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Analysis EO
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Analysis EO
Aug 31, 2020 09:56 am ·

Xiaohongshu Leads Lifestyle for Younger Generations by Using Special Strategies

► Xiaohongshu will play an increasingly important role in the cosmetic market. ► B2K2C model is becoming popular in e-commerce platforms. The makeup industry is recovering and Xiaohongshu is leading the way Whatever the negative direct influence of COVID-19, sales revenue in the cosmetics industry decreased a lot from January to March this year – however, the revenue has been recovering steadily and speedily since April, with figures showing that the industry is still booming. A recommendation and promotion strategy based on social media is playing a very essential role in the makeup industry. And Xiaohongshu utilizes its UGC platform, focusing on lifestyle choices among younger generations, to accumulate large product-specific fan bases.   With the mission of ‘Inspiring Lives,’ Xiaohongshu is a social media platform that blends e-commerce, shopping, UGC, and reviews. User can record their lives in the form of short videos, pictures, and words. They can also interact with each other based on interests like beauty, fashion, travel, fitness, food, and many other aspects. Accordingly, Xiaohongshu has become a social media platform that promotes online shopping specific to the beauty makeup industry. Financial situation Xiaohongshu has raised a total of USD 417.7 million in funding over 7 rounds. Their latest funding was raised on Jun 1, 2018, from a Series D round – the company’s estimated revenue range is from USD 500 million to USD 1 billion. As it shows in its funding history, the latest funding type was a series D which was conducted by Alibaba. And this transaction has meant a lot for both sides. Firstly, Alibaba wanted Xiaohongshu to become one of its ‘flow pools’ while Xiaohongshu would utilize Alibaba’s platform to realize content profitability. Also, Alibaba would like to apply the recommendation and promotion strategy of Xiaohongshu for its operation, since the current trend of e-commerce is to increase revenue by the management of KOCs (key opinion consumers), which is the advantage of Xiaohongshu. Lastly, Alibaba can use Xiaohongshu to advertise its products which can increase exposure to specific consumers. Therefore, the cooperation between Alibaba and Xiaohongshu is not as simple as a funding round. They help each other to improve the business model to the next level. Why is Xiaohongshu so special? 1 B2K2C Because of the community feature and Xiaohongshu has creatively developed a consumers-brand influence model by a closed B2K2C loop. In Xiaohongshu, different beauty makeup firms will attract key opinion consumers who can make influences on general consumers. Then these KOCs will share their true experiences of using these products with general consumers. With time going by, key opinion consumers can build trust between themselves and general consumers. And those general consumers are more willing to buy products recommended by KOCs. In the closed-loop of B2K2C, brands establish public praise through the real experience and sharing of KOC to influence more consumers. Users share consumption experience and then reverse influence the brand and other users, thus making it possible to form a positive cycle. KOC has become the most important and special part of this business model. Firstly, KOCs themselves are consumers. The content they share is mostly their real experiences which can be more trustful for general consumers. They have closer relationships with general consumers. Usually, they share more life-related stuff instead of concentrating on specific characteristics of the products like a professional sale, enhancing the sense of truth for KOCs which gives them more power to influence others. Additionally, KOCs can start a topic in interesting and creative ways. Nowadays, everyone can be a talented creator based on special thoughts and different experiences. KOCs deliver content by utilizing interaction, questions, songs, and other fun diversions – which shows the diverse, explosive power of social propagation. Lastly, KOC strategies are more cost-efficient. The KOCs are not stars or professionals. They are like us, but with interesting content to share – and they can promote stickiness and loyalty among users by establishing trust. 2 Break the circle Just like its mission statement – ‘Inspiring Lives’ – Xiaohongshu has not limited itself to just the makeup industry, which is its best-managed part now. It is heading towards multiple lifestyle-related topics and content, from music to study. All of these show the current popular lifestyle trends among young people. Recently, Xiaohongshu launched its newest recommendation area – travel. And its defined position in this industry is the tourism decision-making platform which is clearly based on its biggest advantage of recommendation and promotion. With the rapid development of the Internet and 5G, Xiaohongshu thinks a short video, a picture, a description in words, a movie, and a TV show all could trigger a trip. The flows of tourists are spread across many channels. Xiaohongshu wants to gather all these channels to its platform. However, after recommendation and promotion, all of the services will be undertaken by related companies. Xiaohongshu’s breaking through its circles is strengthening its mission and showing its future direction – which is to make full use of its strong recommendation and promotion ability to illustrate the popular lifestyle trends among young people. 3 Collaborate with national brands Although European & American beauty makeup brands dominate this market, the growth rate of national brands has increased much faster than other brands, with 65.9% YoY. Also, many novels and unique national brands have performed astonishingly in the last year. In 2017, the Perfect Diary carried out a round of marketing on Xiaohongshu. Through refining brand stories, more than a dozen KOLs shared the related content. A month later, the notes of the Perfect Diary rose to three or four hundred, among which only about a dozen were the official contents of the brand. Xiaohongshu revealed that, in 2018, the daily average revenue was more than CNY 20,000. As national brands enter more consumers’ lives, national brands can accomplish more with qualified products and effective campaigns. Accordingly, Xiaohongshu could be one of the best channels for national brands to advertise their products and brands. Future expectations for Xiaohongshu Based on current trends, it is plausible to believe that Xiaohongshu would go further to expand its community to every topic in lifestyle based on its recommendation and promotion advantage. For its makeup business, it would be more like the business model of Instagram+ Sephora. As for other content areas, it would be also similar to the cosmetics businesses which are already a combination of social media and e-commerce apps. However, there are some risks and threats that Xiaohongshu needs to pay more attention to, such as fake advertisements, ghostwriting notes, and illegal content. Any violation could put Xiaohongshu in trouble. Thus, Xiaohongshu has to standardize the content operation and improve the content quality which can accelerate its future success.

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Apr 17, 2019 02:42 pm ·

Xiaohongshu Withdraws All the Tobacco Related Posts after YNET.com's Report

April 16, 2019, Beijing Center for Diseases Prevention and Control (北京市疾病预防控制中心) released the monitoring results on tobacco’s online marketing data. It shows that the Internet platforms with many young users are relatively lack of supervision have become the hardest hit area for tobacco marketing. On the app of Xiaohongshu (小红书 is also known as RED) alone, there are more than 95,000 marketing posts related to "smoke". This information is mostly carried out in the form of “reviews” and “Zhongcao(种草, refers to the act of promoting a product with great quality)”, attracting millions of readers' attention. According to a journalist from YNET.com (北青网), the monitoring of Internet tobacco marketing data was carried out by Beijing Center for Diseases Prevention and Control in collaboration with Center for Social Media Research School of New Media Peking University (北京大学新媒体研究院社会化媒体研究中心). The monitoring team uses web crawler technology to automatically identify the keywords related to tobacco. Based on those data collected to conduct preliminary investigation and research on the advertising and promotion status of tobacco companies online. The monitoring period is from Jan 1, 2018 to Jun 30, 2018. It mainly analyzes the quantity of tobacco advertising and promotion information, the characteristics and new trends of tobacco advertising and promotion information on various network platforms, the typical network tobacco advertising and service case analysis, and the characteristics of tobacco information publishers. Then after three rounds of discussions by industry experts, legal experts, market supervisors and network management experts, the monitoring team has sorted out on information classification, data analysis and prevention and control measures, in order to assist in tobacco marketing information supervision on China's Internet platform. On the Xiaohongshu app, if one enters the word "smoke" to search, the page prompts 95,000 posts. The recommended search entry on this page is “e-cigarette”. After entering, there are 2,656 posts on the “e-cigarette” topic, with a total of 4.9 million views. If enters “Lady’s cigarette”, the result show 6848 notes. These posts disseminate tobacco information in a way that greatly beautifies the behavior of smoking, and enhance public recognition of tobacco brands by rendering the consumption of tobacco is based on love, friendship, and family relationships. Though does not look like advertising, the marketing strategy has attracted many users' attention. Besides Xiaohongshu, there are 14 other online platforms are in the portfolio of this monitoring research. Weibo (微博) for example, accounts for 82.54% of entire data collected. On March 15, 2019, Sina Weibo Data Center (新浪微博数据中心) released the latest "2018 Weibo User Development Report", showing that young users aged 18-30 accounted for 75% of Weibo platform users. Female and youth groups are becoming the main marketing target of the tobacco industry. In the newly revised The Advertisement Law of PRC (中华人民共和国广告法) in 2015, clause 22 clearly stipulates the prohibition of advertising in the mass media or public places, public transport, and outdoor. It is prohibited to send any form of tobacco advertising to Juveniles. However, with the rapid development of the Internet industry and the changes in the way the Internet is transmitted, tobacco online marketing still arises great clamor. The fact is that compared with traditional forms of advertising, tobacco marketing information on the Internet platform is more flexible and more concealed. Soon after YNET.com's report, Xiaohongshu withdrew all the tobacco-related posts from its app on April 16, 2019 afternoon. Now if one enters “tobacco” or “cigarette”, no results can be found. As of January 2019, the number of app users of Xiaohongshu has exceeded 200 million, with a valuation of more than USD 3 billion. It has been selected as the "World's Most Innovative Company" list together with Meituan Dianping (美团点评 )and Alibaba (阿里巴巴) by the most influential business magazine Fast Company. The main competitors Xiaohongshu facing are oversea E-commerce platforms like NetEase HK, Tmall and Haitun Global (海囤全球) under JD.com. According to iiMedia Research, the reasons for consumers to purchase online and overseas are shown below, the reason to purchase for quality increases from 22.9% to 30.7%, which has the highest increasing rate among others reasons. Clearly, the consumers' consumption upgrading (also mentioned in the New Style Tea Drink article) lead people to quality-driven purchasing. Xiaohongshu is currently the most famous zhongcao (explained above) platform similar with Meituan Dianping (美图点评) in China that users would promote the superior quality of a certain commodity on the app and attract others to view or even to purchase. This user-based operation mode is called User Generated Content (UGC). UGC is the most important product model of Xiaohongshu, and the foundation of its survival. It might choose a less GMV oriented expansion plan for the above reason. If separated from the community relation, it will lose its advantage compared with other e-commerce giants such as Tmall and JD.com. Xiaohongshu needs to protect its community gene with real users’ value adding in, and focus more on its sharing content quality and branding.

Analysis EO
Analysis · 2
Analysis EO
Mar 22, 2019 02:04 pm ·

Red, An Instagram-like Social Media Platform with An Amazon-like Marketplace

We are initiating coverage of Red (also known as Xiaohongshu, 小红书) with a Strong rating. Founded in 2013 by MAO Wenchao (毛文超) and QU Fang (瞿芳), this young Chinese company has less than six years of operating history yet has over 200 million users, approximately 45 million MAU and a valuation of more than USD 3 billion. Red’s distinctive business model combines an Instagram-like social media platform with an Amazon-like marketplace. So far, the social and e-commerce features available on Red are difficult for competitors to replicate. Business overview 80% of active Red users are women and Red’s primary customer base consists of young females between the ages of 18 and 35. Using texts, pictures, and short videos, Red users create original content, primarily sharing reviews on merchandise they purchased. Users view billions of posts about cosmetics, apparel, food, traveling and home decor on a daily basis. From how to lose weight, to how to celebrate Valentine’s Day, to which wedding dress to pick, the articles draw millennials actively seeking out peer recommendations. While the social media platform is the main user acquisition tool, Red’s e-commerce store serves as the primary monetization channel. In 2014, the business started to import overseas products favored by its users to sell through Red. After a year, it introduced third-party stores, in turn increasing product offerings. As of March 2019, Red sells more than 200,000 SKU (up from 10,000 two years ago) mostly consisting of overseas skincare products and women’s and kids’ apparel and accessories. The company is still at an early stage of monetization but should see a trend of increasing monetization as the user scale becomes more stable and the e-commerce service more complete. Red user profile as of March 2018: Total addressable market and competitive landscape According to Analysys Yi Guan (易观), cross-border e-commerce transactions reached around USD 60 billion in 2017 growing at a CAGR of 60% from 2012 to 2016. Going in 2019, China's cross-border e-commerce market has entered a mature stage and is expected to achieve 15% growth in the next 3 years, driven by more favorable regulations, more product offerings and faster delivery time compared to other channels. Under the large total addressable market, these top 3 players take 60%+ of the market shares: Alibaba’s Tmall International, NetEase Koala and JD International. Red ranks #6 in the sector, followed Amazon International. Investment positives High-quality, reliable, reviews drive substantial MAU growth In a climate where Chinese consumers are more selective than ever, traditional advertisements and celebrity endorsements are a hard sell for consumers. Purchasing decisions are increasingly influenced by social media and especially by Key Opinion Leaders (KOL). Red’s moat comes from the original reviews posted by real customers; content created by consumers is inherently different from commercials, and thus viewed as more reliable. Before posting reviews, users must prove that they have purchased the products they are reviewing. Posts are vetted and commercials are deleted by the app. In this way, most sharers are ordinary individuals. Those posts are viewed as an accurate and detailed way to win the most trust from users. Women inherently value sharing, and as a consumer base, they are more incentivized to contribute detailed shopping tips on Red than other social apps including Wechat and Weibo.com. On other platforms, a behavior seen as normal on Red might be seen as bragging. Additionally, Red encourages users to share more reviews by offering reward points. Having successfully built a vibrant and dynamic community of sharing, Red has sustained substantial MAU YOY growth of 143% to 45 million in November 2018. This number implies a ~22% penetration of its core customer group (Chinese females born between 1980 and 1999, estimated to be 200 million). Looking at other emerging Chinese lifestyle apps including Douyin (抖音), Kuaishou (快手), Toutiao (头条) and Meituan (美图), which respectively had MAU of 277mm, 196mm, 190mm and 117mm in 2018, we expect ample room for Red to grow its MAU. Recommendation system leads to high user engagement Having built large data sets through users’ views, comments, collections, follows, likes and shares, the app is able to deliver customized content through the “Explore” section. In the “Nearby” section, users can discover what other people in their neighborhoods are doing and where they are visiting. According to surveys performed by Haitong Securities, the average time spent on Red, 18.2 minutes, is significantly higher than the 9.9 minutes spent on competitor NetEase Koala. Further, after adopting the technology-driven approach, consumers began spending 150% more time on Red. We believe the recommendation and personalization systems will only get better with more users and data. Differentiated e-commerce positioning While Red does sell well-known international brands on the platform, including YSL, SK-II, and GNC, the company plans to focus more on imported niche brands to differentiate itself from major e-commerce platforms. According to NetEase, nearly 60% of customers have expressed strong interest in imported niche cosmetic brands. Further, younger customers between the ages of 18 to 26 are more willing to give it a try. Red uses big data analytics to determine the products that their users want to own but are hard to purchase on domestic websites. Then, the company purchases such in-demand products ahead of other platforms, becoming the sole supplier of the brands. There are currently over 10,000 domestic and international brands on Red. We believe that more merchandisers, especially young brands, will begin making partnerships with Red or directly open stores on the platform. We are confident that this is the case because 1) Red allows vendors to identify their target customers and to adjust the products based on user reviews; 2) The posts on Red serve as word-of-mouth marketing, helping vendors to advertise their products effectively. Cross-border logistics systems: Red has adopted the mainstream logistics systems including direct mail and bonded stocking. Promotion: annual sales takes place on June 6th every year and is a big boost to the annual GMV amount. In 2017 June 6th, sales exceed in RMB 100 million (USD 15 million) in the first two hours. Offline expansion: Red has recently opened 3 offline stores, called REDhome, in three Chinese inner cities. With 1000+ SKU, customers get in-store experiences and can purchase cosmetics, home goods, and lifestyle products directly through their mobile apps. Investment risks While Red’s social platform has a moat, e-commerce site has more challenges ahead Fierce competition makes Red’s path to successful e-commerce challenging. We believe the main challenges for Red include the following: 1) Red must compete with larger and more mature e-commerce sites that currently take more time and money from consumers. Most customers are likely to determine which products they intend to purchase by browsing posts on Red, but ultimately complete final purchases on Tmall or JD.com for lower prices, more product offerings, and faster delivery time. Even if Red tries to focus more on niche products, it will be hard to avoid competition with bigger players. 2) Given its short operating history, Red is still largely inexperienced in e-commerce. In 2017, the consumer satisfaction rate was only one star out of five and the complaints rate was as high as 46%, according to China Business Research Institute (http://www.askci.com/). Criticisms were largely related to fake products, wrong delivery, complicated return processes, the leaking of customer information, bad customer service, and similar issues. Monetization outlook The management team has been patient on monetization. While many marketers eyed on the high ROI that Red might deliver, Red initially chose not to monetize through ads to protect user experience - the founding team cited the example of Wechat, Chinese social media giant which has over 1 billion MAU while still being cautious on posting display ads. After entering the e-commerce space, Red constantly balances its commerce and social components. For instance, to avoid being a pure e-commerce player like Alibaba’s Tmall or JD.com, Red does not put its commerce site, but the social site, on the home page. Currently, there are three ways for the company to monetize: Commission fees: The app currently charges ~15% commission fees and marketing fees from third-party stores. Advertising fees: The app became an advertising venue at the end of 2018, allowing commercial posts for partner brands. The posts are tagged as ads to be distinguished from regular posts. Revenue from self-operated stores. Within the next 2 to 3 years, we expect Red to prioritize developing great content and broadening their user base, as opposed to becoming over-commercialized. Higher MAU and user stickiness will be an important stepstone along the path to monetization. In the meantime, Red must improve their customer satisfaction ratings, as well as bring in more third-party partners and more unique products to the platform. Valuation In five years, Red secured financing from well-known investors such as Alibaba Group Holding, Tencent Investment, Zhen Fund, and GSR Ventures.