Ecommerce's Fading Attraction with China's Most Famous Online-Native Brands

In 2012 in the city of Wuhu, Anhui, a former street vendor and motorcycle taxi operator named Liaoyuan Zhang, left his job selling nuts to start his own nut company. In just 65 days, the company - Three Squirrels - became the top selling nuts brand on Tmall and within a couple of years, was said to be the top-selling food brand online. On Singles' Day last year, it took less than 10 minutes to sell ¥100 million ($14.2 million) worth of snacks. The recently-listed company now has a market cap of close to $3 billion.

Many brands can learn from Zhang's success and his trio of squirrels. For a start, its DNA is imbedded with three super-cute mascots, tapping into Chinese consumers' adoration of Japanese-inspired Meng culture, and its cute cartoons such as Pokemon. Their appeal stretches beyond just kids with many urban professionals hooked on all that is cute. This can be observed in some of China's most aspirational mainstream brands such as Tmall's cat and JD's dog.

Yet while many Chinese brands plaster cute mascots over their packaging and promotions, Three Squirrels has always gone deeper incorporating the personalities into everything they do. Videos, stories, games and prizes showcase each squirrel's personality, providing consumers the experience they so-often seek, and weaving them into a longer narrative. Thoughtful extras that add to the experience include a wet wipe, a bag for shells and often nut crackers with purchases. On its customer service line, consumers are addressed as pet 'owners' and purchases are called 'adoptions. Everything Zhang does keeps his customers at the heart of his business, so much so, that he considers "fans" to be as much a part of Three Squirrels as his employees.

Three Squirrels' D2C (Direct to Consumer) model bypasses retailers but still manages a notable premium over the sea of competitors that make up China's massive snacking category. It also taps in to other digital channels such as asking and listening to its social media fanbase about the type of products they want, which has shortened its new product development cycles to a few months.While the Three Squirrels brand was built on the back of Tmall sales, like many online retailers, lowering ecommerce margins and high customer acquisition costs have led it to focus on channel diversification. Whereas Tmall once accounted for 80% of its sales, now just half of its billion dollar-plus revenue comes from the platform. A nice chunk of this growth has come from the drive for offline 'experience' stores, where gross margins exceed 40%, versus sub-30% online.

Unlike it was in 2012, selling online is no longer novel in China. Whilst it remains a vitally important sales and marketing channel, one of the advantages of brick and mortar stores is that it is harder to compare products than simple searches online. In online stores, brands tend to use their best-selling products for promotional purposes and so must discount, resulting in even lower margins. Customers can see how many ratings, and often the number of purchases, which is likely to further distort sales as consumers regularly just go for the bestselling or most reviewed items. In an offline store, hero products are not nearly as obvious and so the distribution of sales is less likely to be skewed towards just a few popular items. This plays better to Three Squirrel's strategy of product diversification which has seen cakes account for over 20% of its sales, and nuts just over half.

Brick and mortar stores also allow consumers to buy very little at a time, at a much higher frequency, and without added delivery costs. The fixed delivery costs online means each order needs to reach a certain dollar amount in order for it to be financially viable. Offline purchases have no such threshold.

Whereas no one should underestimate the importance of ecommerce in China, China Skinny is increasingly seeing brands focus more on traditional retail as the golden years of high growth and high margin sales through platforms like Tmall and JD appear to be over. Experience-focused physical stores such as New Retail has also given the channel a second wind. Brands are becoming increasingly concerned about being over-reliant on platforms such as Tmall for sales and are also cognisant of ecommerce platforms launching more private label brands, which are somewhat of a conflict of interest. Like many things in China, it is important to understand and assess sales and marketing channels beyond the hype and develop strategies that balance risk with opportunity, such as China Skinny does.

Here are this week's news and highlights for China:

 Chinese Consumers

Will There be a Currency War? Behind China’s ‘Momentous’ Decision to Weaponize the Yuan: The Chinese Yuan has abruptly fallen by 2% to break 7 against the USD - a symbol from China representing the escalation of the trade war. The dollar has increased 12% since April 2018, but the changes have been much smoother.

China's Consumer Resilience Robust Despite Headwinds: Survey: 78% of Chinese reported increases in salary, rising from the previous 75%, according to research from UBS. Nearly 70% of respondents reported a better financial situation, and 55% felt very well protected financially, both higher than before. 33% increased consumption over the past 12 months, higher than 21% previously, indicating that the trade war is having a limited impact on consumer spending, confidence and finance. Chinese consumers are more willing to raise spending for the next 12 months on items related to quality of life, such as sports, education, travel and healthcare, and are willing to defer less pressing items such as auto purchase.

Why Chinese Officials Like Useless Meetings in Over-Stuffed Chairs: According to an American who helped China negotiate its entry into the WTO, Chinese counterparts used exhaustion and embarrassment to manipulate visitors. Meetings with envoys began at 10pm and reception rooms were laid out to make it daunting to stand up from an armchair, cross yards of empty carpet and hand a boss a note about a detail of policy or tactics.

The Daigou Channel — How a Handful of Chinese Shoppers Turned into a Billion-Dollar Industry: There are now some 1,000 Chinese specialty stores and logistics companies across Australia, serving an estimated 150,000 daigou in the country. Those involved in the trade say as many as half a million packages containing cosmetics, clothes, food, wine, vitamins, toys and other things are sent to China every week.

Digital China

China Social Media Content Report 2019: The portion WeChat KOL campaigns costing more than ¥100K ($14,200) jumped from 40% to 58% between 2017 and 2018, as larger influencers tend to yield a better ROI for brands and traffic is consolidating into fewer larger accounts. Internet companies, FMCG and finance invested the most in influencers accounting for 53% of investment. Travel was 2.9%, fashion 1.8% and education 1.6% by comparison. Among consumers who purchased a product following a KOL campaign, 48% of them bought directly from the links provided by the influencer. KOL videos are twice as likely to convert than articles. Search advertising is shifting to display advertising, which is expected to grow from 2% to 35% between 2013 to 2020. WeChat follow and conversion rates are higher in tier 3-5 cities according to Newrank.

Promotions and Patriotism: 'Battle Mode' Huawei Sees China Smartphone Sales Surge: Huawei's advertising blitz and grassroots patriotism has proven to be a potent mix, driving its Q2 smartphone shipments by nearly a third from the same period last year. Its market share rocketed 10.6 percentage points to a record 38% as shipments for domestic rivals and Apple plummeted.

Food & Beverage

The Squirrels: The Nutty World of Chinese Direct to Consumer Brands: 34 minute podcast: Three Squirrels, the seven year old snack company from Wuhu is now worth close to $3 billion. Why the online-first is increasingly focused offline.

Auchan China’s Chairman on the Future of Grocery: Restaurants will become the main competitors of grocers in China according to Auchan. More than 21 million meals are already delivered every day in China, and the habits of Chinese customers are changing. There are even new residential developments being built where apartments have no kitchens. As a result, a traditional grocery retailer will need to transition from just selling products to feeding people. Digital capabilities must be national or global, but in-store capabilities must be reinforced locally. It will be important to empower store directors to adapt locally so that stores become more relevant to their local communities.

Juhuasuan Ups Farm-to-Fridge Services with 'Jutudi': Chinese consumers are turning to ecommerce apps to pre-order products even ahead of harvest. Alibaba's Jutudi service allows consumers to 'buy' a plot of farmland and have the crops shipped to them immediately after harvest. The produce is fresher than store-bought produce as it is delivered as fast as 48 hours. It is also 30-50% cheaper than the market price and traceable via QR codes.

Chinese Tourists

Chinese Travel Demand Will Likely See ‘Relentless’ Growth Despite Trade Disputes, Hotelier Says: “The upward trend in terms of Chinese travel is going to be relentless and continuing,” says group CEO of Mandarin Oriental. “There’s a really strong demand among Chinese consumers to be having new experiences.” Although short-haul destinations such as Hong Kong and Macau are currently the most popular among Chinese tourists (due to proximity and shared languages), the destination mix is rapidly shifting to long-haul destinations. "More and more, we’re seeing Chinese travellers wanting to have new experiences in new countries that they’ve not visited before.” Some of those tourists may come from independent travellers who have been banned from visiting Taiwan.

 Fashion

Uniqlo's China Fashion to Add Local Designs: Japanese clothing company Uniqlo will add more Chinese cultural elements to its designs, and increase its China store count from 700 to over 1,000 within the next three years to ride the country's booming consumption upgrade and expansion in lower-tier cities. Between 2014 to 2018 Uniqlo has raised its Chinese market share from 0.7% to 1.2% as Zara grew from 0.4% to 0.5% and H&M stayed on 0.4%.

Education

35% of China's Schools are Privately-Run: 5,815 new private schools were registered in China in 2018 to bring the total to 183,500. High schools saw the fastest increase. Total enrolment in China’s private schools was 53.78 million in 2018, up 5.0% from 2017.

 Entertainment

China Becomes Largest Export Market for European Films: Ticket sales to European films in China grew from 21.2 million to 35.8 million between 2016 to 2017, accounting for 37% of admissions to European films outside of Europe. North America accounted for 28% and was dropping in numbers. The large numbers in China occurred despite the fact that the market was limited to fewer than 30 first releases.

 Environment

’Trash-Recognition’ Tech Sorts Out Recycling Woes: Since Shanghai’s new recycling laws were introduced on July 1, many residents have struggled with the definition for each of the four recycling categories. Alibaba has launched a new tool on its Taobao and Alipay apps where users can scan rubbish and then find out which category the trash belongs to – over 12 million people have used the service. Consumers can also link to Alibaba’s used-goods marketplace Idle Fish where they can book free pickup service for everything from old clothes to fridges.

That’s the Skinny for the week! Contact China Skinny for marketing strategy, research and digital advice and implementation.