Medium Power: Reshaped China Consumption

Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.

Television was once a new technology that seemed to be destined to remake every aspect of popular culture. The launch of Internet likewise reshaped the culture industry, with people suddenly having many more channels through which to explore the world. As traffic becomes ever more diversified, so people around the world have acquired changeable tastes in stars and idols. China's web users have followed suit, unleashing countless celebrity careers and many unpredictable trends. 

The same story goes for the consumer goods market. In the past, the offline channels provided the key for consumer products. Whichever brand ruled the offline market, like Starbucks or Coca Cola, ruled the entire market. However, over the past decade, the diversification of and changes in the main media channels have reshaped the market. We have seen fresh blood generated through the Internet; previous giants no longer hold the absolute advantages.

 The arrival of Taobao opened a new era for the consumer goods industry in China. Many small merchants are now able to sell products without facing geographical limits. T-mall, a subline of Taobao that only focuses on brands and authentic products, provided a real ‘channel dividend’ whereby tons of new brands sprang up online. Three Squirrels, for example, an Internet-incubated snack brand, caught the dividend wave and became a leading company in its sector with sales over CNY 10 billion and a market cap of over CNY 30 billion. 

Since 2018, a new form of medium revolutionized the market again. The content platforms like Douyin (the Chinese version of TikTok), Xiaohongshu, a life-sharing platform and Kuaishou, another short-video platform, reformed the consumer good market in China. 

Another way to look at this transformation is from the marketing format. From texts, to pictures, to videos nowadays, it has been easier for companies to advertise through the Internet to approach the best customers. 

A war for a new medium is on

China has a large consumer base – but the aggregate spending power can't compete with many other countries. The content platforms have been digging out the potential of this huge market over recent years, counting on the high traffic dividend. Many small brands had no fans before, but can now be presented through content platforms, which disseminate powerfully to multiple times the number of fans. Before, brands had to spend large amounts of money to advertise on television, while now even with little to no investments they can market through those platforms, as long as they have products that are able to attract customers. 

Also, different content platforms are focusing on different products. For example, short- video platforms are most suitable for cheaper stuff; you can make quick decisions after watching the video. The more similar videos you watch on the platform, the more it recommends, and the more you buy. The high efficiency circle from marketing to buying has helped many small brands to reach out to potential customers and turned them into real ones. 

Platforms like Xiaohongshu, the life-sharing community, has people actively showing some products and services that need more personal experience and research. By discovering the close relationship between life and consumption and successfully connecting them, it significantly increased the decision speed of customers.

What is more, the live-streaming, another popular way of marketing, is stimulating your desire of consumption. It serves like an online sales assistant, one who tries products for you and guides you to buy. Especially when everyone in the room seems very actively purchasing, you are easily infected with the atmosphere.

The customers are not only the receivers, but also the 'infectors'. They are becoming the central part of disseminating contents, producing multiple waves of propagation. The new term of 'Prosumer,' the combination of producer and consumer also indicates that a new era of a more integrated consumer goods world is here. A battle that sees competition among brands to take over more space in the new mediums is on.

More entrants showing up: from 0 to 10

No doubt that the new media platforms have lowered the barriers to entry into the consumer good market. Developing from 0 to 10, the Internet medium stimulated the most.

Perfect diary, a domestic cosmetic brand in China, was one of the first small brands that benefited from the growth of Xiaohongshu through short-video and livestreaming on the platform, with the influence achieved through accessing Z-generation Chinese users. Those content platforms do not gather traffic via several large bloggers – instead, they use ‘labels’ to sort and recommend any related contents from any small bloggers, which provide wider but more precise reach-out possibilities. 

Another logic change is that new brands are not seeking to beat competitors in every single way, instead, they are trying to build one or several best-sellers that are differentiated, to expand the brand influence. The recommendations on the Internet have become more precise and narrow. Similar product recommendations are replacing brand recommendations. Therefore, if just a small number of products from a new brand can attract customers, the brand can stand out.

What is more, a large amount of the low-consumption population in China has been discovered. Like the 'prosumer' we introduced, Pindouduo runs a model whereby the consumer serves as part of the product dissemination scheme on the Internet, and therefore it has explored a huge number of potential customers. Many investors did not believe these consumers ever had much spending power. Also, from the cooperation with Kuaishou, the short-video platform which is also the biggest competitor of Douyin, Pinduoduo has dug over 800 million users, even surpassing Alibaba.

Filling the vacancy: from 10 to 100

Apparently, now, the platform-based traffic dividend is at a very late life stage. 

Carving up the remainder

After more entrants rushed into the sector, large companies wanted to get this gold and maintain their positions. For example, many international brands are also waiting in line in the Li Jiaqi studio, the top livestreaming anchor in China, such as Estee Lauder and Chanel. Li Jiaqi is no longer an unknown anchor, and livestreaming is now one of the most profitable industries. This is a sign of small and new brands losing this dividend; in other words, the traffic dividend on Internet is not going to push you go any further.

This previous vacancy is being filled and no one can leverage this dividend anymore. Admittedly that it did help many new brands achieve something from nothing – but going from being just something to actually being big will be a challenge. Especially, large amount of inventory accumulated during the pandemic is one of the reasons that merchants and brands are willing to seek livestreaming selling with huge discounts provided. We believe the discounts might soon not be that attractive in the post-COVID period. 

An integrated world?

The emergence of those new medium-based marketing modes is partially contributed by the gaps and barriers between e-commerce and traffic platforms. The e-commerce platforms have no access to the large traffic pools and the traffic platforms have a limited ability to build their own e-commerce systems. Pinduoduo is one of the representatives of companies that benefited from this and succeeded. Tencent was not able to cast another huge e-commerce ecosystem to compete with Alibaba’s Taobao, and Pinduoduo needs traffic to expand the business. Finally, the cooperation between Pinduoduo and WeChat solved the issue. This huge gap was filled and equipped Pinduoduo with a massive traffic pool that Alibaba cannot access. 

However, this is not everything. Xiaohongshu has created its own e-commerce platforms, with the links inserted into the content sharing posts. It is splitting the market with the giants by dividing traffic. Weibo, the Chinese twitter, cooperated with Alibaba years ago, becoming interlinked on both platforms, destroying the 'bridge business' of content platforms. The result of which was that the content platform that purely focused on bridging this gap died at the time.

Currently the content platforms still serve as the traffic support; they are not likely to build their own e-commerce systems yet. As long as this gap still exists, the content platform-based consumer marketing mode will go on, e-commerce platforms will have to continue seek outside helps for products promotion. The thing is, we are not sure how long it will take this gap to be filled, and how it will be narrowed down.

What's next?

The good thing is, the market will be fairer. Before it might have been difficult for us to distinguish a real competitive brand as it could be benefiting from the dividend, but now the good brands will stand out by themselves. Parameters like contents, customers’ demands, channels, supply chain, are all going to mutually decide if a brand or product can break out. 

In 2020 and before, investors chose companies from a traffic dividend perspective – now the logic needs to change. Good brands need to start with products, which are able to sell themselves and therefore acquire more customers. The increase in the customer base will benefit the supply chain system and lift productivity afterwards, which will therefore support and feed further on the cycle. This virtuous cycle is investible.

Dividends are always time-sensitive. From now on, the investments will focus more on whom can understand the customers' needs and draw that circle with long-term vigor.

EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.