Club Factory rejigs biz model after tax woes trigger sharp slide in volumes

China-headquartered Club Factory has run into rough weather in India, with tax-related troubles hampering the cross-border e-commerce platform’s growth in its biggest market.

Club Factory sources apparel, accessories and lifestyle products from Chinese sellers and offers them to Indian consumers. It made a promising start in India after entering the country in 2016, trumping the likes of Ali Express and SHEIN to occupy the biggest market share in the cross-border e-commerce segment. Apart from its online presence, the firm opened flagship brick-and-mortar retail stores in India while roping in Bollywood star Ranveer Singh as a brand ambassador.

But Club Factory’s volume of orders in India has fallen by more than two-thirds over the last nine months --from 70,000-80,000 in September 2018 to around 20,000 now -- according to industry experts .

Two people who have partnered with Club Factory’s Indian operations told TechCircle that a major factor for the slide in volumes has been the crackdown on the misuse of the “gift channel” that was being exploited by cross-border players to avoid paying custom duty.

According to multiple people acquainted with Club Factory’s business model, the company would buy goods from sellers in China, import them as “gifts” assigned to different people, and then send them within India to the intended recipients.

The Indian government does not impose tax on gifts valued at less than Rs 5,000 sent by non-resident Indians (NRIs) to their family members.

The people cited above said that Club Factory had declared lower values for products. TechCircle has reviewed some samples of actual orders delivered as recently as last month.

According to community engagement platform Local Circles, the Union government’s Department for Promotion of Industry and Internal Trade (DPIIT) had convened a meeting last November to discuss the misuse of the gift channel.

A subsequent clampdown by the customs authority in Mumbai on such shipments led to a 60% decline in volumes for Club Factory, said LocalCircles CEO Sachin Taparia.

“We have written to the DPIIT on April 3 with regard to shipments arriving at other ports including Bengaluru, Kochi, Delhi and Chennai and through the India Post channels,” he said.

In addition, Club Factory did not use the services of any “importer of record”, typically an Indian seller or merchant who will be liable for paying the necessary duties, filing legal documents as well as levying the Goods and Services Tax (GST) on shipments dispatched to buyers.

“Many of the orders which were returned were re-sold without accounting for GST. There was a clear violation of foreign direct investment (FDI) norms,” one of the people associated with Club Factory told TechCircle on the condition of anonymity.

When contacted, Club Factory refused to address specific queries.

“We can’t comment on rumours and false information. Our business in India complies with local regulations and we have strict measures in place to take action against sellers who might violate any local policy,” said a Club Factory spokesperson.

“We look forward to working with key stakeholders to make Indian e-commerce a thriving industry and drive benefits to consumers and SMEs. We are currently witnessing very healthy growth in India,” the spokesperson added.

Overhaul

Stung by the sharp slide in volumes, Club Factory has been making attempts to rejig its business model.

In September last year, Club Factory created two Indian entities -- Globemax Commerce India Pvt. Ltd followed by Globemax Technology India Pvt. Ltd, show filings with the Ministry of Corporate Affairs. The two companies are incorporated as wholly-owned subsidiaries of Hong Kong- headquartered A2Z Trade Ltd, the registered entity of Club Factory.

Club Factory founder and CEO Vincent Yun Lou is a shareholder in both entities. A2Z holds shares worth Rs 1 crore in Globemax Technology, while its shareholding in Globemax Commerce is valued at Rs 2.9 crore.

According to the people TechCircle spoke with, Club Factory now sells products brought in by A2Z Trade to multiple sellers on its platform through Globemax Commerce. These sellers then list the items for sale on the Club Factory marketplace. TechCircle reviewed five such sellers across multiple categories on the platform.

This practice is along the lines of entities created by e-commerce retailers which have been under investigation by the Competition Commission of India for allegedly providing an unfair price advantage to such sellers.

Independent analysts and industry observers TechCircle spoke to said that the overhaul of the company’s business model indicated that Club Factory was looking at India as a serious market with an intent to comply with the regulations.

“We will see a comeback from Club Factory with better compliance and new sellers on the platform,” said Satish Meena, senior forecast analyst at market research firm Forrester Research. “They played a significant role in the online fashion commerce and are likely to invest more to be in the market for the long haul.”