Earnings Call Transcript - BZUN Q4 2023

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations for Baozun. Please proceed, Wendy.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today. Our fourth quarter and fiscal year 2023 earnings release was distributed earlier before this call, and is available on our IR website at ir.baozun.com as well as on GlobeNewswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same IR website where they are available for download. On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Arthur Yu, Chief Financial Officer and President of Baozun E-Commerce; and Ms. Sandrine Zerbib, President of Baozun Brand Management. Mr. Qiu will review the business strategy and company highlights, followed by Mr. Yu, who will discuss the business development of Baozun E-Commerce and about our financials and outlook and then by Ms. Zerbib to share more about Baozun Brand Management. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the U.S. Security Act of 1933 as amended, the U.S. Security Exchange Act of 1934 as amended, and the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management’s current expectations and current market and operating conditions and relates to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission and its announcement notice on other documents published on the website of the Stock Exchange of Hong Kong Limited. All information provided in this call is as of the date hereof and is based on the assumptions that the company believes to be reasonable as of today and the company does not undertake any obligation to update any forward-looking statements except as required under applicable law. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. In addition, we may elect to use adjusted in place of non-Generally Accepted Accounting Principles or non-GAAP in order to reduce overall confusion that may arise from our discussion about financials related to the Gap brand. Now please turn to Slide number It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, go ahead please.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you, Wendy. Hello, everyone, and thank you all for your time. 2023 kicked off our journey of transformation. Throughout 2023, Baozun Group demonstrated our resilience and adaptability to transformation. BEC reinforced its omnichannel capability and improved service quality, consolidating our leadership within the digital commerce ecosystem. BBM contributed an additional revenue stream and extended our value creation from supply chain to also supply chain fulfillment. We also further enhanced our cash generating capabilities with cost optimization resulting from process reengineering and more effective working capital management. Overall, despite challenging market conditions, our annual operating cash flow and free cash flow both grew by double digits year-over-year and surged to record highs. This has significantly strengthened the financial health of the group. Total revenues of the group grew 5% year-over-year to RMB8.8 billion, underpinned by incremental contributions from Baozun Brand Management. BBM executed its strategy of premiumization for GAAP China and achieved an impressive gross margin of 54% for the year. This in turn resulted in much lower operating losses, far surpassing our initial forecast. This breakthrough in our first year is the result of having established a solid foundation for growth and success in brand management. BBM is a key component of Baozun Group's second growth curve. Baozun International, BZI, represents a longer-term opportunity for which we continue to lay the business foundation and infrastructure. As BBM ramps up expansion following its acquisition of Hunter IP, BZI will play a vital role to expand Hunter into Southeast Asia, starting with Singapore and Malaysia this year. This is a good example of the synergy and collaboration between our business units. We believe that our expertise in technology applied to operations and business transformations is at the core of Baozun's identity. We're happy to share that Baozun has been acknowledged as a representative vendor in Gartner's 2024 market guide for distributed order management systems. We are proud to be the only Asian vendor selected alongside global retail service giants, such as Oracle, SAP, IBM, and Salesforce. This is a recognition of Baozun's outstanding technical capabilities in the industry. Looking forward, we remain cautious about the macro uncertainties, yet we are confident that our ongoing transformation has strengthened our business fundamentals and our value proposition to brand owners. Our main focus this year is to continue to execute our plans diligently and patiently in a sustainable manner. With a healthy cash flow and a balance sheet, we will be ready to seize new opportunities and provide lasting value to our shareholders. This January, our board also approved a new share repurchase program of USD20 million over the next 12 months. We will execute this program from time to time, taking into account factors such as the trading window and the market fluctuations. Let me now pass the call over to Arthur for a review of our financials and an update on our e-commerce business, BEC; then to Sandrine for more elaboration on BBM.

Arthur Yu, Chief Financial Officer and President of Baozun E-Commerce

Okay, thank you, Vincent and hello everyone. Let me do a quick review of the financials for the fourth quarter and the full year of 2023; after which I will discuss our BEC business in more detail. Please turn to Slide number three. Baozun Group's total revenues for the fourth quarter of 2023 expanded nearly 9% to RMB2.8 billion compared to the same quarter last year, driven by incremental BBM revenue of RMB458 million. Due to a weaker economic environment, our e-commerce revenue declined to RMB2.4 billion. Further pursuing a high-quality business model, we scaled back on low-margin product sales and trimmed low-value added service revenues. Consequently, product sales revenue of e-commerce decreased 23% year-over-year, notably in the appliance, electronics, and fast-moving consumer goods categories. This was partially offset by increased sales from healthcare and beauty categories. Baozun Brand Management generated total revenue of RMB458 million, a sequential improvement of 53%. Our total product sales revenue grew by 36% to RMB1 billion, and the gross profit for product sales more than doubled to RMB315 million. Product sales gross margin for Baozun Group totaled 30%, significantly improved from 17% a year ago. The growth of our gross profit and growth margin was mainly attributable to incremental contributions from BBM. Group income from operations was RMB6.4 million during the quarter, of which e-commerce operating income was RMB50.1 million. BBM continued to show good momentum in reducing its operating loss to RMB43.7 million. Gap's premiumization strategy with discount control, new China for China product launch, and new store openings have all met our expectations. These initiatives will provide a foundation for better profitability in the coming quarters. Sandrine will cover the details later. On the group level, our net loss significantly narrowed to RMB2 million during the quarter from RMB256.5 million a year ago, as we incurred a significant one-time fair value loss during the same period of last year. Excluding the impact of e-commerce amortization and other non-recurrent business factors, our adjusted income from operations was RMB75.7 million during the quarter, of which e-commerce adjusted operating income was RMB118.2 million, and BBM operating loss narrowed to RMB42.5 million. Our adjusted net income was RMB76.8 million during the quarter. Let us turn to a quick full-year summary. We ended 2023 with group total revenue of RMB8.8 billion, an increase of 5% year-over-year. Gross profit totaled RMB6.4 billion, an increase of 4% year-over-year. Our adjusted operating loss totaled RMB23.7 million. Please turn to Slide number four. Turning to our cash and cash flow status, as of December 31, 2023, our cash, cash equivalents, restricted cash, and short-term investments totaled RMB3.1 billion. We continue to improve working capital efficiency through backend process re-engineering on inventory, billing, and cash collection management. Annual operating cash flow and free cash flow were RMB454.5 million and RMB259.5 million, an increase of 19% and 46% respectively year-over-year. Now let's dive into our BEC business. 2023 is a year of transition for our BEC business. At the beginning of the year, we set a strategic objective of achieving customer-centric, high-quality and sustainable business growth for BEC. This guiding principle steered the team's efforts and allocation of resources throughout the year. As a result, we have made progress in the following three areas, as displayed on Slide number five; firstly, the customer satisfaction enhancement. We introduced a Net Promoter Score, NPS framework, in collaboration with Nielsen in 2022. The objective of this initiative is to implement a robust client-service quality management framework, defining precise standards for various services and measuring the outcomes. I'm glad to report that our NPS score has improved from 8.07 in 2022 to 8.23 in 2023. This improvement reflects our clients' growing recognition of Baozun's service and directly contributes to our outstanding contract renewal ratio. In 2023, over 97% of our key account clients chose to renew their contracts with Baozun and I'm pleased that we are well on track to further improve customer satisfaction in 2024. Secondly, we focus on driving business growth through strengthening our omnichannel capabilities and expanding core product categories by participating in high-level discussions. With brand partners and key marketplaces, we helped our brand partners formulate effective omnichannel go-to-market strategies for sustainable e-commerce business growth in China. This enabled us to acquire over 50 new brands in 2023, including Tiffany, Toomey and Dyson, just to name a few. From the product category standpoint, we consistently achieved growth in Baozun's market share within our primary categories of luxury and premium apparel on both Tmall and JD platforms and this has helped us establish a solid foundation from which we will extend our reach into new product categories such as health and beauty and luxury automotive in 2024. Given the dynamic nature of the e-commerce landscape, we are strategically investing in interest and content-based e-commerce. In early 2023, we launched our creative content to commerce division, which included a Shanghai-based live streaming center. This was followed by the announcement of our acquisition of a leading Douyin partner in November 2023. Leveraging our established partnerships, we secured several contracts on Douyin channel with industry leaders like ZARA, TROX, Armani, and Coca-Cola, just to name a few. Thirdly, we continued our efforts in efficiency improvement and cost control. During the year, we established a lean management committee to drive cost control and efficiency improvement. Our middle and back office functions have become leaner and more integrated through process reengineering. We also scaled up regional service centers by transferring approximately 770 new positions into these facilities, generating an annual cost saving of RMB24 million. We integrated more AIGC initiatives through strategic partnerships with industry leaders such as Microsoft and OpenAI, enhancing daily operational efficiency for over 3,000 employees. Our efforts in working capital management have also yielded substantial results, setting new records in both operating cash flow and free cash flow, as mentioned in my financial update. Looking ahead, our primary focus for 2024 remains on executing our business strategy to create high quality and sustainable business growth. We aim to fortify our market leadership position in the luxury and apparel categories, while also expanding into high potential categories such as wine and spirits, health and beauty, and luxury automotive. We believe this will naturally expand our market share and total addressable market in brand e-commerce. We will continue to enhance our omnichannel capabilities. One of our key focuses is Douyin, where we leverage our expertise in daily live streaming in conjunction with Baozun's creative content and e-commerce operating experiences. Following the completion of the acquisition in March 2024, we are now well-positioned to seize more opportunities from our brand partners and to create additional revenue streams for BEC. In addition to Douyin, we are also working closely with VIP.com and Little Red Book, aiming to build an extended ecosystem focused on value for money, content marketing and traffic acquisition for our brand partners. We are also exploring business opportunities in other emerging channels, such as Dewu and Kuaishou. We believe these new opportunities will extend our success across major e-commerce platforms, positioning us for sustainable growth. Lastly, we aim to further grow our high-quality product sales business in 2024. In the past year and a half, we have been optimizing our product sales business model by emphasizing higher quality. When we refer to high quality, we aim for both improved margin and enhanced merchandising and inventory control. As part of this effort, we have elected to terminate certain partnerships where the gross margin level and inventory risks did not meet our standards. In 2024, we have introduced a new business model where Baozun serves as the exclusive distribution partner for a given brand in China. This model entails managing all sales channels both online and offline, utilizing our omnichannel digital technology. We are confident that by applying Baozun's leading data and system technology, we can seamlessly integrate online and offline channels to deliver superior performance compared to traditional distributors. Furthermore, with our product sales business, our self-incubated brand continues to deliver high double-digit growth in beauty and healthcare categories. We are convinced that this new initiative will drive growth in both revenue and profit margin for our product sales business in 2024. Overall, I believe we have established a solid foundation and implemented the right initiatives for our transition. We are confident that we are now on track to strengthen BEC's top and bottom lines while continuing to generate healthy cash flow in 2024.

Sandrine Zerbib, President of Baozun Brand Management

Thank you, Vincent and Arthur and thank you all for joining us today. It is my great pleasure to speak with you. Please turn to Slide number six. As you recall in February 2023, recognizing a golden opportunity to reinvigorate an iconic brand, BBM acquired the operations of Gap Greater China with a clear vision to transform Gap into a lifestyle brand tailored to the modern Chinese consumer. BBM embarked on a journey fueled by innovation and strategic foresight. Our vision was to reinterpret American style for the modern Chinese consumer by localizing key elements of the core Gap brand DNA. We pursued a mission to make Gap products and messaging culturally relevant again in Greater China. The goal was not only to revitalize Gap products, but also to reignite consumer love and loyalty, moving away from a discount-driven model to one that resonates deeply with the aspirations of the modern Chinese consumer. We took over a business which had just closed 86 stores and was plagued by abnormally high levels of discounts all year round and in just 11 months, BBM's multicultural talent and diverse teams, coupled with impeccable execution and technology-driven solutions achieved remarkable results. The transformation of Gap China from a discount-driven brand to a consumer-centric powerhouse is evident in the following as indicated on Slide number seven. First, team systems and processes; we focused on assembling the right team and implementing robust systems and processes to execute our turnaround strategy effectively. This included restructuring, hiring key personnel, optimizing operational workflows as well as putting in place a whole new set of systems to support our business. Then premiumization of the brand; we embarked on a comprehensive strategy to elevate the brand by focusing on product design, product segmentation, supply chain enhancements, and improving store image. Our goal was to break free from the cycle of perpetual discounts and focus instead on appealing to consumers thanks to our products and brand image. We introduced a new locally designed China-for-China product, aiming to deliver the right product for the right people at the right time. We launched the new products with an integrated go-to-market approach, combining celebrity endorsements, new store openings, and social media campaigns. We imposed discount control as the key factor driving the increase in gross margin percentage, which has reached about 1,100 basis points excluding royalty. We also opened our new store concept, which is more boutique as opposed to the previous big box type of concept. We're enhancing the brand DNA, transforming our stores into more than just commercial channels and creating immersive brand experiences. Our stores are now smaller in size but higher in square meter efficiency, optimizing space for a better customer experience. We've implemented scenario-based and serialized co-location of merchandise creating relevant festive atmospheres that resonate with customers. In-store pop-ups and campaigns are generating social buzz and further enriching the store experience for consumers. Leveraging WeChat and OmniCRM, we're gaining insights into each customer and offering seamless engagements beyond the physical store. We successfully opened 10 new stores in 2023 including a flagship destination store in Guangzhou as well as new stores in Shantou, Shenzhen, and Beijing. We've enhanced the retail experience achieving a 50% increase in square meter efficiency for newly opened stores versus the existing portfolio on a full-year basis. Additionally, our existing stores have seen a notable 19% rise in same-store comparable sales. Our new stores have been warmly welcomed not only by our customers but have also gained brand recognition within the retail industry. We are proud to report that we achieved our objectives in these areas within the timeframe. In fact, in some aspects such as gross margin, we not only met but exceeded our 2023 targets. This demonstrates the effectiveness of our strategies and the dedication of our team in turning around the business. In 2024, based on our strengths and foundation, we will continue to build on the momentum to solidify the brand's fundamentals and revitalize growth for the Gap brand in China. While we pursue 2024 top-line growth, safeguarding our gross profit remains paramount. We will achieve this through stringent discount controls and increased special production tailored for our online business. We expect that these efforts, combined with continued control of expenses, will lead us to achieve Gap China's turnaround in 2025 as planned. Lastly, we have completed the acquisition of Hunter's Intellectual Property and established a joint venture with Authentic Brands Group. We now co-own Hunter's IP in Greater China and Southeast Asia, and BBM has become the licensee for operations in Greater China and part of Southeast Asia. Currently, we are in the preparation phase, focusing on tasks like store transfers and product planning. The coming second quarter will be the official kick-off of our endeavors with Hunter. We have ambitious plans for Hunter's growth, including expanding into new categories and diversifying our distribution channels to unlock the brand's full potential in China as well as in Singapore and Malaysia in Southeast Asia. Leveraging our Baozun International BZI business units, we aim to further support and accelerate Hunter's business expansion in this region. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator, Operator

The first question today comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap, Analyst

Hi, thank you. Good evening, management. Thanks for taking my questions. I have two questions. One is, what is the latest consumption shopping sentiment that you have observed over the past two months in 2024? What is management expectation of the macro overall and the consumption outlook for this year? While we think it's still early, so not sure, have you started to plan for this year's 618 promotional festival? What do you expect that could be different this year versus the previous year for the June 2018 promotion period? And then second question is for the BBM business. Just wondering, have you noticed any meaningful difference in terms of the user spending habit? For example, the average purchasing value at the offline store versus what you have been operating, which is the online store, the behavior for the user that you can make some comparison and then if there is an opportunity for you to acquire or add a few more brands to your BBM business, could you share with us your decision-making criteria and what kind of brands that you're most eager to add to your portfolio of management? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Okay, I will take the first one, Alicia, for your question, and then I will pass on to Sandrine to talk about the second one. Regarding the consumption sentiment, I have to say the sentiment is still not recovering very quickly, and the consumer confidence, as we can see, the figures are still very low, but within that, there are some highlight points where we can see some categories have performed actually better; for example, outdoor, healthy food, and nutrition. So those are the spotlight which we have seen some good recovery in consumption. Regarding to 618, we haven't formally kicked off the plan for 618. That will start in May. However, we have already focused on improving daily sales. For example, doing good operation and providing good customer service and trying to engage with the customer, which is trying to build a customer base and get ready for the big promotion in 618 and the difference I have seen for this year is that daily sale is becoming more and more important, which means the ongoing operation from a capability perspective is becoming more and more crucial. So that's for my first question. Sandrine?

Sandrine Zerbib, President of Baozun Brand Management

Yeah, thank you, Vincent. So thank you, Alicia, for your question. So first, the first part of your question is about online versus offline consumer behavior. It's pretty clear that the premiumization progress that I talked about is going faster offline than online. Nevertheless, online, we have also been able to achieve a much better gross margin than previously. So it's a question of cycle and time. Then regarding your second question, we are actually looking at multiple opportunities, but we are being extremely selective with these criteria. The four criteria I'm going to say, which are really the key criteria. The first one is obviously the segment and the category in which these brands belong to. We're looking for brands that are operating in very dynamic segments and there are still pockets of growth which are very interesting in China. The second key criterion is that these brands need to have some true potential to develop in the greater China and potentially Southeast Asian markets. The third one is the synergies with our current portfolio, particularly with regards to supply chain, but not only. It's really a synergetic brand we are looking at and the fourth one is brands that will enable us through the right transaction to act on what has been really key so far to the successful progression of Gap, which is China for China, meaning that we need to be able to work on the product and the second one, we need to be able to really make a digital difference with our technology leadership. These are really the four key criteria for us.

Operator, Operator

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong, Analyst

Hi, good evening. Thanks management for taking my question. My question, first, can you talk about the growth outlook for non-Tmall channels and the contribution to our GMV? And then secondly, as we highlight in the prepared remarks, we are looking into operating efficiencies, improving profitability. So I just want to get some more color about the trend in our operating expenses and our margin outlook. And then finally, please talk about our use of cash and our thoughts about M&A. Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Okay, Thomas, four questions. Yeah, let me take them one by one. The first one, outlook for non-Tmall channel. As I mentioned in my earlier part, our mini channel is a trend and it's a strategy we will follow in 2024. We have put a lot of emphasis on the Douyin and Tencent channel. We also are looking into the new channels like VIP.com and the rest. We believe given the complexity and the evolving of the China e-commerce landscape, omnichannel is becoming more and more important. From several perspectives, our non-Tmall channels have increased, but however, we are not looking at the number by itself. We are looking at capabilities because the capability will allow us to do our mini channel. It doesn't matter where the traffic goes. We will be able to adjust along with the brand very quickly and very easily. So that's the first one. Your second question is about operating efficiency. So from the BEC's perspective, we established a lean management committee looking at how to capture the cost of saving and efficiency opportunities in a very structured way and in that program, we have already delivered very significant savings. So, for example, as I mentioned, our regional service center program has transferred 770 positions from Shanghai to lower cost locations, which generates more than RMB20 million of savings. That's just one of those examples. We have a set of those examples in terms of how to drive the cost of savings. In terms of the BBM, we currently focus on two things. One is from the third-party procurement. We actually put a lot of emphasis to deliver over 30% of saving in terms of the third-party procurement, and secondly, it's the overhead control. When we took over the business, we streamlined the overhead to save money. I will pass on to Sandrine to talk about the gross margin improvement in Gap as well, which also drives the market improvement. Sandrine.

Sandrine Zerbib, President of Baozun Brand Management

Well, for the gross margin, obviously the procurement is an important part of it, as Arthur mentioned, but key all year round has been our absolute control over discounts, so that we really convince consumers to come and see us and buy our products, be it online or offline, not just because they're discounted, but because they are good products with a good brand. So in order to get these results, we had to exercise extreme discipline on discounts, that's number one, but also to bring the right products at the right time in stores, which are more attractive and with the right marketing communication and messaging. This is in order to attract consumers.

Arthur Yu, Chief Financial Officer and President of Baozun E-Commerce

Thank you, Sandrine and on the use of cash and also M&A strategy. So for the cash, as you've seen, because of our high operating cash flow, we keep a relatively high net position. So we will use our cash to deliver shareholder value in both short term and long term. In the short term, as Vincent has announced, the board has approved a repurchase program on our shares, and we will start that program once we have the opportunity and in the longer term, when we're looking into using the cash for M&A, we are very selective under the current market situation. We're looking at targets for both strategic fit and also high operating financial status. In this way, we will be able to use our cash very effectively to drive the longer-term value for our shareholders. So that's my answer, Thomas. Thank you.

Operator, Operator

The next question comes from Wang Zhao with CICC. Please go ahead.

Wang Zhao, Analyst

Hi, good evening and thanks for taking my question. My first question is that you mentioned that Baozun will launch the footwear brand Hunter in Southeast Asia. Could you please share some details about the strategies of Baozun's international business in 2024? And my second question is that could you please share your investment plan in AIGC and how AIGC will be used in the company's business? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you, Wang Zhao. This is Vincent. The first question is about our international business, known as BZI. After nearly two years of effort, we have built a complete team that can provide e-commerce services to our targeted brands. Additionally, we have set up a brand business team, allowing us to offer not just traditional e-commerce services in this region, as we do in China, but also to assist brands with both online and offline omnichannel business in Southeast Asia. This opens up significant opportunities for brands looking to expand in this region. We have established several offices in different countries to support our e-commerce services and brand business. Honda is a prime example of our brand business, as we plan to launch both online and offline stores in mid-year, along with marketing efforts in Singapore and Malaysia. These two countries will be the first locations for our Honda business in Southeast Asia, and we will leverage our experience, data, and technology in this omnichannel approach. For your second question regarding AIGC, I want to address it on two levels. Firstly, across the entire group, whether it's BEC or brand business BBM, we are incorporating AIGC. This means we are using the results from major players like OpenAI and Microsoft to generate various content types, including text, photos, and videos. You can see AIGC capabilities utilized in nearly all functions of our business units. Secondly, we have specific initiatives to allocate more resources toward creating competitive advantages for our business. We're currently in the early stages, working on proof of concepts and minimum viable products, and we hope to make progress this year. Our collaborations with brands, particularly Gap and Hunter, are closer than ever, which we believe will lead to improved results in this area.

Operator, Operator

The next question comes from Colin Shan with CITIC Securities. Please go ahead.

Colin Shan, Analyst

Good evening, management. Thanks for taking my question. I'm Colin Shan from CITIC Securities and I have two questions about BBM. The first is that we saw a significant narrowing of Gap's losses in the past quarters and the offline same-store sales achieved double-digit growth in the fourth quarter. During this process, what progress is better than your expectations and what measures can be further adopted to improve the margin of Gap in the future? And the second question is that in your experience of running Gap, what's a key know-how of fully running an international brand in China's online and especially offline market directly and how would that experience be leveraged in your further operations in other brands such as Hunter? Thank you.

Sandrine Zerbib, President of Baozun Brand Management

Okay. Thank you, Colin, for this question. So on your first question, I think what was a good surprise, really, was the faster improvement of the gross margin than we expected. We had planned for improvement of gross margin. It was actually at the heart of our plan, but honestly, it has been even better and faster than what we had expected. Of course, there is still room to further improve the fundamentals of the business, but still, I think it's important to notice that it's actually the most pleasant surprise, I would say. Now, what room we have to further improve, it's going to be through, obviously, further working on refining products and product segmentation. That's pretty clear, but also by using data. We explained that in the first phase of our work, which was the year 2023, we already did quite a bit of work to change all the legacy systems of Gap China and to bring a new platform of systems, thanks to Baozun technology. Now really in the second phase, we want to go much further in terms of data enabling us to be even thinner in our understanding of consumers and also enabling us to have almost instant reaction in terms of messaging and product once we have this very refined information. So that's for the gross margin. Gross margin also, overall, requires continued discipline. It's a lot about the discipline on discounts and overall, also, regarding our strategy going forward, now I think clearly we want to go back to a growth strategy with more store opening, continued improvement of our store productivity, and a multichannel approach to our online business. So that's for the first part of your question. On the second part of the question, I think in terms of synergies, clearly it's going to be about the product machine, number one, and number two, the systems, but in terms of overall learning from the experience, it's also about how important the teams and the people are in this business. It's all about people and I think this is something we really worked hard to put the right team together and we're quite happy with our team, but it's also about constantly trying to enchant the consumer's experience with interesting stores, interesting stories, interesting products, and this in a time of weaker consumption, this necessary enchantment of consumers is even more important.

Colin Shan, Analyst

Thank you, Sandrine, and very clear for my question about BBM. I have a follow-up question about the BEC, and since the beginning of the year, almost all e-commerce platforms are talking about and emphasizing about the price power and from the perspective of Baozun and from the perspective of brands, how do you view the competition situation of China's domestic e-commerce platforms and did you see any consumption characteristics changes in consumers' behaviour and how would Baozun react to this trend? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Thank you, Colin, that's a great question. We have noticed that there is a greater focus on price points and service levels across various platforms. We see this as a positive development, as it encourages platforms to provide better service to both brands and consumers. From the consumer's point of view, quality remains crucial. A high-quality brand will always attract its market. Value for money does not imply that good-quality brands won't be favored by many consumers. On the contrary, modern technology and the transparency of e-commerce platforms allow consumers to compare options and make informed choices, which drives two key aspects. Firstly, it is essential to define an omnichannel strategy for brands within the current e-commerce landscape, and that's where Baozun can leverage our experience and technology. Secondly, enhancing the online purchasing experience for brands is vital for improving conversion rates, and we can achieve this through our data and technology. With these trends, we believe we're in a strong position, equipped with robust technology and extensive data capabilities, alongside significant experience across various categories. This positions us well to increase our market share in the evolving e-commerce environment.

Operator, Operator

The next question comes from Cheryl Wei with HSBC. Please go ahead.

Unidentified Analyst, Analyst

Hi, good evening, management. Thank you for taking my questions. I'm asking on behalf of Cheryl. So I have a question regarding the product sales segment. We understand that product sales have been under adjustment and some challenges for two years. How should we think about this trend entering into 2024? So is there any chance we can see this segment, the revenue growth or decline can stabilize this year? And what are the key drivers and the challenges here? Thank you.

Vincent Qiu, Chairman and Chief Executive Officer

Yeah. Thank you for the question. For the product sales, first of all, it has already started to see stabilization in quarter one and we will see the product sales revenue as our plan starts to increase from quarter two and quarter three onward. For the full year, we expect to see increased product sales revenue from BEC. From the business management perspective, we put a lot of emphasis on better control of the risk from the product sales. What we emphasize on is two things. Number one is inventory and number two is the commercial terms. We will make sure we rationalize the inventory level to reduce the risk and enhance our cash flow. At the same time, in the negotiation, we will put a strict requirement on our commercial terms to protect our gross margin. Secondly, as I mentioned earlier, we introduced a new business model on product sales this year, which is focused on acquiring the exclusive distribution ownership for a brand. So in this model, Baozun will have full control of all sales channels, both online and offline and using our data and system technology, we will be able to enhance efficiency throughout our system and we believe we will do better than traditional distributors by using our data and technology. And thirdly, as I mentioned earlier, our own incubated brand has seen double-digit growth. In 2024, we expect to see that part will further increase and that will also help to drive the product sales revenue. With those initiatives, we believe we can drive both online and top-line and bottom-line growth for our product sales business.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Sun for any closing remarks.

Wendy Sun, Senior Director of Corporate Development and Investor Relations

Thank you, operator. On behalf of the Baozun management team, we'd like to thank you for your participation in today's call. If you have any further questions, just feel free to reach out to us. This concludes the call. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.