Yuelin (阅邻), a secondary-hand book trading platform, has recently announced completion of its Series A+ round of funding, raising over CNY 100 million (USD 14.2 million) from a private investor: Huang Wentsai (黄文仔), Chairman of Star River Group (星河湾地产), a luxury residential property developer.

Previously, the company completed three rounds of financing. In September 2017, it received CNY 2.5 million (USD 360,000) from angel investor Unity Ventures (九合创投). Afterwards, in 2018, the second-hand books marketplace advanced its business through two subsequent rounds – pre-Series A in May, Series A in August – securing tens of millions of yuan in each, led respectively by 36Kr (KRKR: Nasdaq) and privative investor Lee Pui Man, senior general manager of Henderson Land Development (恒基兆业地产, 0012:HK).

The business model

Founded in 2017, the Beijing-based company is amongst the first batch of projects incubated by the Peking University Global Center for Innovation and Entrepreneurship (北京大学全球创新创业中心).

In the beginning, Yuelin, initiated by Cai Wenyuan (蔡文源), was developed from solving the inconveniences in the trade of second-hand textbooks among students at Peking University, after the ‘Weekend Book Fairs’ in the campus were been shut down. At that time, it was only a Consumer-to-Consumer (C2C) textbook trading platform based on a WeChat mini-program.

With repeated iterations, Yuelin now operates under a Consumer-to-Business-to-Business (C2B2B) model. Put simply, it collects books from customers and sells them to businesses.  The company has now set up recycling points and warehouses in more than 1000 universities and colleges across China.

Books to be sold can be picked up directly from users’ hands by recycling staff. Meanwhile, Yuelin is also cooperating with logistics firms, such as Cainiao (菜鸟物流) – launched by Alibaba Group (BABA: NYSE) – and SF Express (顺丰速运, 002352:SZ), to improve its logistics efficiency. Currently, the second-hand books recycling solution provider has signed 200 service points of SF Express as its book recycling points.

The prices of the used books that users sell to Yuelin is uniformly determined by the platform, based on its self-developed ‘Mofang System’ (魔方系统, literally ‘Rubik’s Cube System’), incorporating big data and cloud computing mechanisms. The reason that the company is able in solve the universal problem in a secondary-goods trading market where pricing is difficult to standardize mainly lies in two aspects:

• First, books form a relatively standardized category that is easy to price. Each book has its globally unified International Standard Book Number (ISBN), and one ISBN only corresponds to one publication. In addition, compared to luxuries and Computing, Communication, and Consumer (3C) products, it is considerably simpler to identify whether a book is authentic or not and assess its level of damage.
• Secondly, the ‘Mofang System’ leverages big data technologies effectively. It is a Software-as-a-Service (SaaS) system that enables standardized pricing for each Stock Keeping Unit (SKU) of used books. It works through gathering relevant data and information from the dominant e-commerce platforms – including Average Selling Price (ASP), comments and Inventory Turnover Rate (ITO) – besides, book reviews from mainly community sites like Douban (豆瓣) along with the demand situation of thousands of second-hand book dealers in the system, will also be incorporated.

Apart from solving the pricing difficulties in the second-hand book market, the ‘Mofang System’ can also help the dealers in improving the efficiencies of their operations. In the past, second-hand bookstores often opened stores on multiple e-commerce platforms in order to boost sales; however, the data on each platform could not interact with others, so this give rise to the serious issue of arbitrage. Yuelin’s SaaS platform, however, enables order synchronization across different platforms, which can – to some extent – eliminate the problem.

At present, Yuelin is cooperating with 1,600 schools and has five million active users on its platform, and it receives 20,000-30,000 sales order per day on average from book dealers. As of June 2019, its monthly sales had reached CNY 10 million (USD 1.4 million); according to the company, it is expected to realize an annual revenue of CNY 80 million (USD 11.4 million) in 2019.

Furthermore, Yuelin is currently expanding its business to cover multiple categories, including 3C products and clothing. The two categories have the highest trading volumes in the second-hand goods market. Meanwhile, existing standards in the field make the prices of the products easy to normalize.

Since August 2019, the company has also extended its operations to offline – not only expanding from the campus to the community, but also started its ‘to consumer’ business – which is named the ‘Yuelin Recycling Store.’

Yuelin is expected to open ten thousand offline stores across China in the next three years – according to Yang Yuhuan (杨宇欢), Co-founder and COO of the company – more than 80% of stores in which will be located in communities. Mr.Yang considers this kind of store to become one of the basic service infrastructures among residential areas in the future, which also explains why real estate players are interested in investing in the company.

The counterparts

At present, players in China's second-hand book trading market mainly focus on serving consumers, operating under either a Consumer-to-Consumer (C2C) or a Consumer-to-Business-to-Consumer (C2B2C) model. On the other hand, Yuelin is currently the only startup – which has only now begun to take shape somewhat – concentrating on serving the business side.

C2C players represented by Xianyu and kongfz.com

The C2C model is the primitive form of online second-hand trading, where the service provider only sets up channels for buyers and sellers to directly dock between each other, i.e., the platform hardly participates in the transaction process. The buyer has room for bargaining, and the strike price is the result of negotiation between the two parties.

The model enhances the social function of the platform; however, the free trade between users gives rise to problems such as high pre-sale communication costs, agency problem causes by information asymmetry, a lack in after-sales services and relevant rights protections.

On the other hand, operating a used book trading business under a C2C model is also a tough business for the platforms. In particular, it requires them to have the ability of maintaining a high Monthly Active Users (MAU) level – in order to sustain active transactions among users in the low frequency and low Average Selling Price (ASP) second-hand books trading scenes – and to build the credit system among users.

Therefore, Xianyu (闲鱼) – the second-hand goods platform of Alibaba Group – did not position books as a major category in its business, even though it has an absolutely dominant power in the market, recording an average MAUs of 58.1 million in Q1 2019 according to QuestMobile. Similarly, Kongfz.com (孔夫子旧书网) – one of the first vertical used books e-commerce platforms, founded in 2002 – currently focuses on out-of-print ancient books with high ASP alone.

C2B2C players, represented by Duozhuayu

Noticing the problems of the traditional C2C business, Internet entrepreneurs initiated a C2B2C business model by enhancing user experiences via deep engagement and guiding the trading process between users. In the model, sellers trade their books to the platform, where services include door-to-door pick up, sterilization, plastic-wrapping and uniform pricing are provided. The platform then sells the treated books to buyers.

However, while the C2B2C model improves customer satisfaction to some extent, it also transfers most of the costs to the platform. This asset heavy business model also relies on the platforms having strong ability in operations – especially in perfecting multiple systems such as warehouses, cargo inspection and packaging – which requires continuous investments in the beginning. Besides, smooth operations under a C2B2C model are still largely influenced by the number of MAUs on the platform – and basically, it is a universal problem for every second-hand books e-commerce platform, regardless of the business model.

Founded in 2017, Duozhuayu (多抓鱼) is the first company to operate with the C2B2C model. Late entrants like Zhuan Zhuan YouShu (转转有书) – a book sub-site of Zhuan Zhuan (转转), which is the online used goods marketplace backed by Tencent (0700:HK) – and Pandacase (熊猫格子), also apply the C2B2C model.

The industry

Currently, the traditional C2C model in China's secondhand books trading market is encountering development bottlenecks. High logistics costs and low-frequency demand from buyers have limited its category’s expansion and the engagement level of users to a large extent. While in a C2B2C context, most players apply a purely self-run model, which is hard to scale up in an early stage.

The C2B2B model that Yuelin employs shows a solution to the above issues somewhat. In the sense that through selling to the book dealers in bulk, it operates under a relatively asset light approach, which efficiently eliminates the problem of excessive loads in warehouses that the ‘to consumer’ players frequently meet, and considerably increases the turnover rate.

The printed book retailing market in China has always been a field with steady growth. Its size reached CNY 89.4 billion (USD 12.7 billion), representing a year-on-year growth of 11.3%. Besides, according to China Audiovisual and Digital Publishing Association (中国音像与数字出版协会), the market size of e-books was CNY 25.4 billion in the same year (USD 3.6 billion), which suggests that its impact on printed books is somewhat limited.

China’s second-hand goods trading market has also witnessed smooth growth. As of Q1 2019, its market size had reached CNY 202.5 billion (USD 28.8 billion), according to iiMedia Research (艾媒咨询).

Meanwhile, investors also started to turn their eyes on the opportunities in this market. With eight investment events taking place in 2018, players in the field raised a total of CNY 1.3 billion (USD 184 million) during the year.

In this case, it follows intuitive logic that the field of online used goods e-commerce is enjoying broader commercial space at present. However, there are still headwinds at play.

The efficiency of second-hand goods transactions is largely affected by economies of scale. Specifically, the number of SKUs on the platform depends on the number of active sellers, and its profitability relies on the number of active buyers as well as the turnover rate of books.

Therefore, the ability to acquire users and keep a relatively high engagement rate are central issues relevant to the survival and success of the online used books trading platforms in China.

However, in an age wherein the acquisition cost per user has rocketed for most of the e-commerce players, and startups need to earn credits and build their reputations among consumers, there still seems to be a long way to go for the used books entrepreneurs.