China’s Ecommerce Duopoly Has Finally Fallen
The brains trust at Amazon are likely to be scratching their heads wondering how that happened. After spending hundreds of millions of dollars and 14 years to wrestle market share from the almighty Alibaba and JD-Tencent-Walmart syndicate, they have managed just a meagre 0.7% share of ecommerce retail in China. Ebay suffered an even worse fate after throwing hundreds of millions at China before effectively giving up on the market in 2006.
Yet in less than three years, ex-Google engineer Colin (Zheng) Huang has managed to defy all odds with his ecommerce platform Pinduoduo. Not only has he blindsided Alibaba’s rural operations, he has also surpassed JD’s daily user count by cleverly targeting China’s underserved smaller cities. 65% of his 343.6 million active buyers live in third tier cities or lower.
“The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui province,” says Huang. The strategy has paid off. Pinduoduo’s IPO last week valued the company at $23.8 billion, catapulting him to become China’s twelfth richest person.
Pinduoduo has also changed the online shopping experience into a social one where users are constantly reminded of other shoppers and their friends incentivised to join – something that has a struck a chord with lower tier shoppers who have traditionally been less forthcoming about buying online. Every Chinese consumer loves a deal, but those in smaller cities are the most price sensitive, unable to resist ten boxes of tissues for $1.90, bed sheets for $1.50, umbrellas for $1.51 and PCs for $150, even if there’s a good chance of fakes. Unlike the search-focused interfaces of Taobao and JD which deliver thousands of results, Pinduoduo displays products more like a news feed with a few hero products, making the whole experience less overwhelming and more fun for many.
There are countless takeaways that we can learn from the success of Pinduoduo; here are four that we found particularly interesting:
Pinduoduo’s success is a metaphor for many businesses hoping to tap the China opportunity. They have gone beyond the overcrowded megacities and into the less glamorous outcrops in the hinterland. Given half of the 50 million new households expected to enter the upper and middle classes between 2016-2020 will be located outside of China’s top 100 cities, there is no shortage of opportunities out there. The right products, targeted in the right smaller cities, in the right way, can be very fruitful in China;
Pinduoduo is further proof that investing squillions in building your own app could be better spent developing a Mini Program inside WeChat. Users need a very good reason to download a standalone app, whereas something embedded in WeChat is seamless, hence the 62% of users who shop on Pinduoduo through their WeChat Mini Program;
The power of social advocacy shouldn’t be underestimated in China. Pinduoduo has done a remarkable job of tapping into shoppers’ WeChat contacts and taking them along for the ride by incentivising them with discounts, prizes and even free goods;
And lastly, much like we saw with Luckin Coffee a few weeks ago, even markets like ecommerce that appear to be sewn up by the giants can still be ripe for the picking. The speed, complexity and fragmentation of China’s growth is constantly opening up gaps and new opportunities, some which may turn into $23.8 billion operations giving the gorillas a run for their money.
But don’t go flipping the birdie to Alibaba and JD just yet - they may be expensive, hyper-competitive and in many cases unprofitable, but Pinduoduo is unlikely to be a white knight for many foreign brands at this point in time. The average order value is just $6, compared to $60 on JD and $30 on Alibaba’s platforms. Discounts as much as 90% are not a sustainable strategy we’d recommend for the guardians of premium products that form the faithful Skinny readership. But take the opportunity to learn some good lessons from Pinduoduo’s success, keep abreast of how it evolves and give China Skinny a call to ensure you have the optimal ecommerce and marketing strategy for China.
Here are this week's news and highlights for China:
Digital China
The Incredible Rise of Pinduoduo, China’s Newest Force in Ecommerce: In just three years Pinduoduo has racked up 343.6 million active buyers in China's hotly-contested ecommerce market. Last week's IPO valued the company at $23.8 billion, making its founder, former Google engineer Colin (Zheng) Huang, China's 12th wealthiest individual. The platform has clocked up 4.6 billion annual orders from its shopper base of 70% are women. More than 1 million merchants sell on the platform.
Chinese Consumers
How Consumers Will be Affected by the U.S.-China Trade War: American families are likely to pay upwards of $500 more a year on clothing, shoes, fashion accessories and travel goods due to the trade war. But even more damaging are the negative perceptions and awareness that will result from less trade and tourism connections. Meanwhile, late last week the US Senate voted quietly to cut or eliminate tariffs on 1,660 items from industries which no longer exist in America, half of which are made in China.
China Can't Count on Consumers to Get Through Trade War: One million credit cards are issued in China every 4.5 days, with outstanding card balances expanding at three times the rate of American balances between September 2015 and last March to reach $870 billion. The author has grave concerns with household debt growing at 20% while disposable income is growing at 9%, and now reaching 120% of incomes (versus 108% in the US). However just looking at official incomes will give a misleading picture of the ability to service debts. Many Chinese have 'grey' income sources, allowing for a much higher ratio of assets to debt than Americans. Six adults often support one 'child' resulting in a greater means to service debts - that's how people earning $1,000/month can be driving European cars, sporting expensive handbags and smartphones, and taking a couple of long haul trips a year.
AmCham Shanghai 2018 China Business Report: 77% of companies surveyed in the AmCham Shanghai 2018 China Business Report were profitable, and 80% were either optimistic or slightly optimistic about the future - rates akin to 2017. 69% of respondents were opposed to the use of retaliatory tariffs; 42% favoured using investment reciprocity as a tool to gain greater market access to China.
Parallel Traders, Beware: New Facial Recognition System Installed at Hong Kong-Shenzhen Border: Brands selling in China by bringing goods through Hong Kong may want to rethink their strategy as facial recognition may soon catch parallel traders passing through the checkpoint. Facial profiles are checked against the database, meaning if there is any suspicion the profile matches that of a parallel trader the system will send an alert to the customs officials. There are currently 640,000 crossings at the Shenzhen border every day.
10 State Media Cartoons on China’s Social Credit Implementation: With the nationwide Social Credit System to be rolled out by 2020, media coverage is growing monthly. Cartoon comparisons between Western media and Chinese state media depict harmony for those who abide, and punishment for those who don't.
Chinese City Crusades Against Fake Bus Stop shelters: 45 bus stop shelters that have stood for years in Hefei, Anhui Province are slated for destruction after it was discovered they were not approved by the city. It is believed a large portion of them were built by companies that are profiting from adverts, although commuters are still using them!
Food & Beverage
Imported Food Gains Popularity in China: China's total food imports amounted to $58.28 billion dollars last year, up 25% year-on-year, while the annual average growth rate over the previous five years was 5.7% according to China's General Administration of Customs. The European Union remained China's largest supplier of food, followed by the United States, New Zealand, Indonesia and Canada. Meat, oil, dairy, and seafood were among the most popular food imports in China.
A Chinese Coffee Startup Has Starbucks Sweating: Luckin Coffee is likely to have impacted Starbucks' decision to offer delivery through Alibaba's Ele.me from next month. Comparable store sales for Starbucks in China declined 2% last quarter. Somewhat worryingly, the drop comes amid a broad expansion in China which will see a new store open every 15 hours.
China's Growing Snacking Segment Needs Some Spicing Up to Raise the Bar: 67% of sports or exercise lovers in China have consumed protein or energy bars as sports nutrition, with format and nutritional value as important considerations. 46% of consumers want snacks they can share. 40.5% of Chinese consumers love spicy flavours according to Alibaba, which lead to the creation of Snickers' spicy bar.
Education
Study Finds Weight, Vision, Sleep Problems Among China’s Schoolchildren: China's Ministry of education 572,314 fourth- and eighth-graders across 31 provincial-level regions from 2015 to 2017, and found that the vast majority of students performed satisfactorily or better in language, mathematics, and science, but many showed weaknesses in areas that require more critical thinking and creativity, like data analysis and scientific inquiry. Just over 17% of boys and 13% of girls in the fourth grade are overweight or obese. Over 53% of boys and 63% of girls have moderately to severely impaired vision by eighth grade, and a whopping 83.4% of children get fewer than the nine hours of sleep a day recommended for middle schoolers.
Parents
80,000 Shops & Nothing in Them: Hipac brings products such as empty tins of infant formula to 80,000 stores in tier 3 and 4 cities. This allows shoppers to hold and feel products before ordering them via cross border commerce. It also enables brands to have a physical presence in China without the necessarily certifications.
Chinese Tourists
From Volcano Lava to Love Scams, Five Risks for China’s Growing Band of Overseas Tourists: Chinese embassies and consulates around the world have are issuing travel warnings such as lava in Hawaii, Taiwan-based kidnappers and scammers, snorkelling deaths in Australia, fake romancers in Japan, and false promises of VIP access in New Zealand.
Health
Chinese Consumers to Get WebMD Content via WeChat: Tencent has struck a deal to provide WebMD’s health-care content to WeChat and QQ users, translating and adapting articles, videos and slideshows for Chinese audiences, as well as focus on diseases that are more prevalent in China, such as lung cancer.
Pets
After Making His Owner Rich, this Border Collie Gets to Live in a $500000 Pet Mansion in Beijing: Photos of the extravagant pet mansion and pool an owner made for his pooch Sylar after becoming famous showing off tricks to Lady Gaga music on video site Meipai and opening a dog food and toy store on Taobao utilising Sylar's 800,000 social media followers. Chinese consumers' expenditure on pets is forecast to grow from $2.6 billion last year to $7 billion by 2022.
That’s the Skinny for the week! See previous newsletters here. Contact China Skinny for marketing strategy, research and digital advice and implementation.
