fee model, the company provide one or more of the following services in exchange for service fees:

• IT solutions;
• online store operation;
• digital marketing; and/or
• customer service.

Consignment Model

Under the consignment model, in addition to the above services the company may offer under the service fee model, the company also provide warehousing and fulfillment services, whereby its brand partners stock goods in its warehouses for future sales and Baozun is responsible for delivering goods to customers. In contrast with the distribution model, however, the company do not take title to the products, do not have any latitude in establishing prices and selecting merchandise, have no discretion in selecting suppliers and generally are not involved in determining product specifications. The company may also facilitate its brand partners’ online sales of goods as an agent and charge its brand partners commission fees based on a pre-determined formula.

Brand E-commerce and Maikefeng

End-to-end Brand E-commerce Capabilities for Brand Partners

The company's integrated brand e-commerce capabilities enable it to provide end-to-end solutions that encompass every aspect of the e-commerce value chain, including IT infrastructure setup and integration, online store design and setup, store operations, visual merchandizing and marketing campaigns, customer services, warehousing and order fulfillment. The company utilize its capabilities and tailor its solutions to fulfill the specific needs of each brand partner. For each brand partner, the company first hold consultations to determine its e-commerce needs and development plans. Each brand partner may then elect to use its full e-commerce capabilities or select specific elements of its capabilities that best fit their needs. Depending on these specific arrangements with brand partners, the company generate revenues under different business models.

The flowchart below illustrates its capabilities and the solutions the company offer for each aspect of its brand e-commerce operations:

IT Solutions

With its expertise in technology infrastructure and system, web design and its intimate understanding of Chinese consumers’ online shopping habits, the company help its brand partners set up effective e-commerce sites that both enhance their brands and cater specifically to local consumers. The company provide proprietary e-commerce technology which can be customized to and integrated with its brand partners’ existing operation back-end systems in a convenient and cost-effective manner.

Where necessary, the company also help its brand partners set up or improve the suitability of their own IT infrastructure for e-commerce operations. The company's proprietary e-commerce IT platform supports a wide range of localized features, including payment and live chat, as well as mobile and new consumer touch points. The company's IT services enable its brand partners to quickly adapt to the local e-commerce market and effectively service online shoppers in China without the costs associated with establishing and maintaining local infrastructure and capabilities on their own. For more information about its technology infrastructure and capabilities, please see “—Technology Infrastructure and Capabilities.”

In addition to establishing the infrastructure for system integration, its web designers help its brand partners design online stores that enhance their brand image and online presence. The company's web developers also incorporate features and functions familiar to Chinese consumers to facilitate conversion of site visitors into paying consumers.

The company also offer brand partners with the official brand WeChat store platform service, which enables brand partner to quickly expand their presence on WeChat without the heavy costs associated with creating a new online store. The company's new official brand WeChat store platform includes a number of customizable options to make it easier for customers to interact directly with the brands and accommodate promotional campaigns.

Store Operations

The company believe efficient store operations are crucial to its brand partners’ e-commerce business. The company staff dedicated operations teams for stores operated by it. The company's operations teams closely monitor and are responsible for all activities and the daily upkeep of online stores. The functions of the operations teams broadly fall into two categories: merchandising and site content management.

Merchandising: Each operations team has merchandising staff in charge of maintaining an appropriate level of inventory for online stores by procuring products to be sold on its brand partners’ online stores and forecasting quantities to purchase based on expected demand.

The company's operations teams also assist its brand partners in processing sales orders in online stores. The company manage sales orders through its proprietary order management system that integrates with its other technology platforms to ensure smooth online transactions.

The company's merchandising staff monitors store sales through periodic sales reports.

Site Content Management: In addition to providing design services during the initial store setup, the company also periodically update the content on stores operated by it in order to maintain the appeal of the stores. Baozun has a design services team that helps ensure that brands’ online stores are artfully presented, and refreshed in keeping up-to-date with its brand partners’ latest advertising campaigns. The company's design services team regularly works with its brand partners in producing the most updated digital content, including product photography, site banners and other promotional content. For more information about its design services team, see “—Digital Marketing—Creative Contents.”

Digital Marketing

The company believe performance digital marketing is key in boosting visitor traffic to stores operated by it and increasing conversion and overall transaction volume.

The company's digital marketing capabilities cover both official marketplace stores and official brand stores. In particular, Baozun has developed an expertise in digital marketing on Tmall. The company's digital marketing capabilities include  media services; (ii) word-of-mouth marketing; (iii) creative content; and (iv) consumer data.

• Media Services: The company plan advertising media for its brand partners. In planning its brand partners’ online advertising media, the company first determine with its brand partners their most likely and desired customers. Based on that determination, the company then identify with its brand partners which media platforms its brand partners’ intended audience is most likely to visit, and the company design advertising campaigns crafted to have the most impact on the targeted audience. The company's media planning capabilities enable its brand partners to strategically target the reach of their online advertising campaigns and minimize wastage and hence increase their return on investment, or ROI.
• The company engage in search engine optimization and marketing for its brand partners. In particular, the company aim for stores operated by it to rank earlier or higher on the search results pages of a search engine so that they will receive more visitors from search engine’s users. Based on its understanding of the methodologies and mechanisms adopted by search engines, the company customize the content of the stores operated by it to achieve high rankings. Where appropriate, the company also help its brand partners negotiate arrangements with search engines to favorably list the stores operated by it on search results pages.
• Word-of-Mouth Marketing: Based on its experience, Chinese e-commerce consumers are heavily influenced by word-of-mouth, or WOM, which is information from non-commercial communicators about products, services or brands. The company believe Baozun is able to provide tremendous value to its brand partners by helping them formulate WOM strategies and campaigns that encourage consumers’ engagement with their brands and drive consumers’ desire to purchase their products.
• One of the most important WOM channels is social media platforms. The company identify the preferred social media platforms of its brand partners’ target consumers, which are generally WeChat and Weibo. The company then open and operate accounts on these platforms for its brand partners. The company create and publish contents on its brand partners’ accounts, and the company engage in dialogues with consumers who post on its brand partners’ accounts. The company track visitors’ activities and analyze the impact of its WOM outreach.
• In addition, the company monitor and respond to online comments about its brand partners on internet forums and product review websites. The company help identify key opinion leaders on these platforms and work with them in responding to comments about its brand partners. The company believe that providing meaningful feedback addressing potential customers’ concerns greatly facilitate their purchase decisions.
• Creative Contents: The company provide its brand partners with the infrastructure and expertise for producing digital content to be used on their online stores. The company operate an in-house, professional photography studio in Shanghai to create digital product images for product features, promotions and advertising campaigns. The company's production services range from pre-production work such as casting, art direction and styling to post-production editing and retouching.
• The company also employ a team of copywriting staff who produces product descriptions and related content, such as buyers’ guides, sizing charts, product tours and comparison shopping tools.
• Consumer Data: The company use data the company collect from its data warehouse and reporting system to understand consumers’ online shopping habits and apply these insights to create impactful marketing campaign for its brand partners. For more information about its data warehouse and reporting system, please see “—Technology Infrastructure and Capabilities—Data Warehouse and Reporting System.”

Customer Service

Providing satisfactory pre-sale and post-sale customer services is one of its top priorities. The company believe in the importance of real-time customer assistance. Customers can contact it through real-time online chat, phone calls or emails. Pre-sale questions relating to product details comprise most of the questions the company receive from customers, and the company believe that a great pre-sale customer service experience could encourage customers’ purchases. Customers can access its online representatives and service hotlines 9 a.m. to 10 p.m. daily (except three days per year during the Chinese New Year holiday).

The company assign its brand partners dedicated brand customer service teams who have undergone full basic customer service training, initial and periodic examinations and targeted coaching sessions.

Warehousing and Fulfillment

Baozun has established along the e-commerce value chain a robust logistics network and warehousing capacity to help ensure a smooth and positive shopping experience for consumers of online stores. The company adopt a flexible logistics model supported by its robust and advanced warehouse management system. The company partner with leading nationwide and quality logistics services providers to ensure reliable and timely delivery to over 500 cities across China through their network. The following flowchart illustrates its warehousing and fulfillment process:

As of December 31, 2016, the company operate seven warehouses with an aggregate gross floor area of approximately 174,943 square meters in Guangzhou, Suzhou, and Hong Kong. The company's warehouses cater to different product categories. The company provide value-added services to its brand partners, such as anti-counterfeit code protection and tailor-made packaging. In addition, the company also store goods in three other warehouses operated by third parties. With its proprietary warehouse management systems, Baozun is able to closely monitor each step of the fulfillment process from the time a purchase order is confirmed and the product stocked in its warehouses, up to when the product is packaged and picked up by a logistics services provider for delivery to a customer. Shipments from suppliers first arrive at its warehouses. At each warehouse, inventory is bar-coded and tracked through its warehouse management system, allowing real-time monitoring of inventory levels across its network. The company's warehouse management system is specifically designed to support a large volume of inventory turnover. The company's warehouses fulfilled approximately 5.0 million, 10.7 million and 17.8 million orders in 2014, 2015 and 2016, respectively. As of December 31, 2016, its warehouse management processing system was capable of processing 600,000 inbound pieces and 1,100,000 outbound orders per day. During the Singles Day promotion in 2016, its warehouse management processing system processed approximately 4.6 million orders, showcasing its ability to support an enormous flow of transaction and order traffic. The company closely monitor the speed and service quality of the logistics services providers through consumer surveys and feedbacks from consumers to ensure their satisfaction.

Maikefeng

To extend its product and service offerings to cover the entire product cycle, the company began operation of Maikefeng, its retail online platform, in March 2014, which has grown significantly since then. The company offer authentic, quality products at steeply discounted prices to consumers on its Maikefeng mobile application.

The company's strong merchandizing expertise enables it to select the brand composition and product mix of its sales on Maikefeng that appeal to its consumers. The company carefully select prospective brands for its Maikefeng platform, and target to work with those that are well-known and offer high quality or premium products that are popular among consumers in China, and those are willing to provide competitive prices and favorable payment credit and product return terms. The company believe that its Maikefeng platform helps its brand partners sell out-of-season inventory, generate more sales and acquire additional traffic, which will help it attract new brands and build stronger ties with its existing brand partners. In addition, its warehousing services help attract brands to its Maikefeng platform as they allow existing users of these services to adopt its Maikefeng platform and solve excess inventory issues without the need to physically move inventory.

Major product categories on Maikefeng include sports, clothing and footwear, beauty and cosmetics. Baozun has adopted stringent quality assurance and control procedures for products sold on the Maikefeng platform and delivered through its logistics network. The company source its products on Maikefeng directly from brands or through procurement agents. The company carefully inspect all products delivered to its warehouses, rejecting or returning products that do not meet its quality standards or the purchase order specifications. The company also inspect all products before shipment from its logistics centers to the consumers. The company believe that its strict brand selection process and quality control procedures enable it to ensure the high quality level of products sold on its Maikefeng mobile application and increase customer satisfaction. The company price products on Maikefeng at significant discounts, typically 70% off the original retail price. The company's attractive pricing is made possible by lower purchase price, in particular for off-season or slower-moving inventory or slightly damaged goods, and the absence of physical retail space and related overhead costs.

The company opened up its Maikefeng platform to third-party sellers to diversify its product offerings and improve operational efficiency in May 2015. Third-party sellers sell products to the consumers through its mobile applications and these sellers may also use its other value-added services, and the company charge such third-party sellers service fees for its other value-added services the company provide upon their request. Upon successful sales at Maikefeng, the company charge commissions from such third-party sellers at a fixed fee rate based on the sales volume. The company monitor third-party sellers’ performance and activities on its Maikefeng platform closely to ensure that they meet its requirements for authentic products and high-quality customer service. In this business model, since Maikefeng is operated as an intermediary platform that facilitates transactions between merchants and consumers, the company generally are not the primary obligor, do not bear the inventory risk, do not have the ability to establish the price or control the related shipping services utilized by third-party sellers.

Brand Partners & Brand Partner Development and Services

Brand Partners

As of December 31, 2016, the company were providing e-commerce solutions to 133 brand partners primarily under annual or tri-annual service contracts. The company's brand partners cover diverse product categories, including apparel, appliances, electronics, home and furnishings, food and health products, cosmetics, fast moving consumer goods, insurance and automobile.

In response to its brand partners’ needs to leverage its expertise to help them expand their e-commerce business in the Greater China region, Baozun has extended its service and operational capabilities beyond mainland China. The company can now provide brand partners such as Microsoft and Nike end-to-end e-commerce solutions in Hong Kong. The company also got approval from the Investment Commission of Taiwan’s Ministry of Economic Affairs in October 2015 and started to provide brand partners end-to-end e-commerce solutions in Taiwan in April 2016. The company provide IT service, customer service and warehousing and logistics services through local staff on the ground and online store operations and digital marketing through the home team in mainland China. Some of its existing brand partners have had years of cooperation with it and the company generated a significant portion of its net revenue through  the sale of products in the stores of these brands operated by it and (ii) provision of its services to these brand partners. See “Item 3. Key Information—D. Risk Factors—Risks Related to The company's Business—If Baozun is unable to retain its existing brand partners, its results of operations could be materially and adversely affected.”

Brand Partner Development and Services

Brand Partner Screening and Acquisition

Baozun has implemented a strict and methodical brand selection process. Based on its screening guidelines, the company carefully select prospective brand partners, choosing to work only with those that are established in profitable industries and with long-term potential. In addition, the company screen potential brand partners based on criteria such as projected annual GMV and service fees, projected profitability and proposed duration of cooperation. The company also conduct due diligence reviews on its prospective brand partners’ qualifications, including whether they hold the proper business operation licenses and safety, sanitary and quality certifications, and trademark registration certificates and license agreements in relation to the branded products.

The company intend to grow its business by adding new brand partners into its brand partner portfolio. The company seek to attract new brand partners by providing solutions that enable them to grow their e-commerce business more rapidly and cost-effectively than they could on their own. Baozun has been able to use the capabilities Baozun has developed for its existing brand partners to attract new brand partners.

Brand Partner Services Team

The company typically assign each brand partner a dedicated brand partner service team to offer individually tailored services and solutions. All stores across a brand partner’s different channels share the same service team to ensure seamless services to its brand partners.

The company aim to continue to work closely with the brand on reaching its future goals in China by improving its e-commerce services and expanding its e-commerce presence to other markets.

Channels

The company currently work with major marketplaces such as Tmall and JD.com and major social media platform such as WeChat and Weibo, in China. The company also operate official brand stores. The company also provide services to its brand partners through O2O strategies. The company leverage all of these platforms to deliver omni-channel solutions that combine the strengths of diverse platforms to achieve optimal branding effect and sales results responsive to brands’ individual e-commerce objectives.

Official Marketplace Stores

The company maintain close working relationships with the major marketplaces in China, such as Tmall and JD.com. The company's brand e-commerce solutions benefit third-party marketplaces by helping them attract new brand retailers. As such, marketplaces are often motivated to work closely with it to facilitate its ability to connect its brand partners to their systems.

The company enter into annual platform service agreements with online marketplaces to set up and maintain online stores on these channels. Pursuant to these agreements, the company typically pay online marketplaces based on a pre-determined percentage of GMV for transactions settled that varies by product category, and typically ranges from 0.5% to 5.0%. The company also pay an annual upfront service fees to marketplaces, up to 100% of which may be refunded depending on its sales volume. The company also pay security deposit for potential disputes under these agreements.

Official Brand Stores

The company also offer to work with its brand partners in setting up and operating their official brand stores. Based on its experience, consumers expect a total brand immersion on an official brand store that is different from the presentation of the brand’s stores in online marketplaces, which blend the brand’s image with the particular marketplace’s interface. The company utilize its in-house design team in crafting online and mobile sites for official brand stores and mobile sites that deliver impactful online presence for its brand partners. As of December 31, 2014, 2015 and 2016, the company operated 16, 19 and 26 official brand stores, respectively. As of December 31, 2016, the company operated mobile sites for 21 of its brand partners.

Social Media Platforms

The company work with its brand partners to enhance awareness of their brands on social media platforms and within the broader online community. The company helped its brand partners set up accounts and design their homepage on social media platforms, such as WeChat and Weibo, and regularly update their accounts with stories relating to their products, activities and brands. The company also monitor comments on its brand partners accounts and work with its brand partners in responding to these comments. In addition, the company help brand partners directly integrates WeChat public account with their back-end systems across all marketplace platforms to enable flash sale or routine sale of branded products on social media platforms.

O2O Solutions

The company also help its brand partners devise and execute O2O strategies by integrating and utilizing their online/offline retail space and customer data to optimize sales opportunities and encourage a more connected consumer experience. The company's omni-channel capabilities help its brand partners achieve optimal branding effect and sales results that are responsive to its brand partners’ individual e-commerce objectives. Examples of its O2O capabilities include:

• allowing consumers to place purchase orders and make payments online, pick up or return and exchange goods offline;
• aligning consumers’ online and offline loyalty programs;
• syncing online and offline QR codes; and
• providing brand partners with an effective channel to interact with offline consumers and providing offline consumers with a convenient and reliable channel to online shopping via interactive screens equipped in offline retail stores.

Payment Service Providers

Third-party marketplaces, its brand partners’ official brand stores and its Maikefeng platform provide customers with the flexibility to choose from a number of payment options. These payment options include online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms, such as Alipay and Tenpay.

In addition, official brand stores typically offer the “payment on delivery” payment option. The company's logistics partners deliver products to customers’ designated addresses and collect payment on site. In addition to accepting cash, delivery personnel carry mobile POS machines for processing debit cards and credit cards.

Logistics Partners

The company deliver orders placed on stores operated by it to all areas in China through reputable third-party couriers with nationwide coverage, such as SF Express, STO Express, YTO Express and EMS as well as other quality logistics services providers. Baozun is a partner of Cainiao, a leading logistics data platform operator affiliated with Alibaba Group, which enabled it to provide best-in-class services to a wider variety of merchants through Cainiao’s logistics data platform.

The company leverage its large-scale operations and reputation to obtain favorable contractual terms from third-party couriers. The company typically negotiate and enter into annual logistics agreements with its logistics partners, under which the company agree to pay delivery fees based on the amount and the weight of the goods to be delivered, as well as the destination of the delivery.

Technology Infrastructure and Capabilities

Baozun has made significant investments and will continue to invest in developing its proprietary technology platform to deliver solutions that aim to address e-commerce needs for its brand partners. The company's technology systems cover the whole e-commerce value chain, ranging from online store platforms to warehouse management and to data collection and reporting.

The principal components of its proprietary technology infrastructure cover both official brand store systems and back-end operations systems, including:

• Order Management System: The company process sales orders on online stores through its order management systems, or OMS. OMS controls the whole order cycle, including order data fetching and transfer and fulfillment. OMS connects with both internal and external warehousing systems and is capable of tracking order statuses. OMS also manages all post-sales services such as order canceling, product returns and refunds. OMS is the central node of its e-commerce platform and currently supports all channels including marketplaces and official brand stores.
• Warehouse Management System: The company's warehouse management system, or WMS, assists it and its brand partners in inventory management, cross-docking, pick-and-pack, packaging, labeling and sorting functions to efficiently manage warehouse workflow.
• Baozun platform “NEBULA 5.0”: The company set up and operate its brand partners’ official brand stores through its “NEBULA 5.0” platform. With this platform the company can quickly set up and customize official brand stores to provide rich features that enhance consumers’ online shopping experience. These features encompass all major aspects of online shopping, such as in-site search, checkout and rating, and provide flexibility for data, content and promotion/campaign management. NEBULA 5.0 supports multiple languages and is easily customized and deployed. The company's ‘‘NEBULA+’’ platform enables it to efficiently set up and operate its brand partners’ official brand stores and WeChat stores and achieve centralized store management.
• Mobile Store System: The company's mobile store system is an online web store system for mobile devices based on HTML5 technology. It shares the same back-end system with NEBULA 5.0. The company's mobile store system is capable of identifying the type of device from which visitors are accessing the store and can make adjustments for optimized display accordingly.
• Data Warehouse and Reporting System: The company's data warehouse collects and organizes all kinds of data, such as product information, transaction information, consumers’ geographic location and purchase history. From data the company collect, its data reporting system generates reports that are useful for both its brand partners and it, such as daily sales reports and inventory reports.
• Logistics Management System: The company's logistics management system coordinates the flow of goods between its warehouses and the final address for each package in each order. The company's logistics management system is deeply integrated with the system of third-party couriers to provide multiple levels of services, such as same-day delivery and real-time tracking.
• Data Exchange Platform: The company's data exchange platform manages all data integration requirements from external parties. It supports flexible synchronization of information with any system. It also acts as a buffer to help avoid overloading of its core systems, such as OMS & WMS.
• ShopDog O2O Merchant Tool: The company's ShopDog O2O merchant tool allows brand partners to tightly integrate their inventories across offline and online channels, and to sell inventory in offline stores through online stores.

Intellectual Property

The company use its brand partners’ names, URLs, logos and other marks in connection with the operation and promotion of their e-commerce businesses. The company's agreements with its brand partners generally provide it with licenses to use their intellectual property in connection with the operation of their e-commerce businesses. These licenses are typically coterminous with the respective agreements.

The company also rely on technologies that the company license from third parties. These licenses may not continue to be available to it on commercially reasonable terms in the future. As a result, the company may be required to obtain substitute technology.

The company regard its trademarks, software copyrights, service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to its success. To protect its proprietary rights in services and technology, the company rely on trademark, copyright and trade secret protection laws in the PRC. As of March 31, 2017, the company owned 48 registered trademarks, copyrights to 21 software programs developed by it relating to various aspects of its operations, and 18 registered domain names.

In addition, the company rely on contractual restrictions, such as confidentiality and non-disclosure agreements with its brand partners and employees.