In our previous article, we explained why China’s e-commerce has reached unprecedented levels of complexity and sophistication, presenting both an opportunity and a challenge for international brands developing a commercial strategy for the Chinese market.
At Battaglia Advisory Services, we developed a framework aimed at guiding the definition of any e-commerce strategy for China. In the market, each relevant e-commerce player can be described across three dimensions: Product Category Focus, Business Model and Border Status.
China e-commerce framework
Source: Battaglia Advisory Services
Product Category Focus
Simply put, an e-commerce platform can be narrowly focused, specializing in selling few specific product categories; these are often referred as “vertical” platforms. Conversely, some players have a broader focus, acting as generalists who sell virtually any kind of merchandise; these are also known as “horizontal” players.
The two most famous online marketplaces in China, Tmall and JD, who command a combined market share of 75%, can be both considered generalists. On the other hand, other players specialize more on precise product categories: for instance, Jumei is a leading player in cosmetic products and Vip.com is focused on luxury goods. Nowadays, most product categories have their own specialized e-commerce players. Shades of grey exist too: while some players are pursuing a generalist strategy, due to their heritage they are still viewed as stronger on a specific category. An example of this would be Suning.com, which covers many categories but is considered truly strong in appliances and electronics.
Should a brand focus on generalist mainstream platforms or on the more specialized ones? The two solutions are not mutually exclusive, as long as each platform is leveraged to achieve the overall market goals. They both come with their set of strengths: while large generalist platforms might have larger traffic numbers, specialist players usually allow brands to tap into a more qualified user base. If the brand is still relatively unknown or niche, it might be ignored by users of the larger generalist marketplaces, and probably the brand would achieve better result by concentrating its efforts on specialized platforms. On the other hand, having a flagship store on a generalist marketplace like Tmall is often viewed as a stamp of quality by consumers who are just getting to know a brand, and the flagship store becomes a fully controlled environment for the brand itself to communicate its value proposition to a wide base of potential consumers.
In terms of historical trends, major players grew into their current dominating position by enlarging the number of product categories offered. After a few years of consolidation, the pendulum has started to swing back: consumers are becoming more and more sophisticated, more innovative business models are popping up, so the market has seen a surge of more specialized players, especially in sensitive categories such as Baby Products, Beauty, FMCG. Even the generalist players made specific investments to create their own specialized sub-platforms (e.g. Tmall Supermarket, which focuses on FMCG products sold directly by Tmall).
Business Model
The second dimension that strongly characterizes an e-commerce platform is the business model, in particular the relationship between the platform, the merchants and the consumers. With the progressive development of the industry, many different business models have been popping up and China now sets a global standard in terms of variety. While a few of these models are not directly relevant for international brands, it is important for brands to be aware of the existence of such models, how they are used by consumers and how their presence impacts the brand itself.
C2C marketplaces, namely Taobao, are e-commerce platforms in which shoppers can purchase goods from other individuals or small businesses. While branded goods can be bought through C2C, such transactions happen outside of the official control of the brand since these goods are typically sold by unauthorized resellers. C2C is historically becoming less relevant for consumers but it still plays a role.
Nevertheless, keeping an eye on C2C is still very important for brands: for instance, C2C can be viewed as a leading indicator of the awareness surrounding a brand and the Chinese consumers’ appetite for it. A fitting example is the story of Calzedonia, a leading Italian hosiery and underwear brand. Initially only distributed through physical stores in Hong Kong, the brand had also become popular in Mainland China thanks to social media influence. Calzedonia did not have an official presence in Mainland China (neither online nor offline), so consumers resorted to purchase the goods from Taobao “daigou” sellers, who were sourcing the goods by purchasing them from the official Hong Kong stores. After a few years, confident that Chinese women liked the brand, Calzedonia entered Mainland China, with an online “Flagship Store” on Tmall and offline presence, redirecting the consumer attention towards the official sales channels and essentially smothering the Taobao “daigou” business.
Front page of Calzedonia official flagship store on Tmall
Calzedonia’s story promptly leads us to discuss the business model with the highest relevance for international brands: B2C. In B2C, the brand itself, or an authorized re-seller, operates a “flagship store” in the online marketplace. The most famous marketplaces are the already mentioned Tmall and JD. A very large number of international and Chinese brands and retailers have established storefronts on Tmall.
Other models are emerging too: social commerce has been particularly hot in the recent years. Consumers have plenty of options such ranging from Weidian, “C2C online shops” that run on WeChat, the most popular messaging mobile app in China, and that rely on digital word-of-mouth to sell and promote goods, to Xiahongshu (“Little Red Book”), China’s alternative to Instagram, an hybrid between an online community and e-commerce.
Xiaohongshu is a prime example of a “vertical” player with a very unique business model. Every day, its users add over 100,000 new posts related to products, such as opinions, recommendations or reviews. It has embedded e-commerce functionalities, but mainly positions itself as a place for people to discover new brands, discuss their preferences, and share opinions on products. Users are mostly women in the age bracket 18 to 35, and over 70% of users are Chinese Millennials; it is logical that beauty and luxury brands now consider monitoring Xiaohongshu’s a top priority. Much like on Instagram, China’s movie stars, influential bloggers, and other internet celebrities have a presence on Xiaohongshu: they have their own profile page, can create posts and be followed by other users. This creates a community where online shopping is driven by the trust generated by the sharing of ideas, opinions, bargains and product recommendations. With the right endorsements and the viral effect of user word-of-mouth, a brand can go from obscurity to fame in a very short time.
Xiaohongshu can be used to follow other users, who are often KOLs or Celebrities, discover more about specific interests, brands or products, and seamlessly shop all from one App
Pinduoduo deserves a special mention too: it has pioneered a business model so innovative that captured an estimated 7% of all retail ecommerce sales in China in 2018, an impressive feat considering the strengths of the incumbents and the fact that Pinduoduo was launched just in 2015. Pinduoduo’s depends on its users to leverage their social networks to drive sales conversions. The more friends and family a shopper can get to buy a product offered on Pinduoduo, the lower the price drops for everyone in the group. Pinduoduo literally takes “guanxi”, a system of social networks that defines Chinese society and business, into the e-commerce dimension.
Pinduoduo’s rapid success had lot to do with mobile adoption and the omnipresence of WeChat: Pinduoduo users can easily share product listings on their WeChat “Moments” (a stream of posts only the user’s own WeChat connections can see, similar to a Facebook Wall) and users can also access Pinduoduo within WeChat via a “mini program”, instant apps that do not require users to download anything from an app store. Pinduoduo’s usage has been compared to an addiction by some, due to its large number of gamification features, such as rankings of users who have obtained the most kickbacks for recruiting friends to make a certain purchase. Nevertheless, while Pinduoduo has carved a sizable market share, so far it focused mostly on offering low margin, cheaper goods that are in high demand in lower tier cities and rural areas, where people generally have lower disposable incomes than those in larger cities. It is now facing the typical growing pains of every Chinese e-commerce player growing in scale, such as claims of selling counterfeits, and will have to consolidate its advantages into a sustainable business model.
Border Status
The last defining characteristic of an e-commerce platform in China is its border status. People often believe that any e-commerce platform selling imported goods in China is a cross-border player, while this is not correct. What really matters to the definition is where the products physically sit before they are purchased by customers. A platform is considered to be cross-border if the goods sit abroad, or in one of China’s Free Trade Zone warehouses and they clear customs only after an order is placed by a consumer. Major e-commerce players created their own cross-border counterparts (Tmall Global and JD Worldwide). However, specialized cross-border platforms emerged too, especially for those product categories deemed more sensitive in terms of product origin, such as cosmetics, luxury goods, baby products.
Kaola, launched in 2015 by NetEase, has quickly become China’s number one cross-border e-commerce platform. Initially focused on a narrow set of categories, it now carries over 5,000 brands from 80 countries, covering apparel, maternity and infant care, household appliances, personal care, and health care. Kaola’s business model veered away from the more established B2C marketplace framework adopted by Tmall Global; instead, Kaola buys products from suppliers abroad at a discount, and directly stores, sells and delivers products to its customers. Top brands are however allowed to sell on its platform through a marketplace model.
The opportunity offered by cross-border e-commerce to international brands is obvious: brands can reach Chinese consumers and achieve sales while minimizing direct upfront investments. For instance, a cosmetic-goods brand does not need to submit its products to Chinese authorities for registration and approval as long as they are sold through cross-border. Therefore, cross-border was initially viewed as a flawless solution: tapping into China’s growth and generate revenues with virtually no investments and no risks. While this is theoretically true, the idea really works sustainably only if the brand already enjoys some kind of reputation or demand in China; unknown brands cannot hope to achieve significant results just by setting up a cross-border operation and skimping on communication investments. This rule is valid for all forms of retail sales channels, but the pitfall is very relevant for cross-border due to the intrinsic detachment between the brand and Chinese market.
Applying our framework to understand e-commerce:
Let’s say a Chinese shopper is in search of basic supplies, such as a bottle of shampoo. Where could she buy it online?
She will have many different options:
- Having a specific brand in mind, she could buy it from the brand flagship store on Tmall; while she is at it, she might find out other products from the same brand, or a new fragrance she has not tried before;
- She could buy it together with other products, and therefore purchase it from a “Supermarket” platform such as Tmall Supermarket or Jingdong Supermarket, which offer next day delivery for free with a minimum total purchase of as little as 80 RMB (about 12 EUR); or she could need it so urgently that she might rely on an O2O solution like HemaFresh (now known also as Freshippo) that can deliver to her within 30 minutes, often for free;
- She might take a group deal pushed by a friend on Pinduoduo, or initiate one herself;
- She could be casually browsing Little Red Book and read an article about the beauty care products used by her favourite actress, and right away buy the shampoo mentioned there;
- She could have a more specific product in mind, which could also be found at a better price from sellers that specialize in beauty care, such as Jumei.
Common in-border options
Source: Battaglia Advisory Services
For the sake of the article length we have to stop short but it is evident that the amount of options is staggering, and we have not even touched cross-border e-commerce.
What if the same Chinese shopper travelled to Japan three months earlier, and during her stay at an Airbnb fell in love the shampoo provided by the landlord, then bought a bottle and brought it back to China, but now she is running out of it? Where can she buy a new one, since the brand is not distributed in China? Well, a rich universe of cross-border e-commerce solutions comes to her rescue.
Common cross-border options
Source: Battaglia Advisory Services
Conclusions
By looking at our framework, it is evident that any combination of elements is possible. Brands at different levels of maturity can adopt different kinds of commercial strategies.
For a brand new to China, cross-border is the typical entry point: lower investments and lower risks make it a safer way to experiment. The preliminary results can be reviewed to understand what kind of product the market wants, and decide how to direct future investments.
A flagship store on Tmall is more or less a standard best-practice for any consumer brand. It allows the brand to directly communicate its value proposition, to achieve better margins, reach consumers faster, scale up on volumes, and finally to partake into the annual festivals that drive sales as well as awareness. All in all, having a storefront on Tmall is also considered a mark of quality by consumers. Cross-border can be kept going as a way to test new products or brands before promoting them into the in-border channel.
Last but not least, smaller niche brands should also consider the growing importance of social commerce platforms such as “Little Red Book”. Platforms that offer a mix of e-commerce and grassroots opinion sharing are definitely representative of where China is headed in terms of online business.
In conclusion, it is becoming progressively harder to distinguish the “e-commerce channels” from the “communication channels”, and vice versa. Chinese consumers learn and shop online in a continuous and seamless way. Nowadays, any successful strategy to reach the Chinese consumer covers all angles from the very beginning. In our next article in the series, we will discuss more about the most relevant communication channels and in particular how KOLs and Influencers represent a significantly more relevant channel in China than they do in the Western markets.