Developed by American scholars, Richard Thaler and Cass Sunstein, the concept of nudge marketing has been successfully applied in both public and private sectors in the Anglo-Saxon society. The key elements of the nudge theory include the choice   (reducing the mental effort to make a decision). In a nutshell, both governments and enterprises apply nudge in China to entice people to achieve expected behavior.

In the business context, nudge tactics are all around us

Nudge theory was popularized in 2008, but we have been influenced by nudging, even in a consumption context, our whole lives. Simply observing the online and offline ecosystems exposes the abundance of nudge marketing tactics in China. Anywhere a business creates the environment in which a decision is made will inevitably include nudges.

Individuals retain the power to choose among alternatives, but the structure of their choice favors one particular outcome. Nudging affects behavior while also respecting freedom of choice of the consumer. Whether it is placing sweets or other impulse purchases near the cash register, or listing the more profitable product in front of the less profitable one online, consumer choices are influenced by the environment around them.

Photo Source: Daxue consulting, Mechanism of nudge marketing

However, Nudge theory has low academic awareness in China

Even though “nudge” is a popular concept in the western world, it has been rarely cited for academic purposes in China. The official Chinese translation of nudge is “助推理论 (nudge theory)”. Other synonyms such as “助力发展 (development aid)”, “助推器 (industrial propellers)” and “助推 (nudge)” are used in ways irrelevant to the concept proposed by Thaler. According to CNKI, a key national research and information publishing institution in China, the attention degree of nudge theory has remained very low in the Chinese academic world. Even so, mare the translation of western academic papers and analysis of the nudge application in western society. These facts reveal that nudge theory, and nudge marketing in China has yet to become popular.

Photo Source: CNKI, Subject distribution of nudge theory in Chinese literature

Nonetheless, it is interesting to notice some enterprises, including online car-hailing platforms, have utilized nudge marketing in China. On the other hand, Chinese scholars have been discussing applying nudge theory to policy making in China. If so, in which context it is most suitable?

Nudge in the business sector: Software-as-a-service industry and E-commerce platforms have applied nudge marketing in China

With the increasing household incomes, improving legal measures regarding intellectual property and development of the 4G network, the software-as-a-service industry in China is booming. While lots of market players strive for market share, how can they attract consumers in China and stimulate the purchase behavior, by applying nudge in their businesses?

Case Study of QQ Music: auto-subscription and excessive exposure of promoted products are nudges

QQ Music (similar to Spotify), one of the leading online music service providers in China, has applied nudge in promoting their core product. Green Diamond (绿钻) is the premium membership that enables music consumers to unlock premium music services such as music quality, customized themes and profile pictures, and more access to paid digital music. In addition to the premium membership, regular membership is the second promotive product, and it merely consists of the basic service, limited access to paid digital music.

Application of heuristics: information availability

Information availability is related to the observation that as people see or hear something frequently, they tend to believe its perceived credibility. QQ Music has applied information availability successfully. On the home page of the member center, QQ Music mostly promotes the premium membership by placing multiple stimuli regarding Green Diamond. The images below display pages of the QQ Music member center.

Source: QQ Music screenshot, navigating a Chinese app means immersing ones-self in a series of ‘nudges’

Four activities which are circled in blue are related to obtaining premium membership. For users that are not familiar with the platform, these stimuli are likely to entice them to get premium membership directly as they might perceive that Green Diamond is the only membership they can obtain from this online music platform. However, they might not know QQ Music has also provided regular membership as this platform does not place any stimulus to promote it frequently.

Photo source: QQ Music, member center page

Inertia and auto-subscription

Inertia is related to the tendency of people to stay committed to current situations. It is caused by the fact that people are unlikely to be proactive to change things when there is no stimulus to do so. Likewise, QQ Music has applied inertia as the stimulus. Some subscription agreements take effect after users enable the auto-subscription condition. For example, users can pay 12 RMB/month by subscribing to the successively 1-month plan. Otherwise, they cannot have 6 RMB deductions per month as a benefit. Once users enable this condition, they need to cancel the plan manually if they want to terminate the plan.

Moreover, QQ Music does not send any notification to remind users of the end of the monthly subscription. Affected by inertia, users are too passive cancel the plan when they have not been prompted to do so, and thus their subscriptions would continue automatically. QQ Music tactic regarding auto-subscription leverages the other side of nudge marketing; consumers are less likely to react to a stimulus that is not present. 

Case Study of Tmall: Reviews, discounts and particular display of information are nudges

Likewise, Tmall has driven online purchase behavior with nudge marketing in China.

Photo Source: Tmall, Nudge marketing on Tmall platform

Social proof and reviews

High amount of reviews are effective in driving purchase behavior as they give more context and personal experience to products. Reviews are technique of social proof, which states that when uncertain, individuals will look towards the behaviors of others to help them make decisions.

Anchoring and discounts

Anchoring, a psychological pricing technique, is using existing information as a baseline for new judgements. The higher price “anchors” the individual to make the discounted price seem smaller.

Autonomy in decision-making

Being able to choose from various options, such as to check out, add to the bag, or paying in installments, it gives consumers the freedom of remaining autonomous in their decision.

Pushing the sales of a particular product

Placing the most attractive product next to similar products that aren’t perceived to be as good of a deal makes that option look even better. On Xiaomi’s page, the most attractive option would be the middle with its attractive specs, which justifies its higher price.

Photo Source: Tmall, Nudge marketing on Tmall platform

Credibility and labels

Labelling as implicit nudges boosts credibility of the product to make it easier for consumers to find what they want.

Photo Source: Tmall, Nudge marketing on Tmall platform

Similar nudges are widely used in video platforms, paying-for-knowledge apps, gaming platforms

In terms of other digital content and service providers, auto-subscription is a common nudge tactic in this market. It is noticeable that the applied nudge tactic in China’s business can be found in the western context. With the growth of globalization, more and more business tactics born in the west have been adopted in China readily.

Applications of nudge from China’s government

Nudge in the policy establishment is more insightful. More and more Chinese scholars have delved into this field and discussed its feasibility in the Chinese context.

Nudge in China’s public policies: it is applicable in the pension system while focusing on different attribute   

One of the most prominent applications of nudge is in the pension system. In western countries, in order to tackle the low propensity of saving, a nudge has been applied to  trigger their saving habits for retirement. Auto-enrolment and display of selected information are the main characteristics of nudge in the western context.

By 2020, China had established the pension system for over two decades. Considering the relatively high propensity of saving, it has not been a significant issue in China’s pension system. Instead, the main issue has been the low participation rate. Because of the unequal economic development, the penetration rate of the pension system in rural areas is low. Among these nonparticipants, some of them have limited education and do not know the benefits of investment in pensions. To tackle these issues, some Chinese scholars have suggested that the government should utilize the heuristic, framing and availability, to attract more Chinese people to participate in this system. By amplifying the benefits of pensions, offering limited investment plans and using plain descriptions, people’s willingness to participate are likely to increase.

Nudge applied to prevent the spread of Covid-19

On top of strict government measures to control the spread of COVID-19, China also used some more subtle tactics to encourage citizens to follow the rules. Simply putting a hand sanitiser dispenser or a tissue nearby will increase the chances that people use them, before entering a building, even when people are carry their own tissues and sanitiser.

Source: daxue consulting, 50 measures China used to prevent the spread of COVID-19 report, tissues placed at the doors of ATMs

Standing spots also served as a subtle reminder to keep a two meter from others. Though this measure could have been implemented without labeled standing spots, the spots remove the mental effort for people to have to figure out how far to stand from each other.

Source: daxue consulting, 50 measures China used to prevent the spread of COVID-19 report, people are nudged to stand on standing spots

Nudge theory in China has yet to be widely discussed

Regarding the nudge in China’s business sector, enterprises have applied nudge marketing in China readily. Nudge amplifies the universal trait of human behavior. Since nudge works well in the western society, it can also bring similar benefits in Chinese environment.

In regard to the application of nudge in China’s government sector, scholars are questioning the effectiveness of nudge in changing people’s behavior. Influenced by Confucianism, China has been rooted in a traditionally paternalistic system that features control and power. By 2020, the legislation in China has been to affect people’s behavior directly, rather than enticing them to behave in a certain way.

In the future, mitigating the differences might facilitate nudge’s occurrence in China’s policies

Nudge for good is meant as a plea and not necessarily an expectation. Richard Thaler, Nobel Prize winner

“Although there are cultural differences between Asia and the US or Western Europe, fundamental traits of human behavior are relatively stable around the world that would allow China to use the tools to design policies.” Thaler said. He also mentioned that applying nudge in government policy would help China’s government to obtain better outcomes. In line with some Chinese scholars’ opinions, nudge is a valuable tool that cannot be neglected. However, this isn’t to say we should ignore of socio-cultural and economic differences. Hence it is worth doing more research on nudge marketing in the context of China.  

Authors: Amelia Han & Della Yuzhou Wang

Many COVID-19 prevention measures were nudges, spot them in our report

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This article Nudge marketing in China is omnipresent yet rarely discussed is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone. This is China Paradigm, where we, Daxue Consulting, interview seasoned entrepreneurs in China. Hello everyone. Today, I am with Vincent Ghossoub. I met you in Hong Kong at an event for tech startups and I thought I had to interview this guy because you are in between China and the Middle East. I’ve interviewed many people who were in between the US and China or Europe in China, but you’re in between two parts of the world we rarely talk about and still, there’s a lot to do. You’re in an industry where China is playing a big part. It’s China’s game industry.

Tencent and many other studios are developing games for the world. That’s something I discovered through research we did for one of our clients. One-third of the top 100 apps in India are Chinese. Now people understand how China can be big in apps when we talk about TikTok. But so far it has been a bit unknown how big it could be. So, you have co-funded Falafel games. Maybe, you will tell us more about your co-founders later. You co-founded Falafel Games in April 2010 and you are still the CEO up till now. So, for close to 10 years, you’ve been adapting and developing games for the Middle East from China. I’m sure you’re going to correct me about what you do exactly, but you are adapting and developing games for the Middle East from China and you are also pushing them, doing some marketing, and contributing towards the acquisition of this game in the Middle East, and further than Middle East—Arab-speaking countries, if I’m correct.

You have raised money. You have raised several million. My number is 4.7 million so far from very actually interesting investors such as the Irish SME Association, Middle East Venture Partners, and twofour54 which is an Abu Dhabi-based incubator. And again, that shows me how the links between the Middle East and China can be. One more number: you are attracting, on your different platforms and games, more than 2 million users. And in one interview, we found out that you have been able to monetize on average $0.50 per day per user. Thank you very much for being with us. So, what do you do exactly? What’s your business model? Who are your clients?

Vincent Ghossoub: First of all, thank you very much, Matthieu, for having me. You did a great presentation and introduction explaining what I do. To answer specifically, the clients of Falafel games are basically end-users mostly based in Arabic speaking countries as you mentioned. And half of our revenue comes from Saudi Arabia. 

Matthieu David: Okay. When you say that your clients are the users, does it mean that you develop games for the Middle East from China? It’s not what I understood initially. I understood that you were taking games from China or from wherever in the world to adapt them to Arabic speaking countries.

Vincent Ghossoub: We do have this line of business currently. So, basically, we publish games. We find games that perform well in China’s game industry that are just about launched and the KPIs are okay. We approach the developer and we offer them the opportunity to promote the game in new markets such as Arabic-speaking markets and now increasingly Persian-speaking markets. So that’s one line of business. We do also develop our own games in parallel. And we have a live streaming platform from China also. 

Matthieu David: True. I remember when we met, you actually insisted on your live streaming platform from China mainly initially. Would you share a bit more about the size of the company now? I mentioned $4.5M raised so far as investment and 2 million users. I don’t know if it’s daily or yearly users. Would you mind sharing a bit more numbers, your offices, the size of the team, or the size of the company? Can you share some revenue numbers and confirm the numbers I just mentioned? 

Vincent Ghossoub: Yes. So, your numbers are not too far off—maybe they date since our last discussion. In fact, from the Arabic-speaking markets, we have 3 million cumulative users. This is the number of members of users who have installed any one of our games. And our games are focused on the mid-core category. So, the mid-core category is generally speaking very lucrative per capita. But in terms of volume, it’s quite niche. So, 3 million installs out of a market of, let say, 50 million people in Saudi and GCC, which we specifically focus on as a specific target market in the whole Arabic-speaking market. I think it’s quite an okay penetration. In terms of company size, we have sales of a few million. We have about 28 people in most places between China and Beirut, Lebanon. Yeah, as you said, we raised $4-5M over the course of the years. Yeah, generally speaking, this is the outline.  We have launched six or seven titles so far.

Matthieu David: So, thank you very much for clarifying the size and what you do. More precisely in China’s game industry, you are talking about a niche of games or apps. What’s the name of this niche you’re targeting?

Vincent Ghossoub: Most of us in the industry call it mid-core. So, it’s between casual and hardcore. I’ll try to simplify it with as few parameters as possible. It’s basically the time commitment needed by a user to spend on a game. And the attention needed to put on a game while playing is more or less what defines the whole continuum from casual to mid-core to hardcore. 

Matthieu David: I see. Are there some examples that people can know? 

Vincent Ghossoub: Yes, of course, instead of being too abstract with the definitions. So if you were to spend, for example, both hands on your phone screen on a game and 100% of your attention over the span of one hour and a couple of hours every day and over a few months, this is a lot of time commitment, especially that your full attention is taken when you’re playing the game and both hands are taken. So, this is hardcore. But if you are, let’s say, to spend one or two hours a day over a few months also, but with much less attention when you use it… let’s say you open the game, you do a couple of turns, you switch to email and nothing happens, you have a discussion, you have a call, you come back to the game, and you readjust your situation on the game and then keep going. With sessions of say, 30 seconds and maybe 30 sessions a day, this is mid-core. And then casual is like you can play in a minute and then you don’t have to commit for days or months.

Matthieu David: So, one example that everyone knows is Tetris. Will Tetris be casual, mid-core or hardcore? 

Vincent Ghossoub: Yeah, Tetris is casual. 

Matthieu David: It’s casual. 

Vincent Ghossoub: You can play it for a minute or a session and you can drop the game for six months and nothing happens. Then you come back and you can still play.

Matthieu David: What would be a well-known hardcore game? Will Final Fantasy be a hardcore game? 

Vincent Ghossoub: Final Fantasy is quite a heavy-duty, mid-core game. For a hardcore game, you need to have your full attention focused on it. So, for example, the recent Call of Duty does require full attention over 30 minutes. You cannot get distracted while you’re playing. Call of Duty Mobile released based by Tencent Studios basically is something I would call hardcore. Now, a lot of people in China’s game industry or anywhere else would agree with me on how this is defined. Generally speaking, those two defining parameters—time spent per session and attention spent per session—are something we all agree on.

Matthieu David: I see. By listening to what you said before, I feel that I overstated, in fact, the link with China’s game industry because I feel actually you develop your own games, you develop games for the Middle East from China or the live streaming platform from China. I’m not seeing the link with China as obvious as before except that you have an office in Hangzhou.

Vincent Ghossoub: The gaming business is a global business and our presence in Hangzhou is in China. And our foundation is in China. So, I founded the company in China. The company had spent six years in China before establishing anywhere else—seven years even. So, the presence in China has been essential in a few ways. So, we have employees in China. We have talent in China. We learn best practices in China’s game industry. And we do find games and partners who have games in China which we could promote outside. So, both for the games we develop, for the games we publish, and for the talent we need, China is always a part of the recipe.

Matthieu David: I see. I see. So, I understand now that China has been the place where you founded it. So that’s why actually you have a link with China; because you were there. I think you were at that time studying at CEIBS for your MBA in Shanghai or maybe in other cities because it should be Europe and China Business school. I understand that it’s by that circumstance that it started in China. And then you learned from this environment in transformation with digitization. It’s so big and so advanced in China and especially in Hangzhou. Okay. I get it. 

Vincent Ghossoub: Beyond digitization, there were some very specific trends that made it make sense to set up in China. At that time, China’s gaming freemium model (free-to-play models) were extremely nascent in the West while it was growing and becoming dominant in Asia (Korea and China) for many reasons. Mainly the Koreans started implementing it because of the situation in China where piracy was rampant back then because people wouldn’t pay to buy a box game. They would want it for free. They were used to free content back then. And then Chinese companies kind of perfected this art way before it was adopted and completely embraced in the West—in the US and Europe. So, at that time, China’s gaming freemium model which was emerging made very much sense for the Middle East because it shared a lot of similarities with the environment in China. Piracy used to be rampant back then in the Middle East also. And the internet had just come of age whereby you could actually play a game on the internet while just a couple of years before that, you had to buy it on CDs as box games. So, we shared the same attributes in terms of piracy and in terms of the need for free content and no fluency at all with buying paid content and the emergence of acceptable internet infrastructure. So, it was sort of two very similar markets except for the language difference obviously. So, beyond just digitization, very specifically in the games business, China was a good reference and model back then.

Matthieu David: What has changed? What has changed that China’s gaming freemium model now is not the mainstream and then you can have a premium? What has changed that now people can pay? Now you are monetizing like $0.5 per user on average per day. It’s a huge number for me. When you multiply it by 360 days and by 2 million, it seems huge. So, what has changed?

Vincent Ghossoub: We don’t make $0.50 per day per the millions. 

Matthieu David: Yeah, I calculated it. It’s like $300M. 

Vincent Ghossoub: Yeah, hopefully soon. But basically, if I have like a hundred users enter my games today or are active today whether it’s their first time or their nth time, I make 40 to 50 cents per these users per day. So, it’s not over 2 million. Hopefully soon. We have tens of thousands of users, a few thousands of daily active users, basically. 

Matthieu David: So, the question is what has changed?

Vincent Ghossoub: Do you mean what has changed from premium to freemium or China’s gaming freemium model being bashed these days and turning back to premium?

Matthieu David: You said that similarities were between China and the Middle East and that China’s gaming freemium model and the willingness for people to pay were low. And that freemium then became more mainstream and it had to be freemium if you wanted people to use the games. So, people want to use the games. But now it turns out that in China’s game industry, and I don’t know if it’s the case in the Middle East (you know it), people pay for games. People pay to be VIP clients of QQ email. Just because you have a bigger box, you pay for that in China. So, they accept to send small money to KOLs. What has changed in China and in the Middle East if the similarities continue to be built? What has changed that now you can ask them to pay?

Vincent Ghossoub: Yes. So, first of all, there’s a disconnect and this behavior these days between China and the Middle East. Chinese users have become much more willing to pay outright for content. While this hasn’t happened yet in the Middle East, they still expect free content and try to do their best to work around getting free content. But, of course, you can monetize them well in different ways. So, certainly, China has gone very fast through this transformation of going from ‘we want all the contents free’ to ‘we are happy to pay and even at rates much higher in some cases and in some categories than the West (paying outright for content)’. Just thinking of it, generally speaking, I don’t think much has changed. I just think the natural evolution of things is taking place.  

So when you think about it, if I want to go out with my friends today and watch a movie, let’s say, we’re going to spend ¥100 or ¥200 per person, basically, we’re watching a movie and spending time together while increasingly we are spending time together online, separate physically, but spending time online and we can get that same movie for ¥2 or for a ¥20 subscription or ¥30 VIP subscription on some video-on-demand platform or something. So that’s online entertainment. It’s the same thing for China’s game industry. If we were to go out to a bar or play tennis or something, we’re going to spend a couple of hundred RMBs also, while we might spend ¥2-3 per hour if we’re like having fun online. So, it’s just normal. Online entertainment is still by far the cheapest form of entertainment on a per hour basis. 

So, one thing that really changed and made people realize that it is actually quite cheap to have fun online is maybe the increased penetration of payment systems such as WeChat and Alipay. So, they’re used to buying. We’re more used to ordering online and transferring money all with our phones. So, it’s really one click away. It completely removed the friction from seeing, let’s say, a movie online for ¥2 or for a ¥20-30 subscription and paying for it. But that pricing had always made sense. In fact, I think if you look at how much disposable income goes online, it’s still a tiny portion. I think we can still spend much more online than we are today.

Matthieu David: So generally speaking, we know that users moved from China’s gaming freemium model to a little bit of premium which is $0.5 per day when they are active, as you said, on average. What do they pay for?

Vincent Ghossoub: It’s a bit less than $0.5 in our case. And in our case, it’s still China’s gaming freemium model. So, when I tell you it’s $0.4-5, it’s the average. If I take today’s revenue and divide by the daily active users, it’s $0.4-5, but only 1% of these users paid and they subsidize the remaining 99%. So, it’s still freemium. As you mentioned, you can pay for a lot of things online like the outright content subscriptions, premium games, and items inside of games. So, specifically, for items inside of games such as our case, basically you can categorize what the payers pay for in three categories. First of all, it’s utilities. Utilities are, for example, making my experience of the game easier. Let’s say you want to send two coins or one unit of stamina to all of your friends in the game. With one button, you can send it to all of them and that’s going to cost you a few gems. And the gems convert to dollars. They are bought with dollars. Instead of sending to all of them one by one, it just makes the experience smoother. We remove the ads if you pay a small amount. That’s utilities.

The second category is cosmetics. It’s just cosmetics. You just want to make your avatar look nicer. You want to add skins. You want to make your gun brighter. You want to have a crown on top of your icon. It’s things like that, that don’t perform in the game experience, but just look better. And when you spend enough time on the game, you might want to say, “It’s time for me to put my signature on the game”. The third category is performance items. So, for example, sometimes in strategy games. You mentioned Final Fantasy in games. Similar to Final Fantasy, you need to upgrade your heroes and find the items for your heroes and upgrade the items and go to battle. And you have very few stamina points for the battles. So, for all of these, for the waiting, you can accelerate it. For the finding, you can increase the chance of finding. For the battle, you can battle more by getting stamina. So, all of these bonuses—less waiting, more chance of finding, more battles—are paid for with gems.

Generally speaking, it varies with the markets. But in our case, a fraction is the performance. So, people just want to perform better in the game. And we can discuss a little bit of the psychology behind that. Cosmetics and utilities are a couple of percentage points of the overall spending of gems. Now, why do people want to perform so well? You have different kinds of gamers. You have the gamers who play on their own. They just want to feel they’re achieving. What is the Olympic slogan? Higher, further, stronger or something like that. So, they’re happy with beating themselves time after time. So, they might want to improve their performance from time to time. You have the killers—those who really want to compete. They want to perform better than others. So, you have leaderboards for them to compare. Sometimes, there are direct confrontations between them. So, someone wins and someone loses. You have the socializers who just want to spend their time lubricating the system and doing alliances and chatting and messaging with each other. You have the explorers who are just curious about finding out more and more hidden corners of the game.

Generally speaking, the killers are the most lucrative in the performance. That’s at least in our category of games. Now you would say we have killers who pay thousands of dollars a month. Now you can say, why do these people spend so much? And I can make the case why this is actually, first, a very proportion of their disposable income. Second, it’s much cheaper than all of their other entertainment options. But most importantly, what you do when you’re a leading killer is you’re basically showing status. You are getting a certain puff of psychological satisfaction by being the leader, by being the number one. And here, I can showcase a few situations why this is still taking place outside of games. And it’s much healthier inside of games.

So outside of games, you can go to the hottest mall in Beijing and check the cars parked by the gate. So, these cars are the most luxurious cars in the country and they’re parked there at the front of the gate. Why are they parked at the front of the gate? They’re parked right at the gate for two hours because it’s to a very large degree, one utility, but most importantly a status symbol. And that car was expensive compared to the status symbol you can get inside of a game, especially that only a few hundred thousand people are going to walk in and out of that mall and see the car while tens of thousands are going to see you for over an extended period of time inside of an online game.

So basically, I’m selling you the psychological puff, that satisfaction, without selling you the metal, wheels, alloys, and all the pollution that goes along with it. Basically, it also goes down to the question of what are you buying when you buy a pair of jeans? Why was your pair of jeans more than ¥1000? Tell me. What’s the reason? Why wasn’t it ¥50? Why that premium? That premium is basically a puff of emotional satisfaction. So, I’m selling you that puff without selling you the denim and for a much more extended period of time. So, it completely makes sense. If you’re willing to buy a ¥1000 pair of jeans, it completely makes sense to spend ¥500 on a much better level of satisfaction inside of an online game. In fact, let me go even further. There were Imperial colonial wars waged on colonies. Let’s say Holland in Indonesia or France and other places just so that a person in Paris drinks a cup of coffee and gets that satisfaction. That cup of coffee, let’s say, was sold for 5 Francs in some Parisian cafe and maybe the ton was bought for 5 Francs from the colony. So, the coffee shop was not selling coffee beans. The coffee shop was selling that puff of emotional satisfaction. 

Matthieu David: Interesting. So, what you are saying is one of the reasons for paying is social status. You believe that people want to compare to others. They want to be the first. They are competitive. As a killer, the psychology, as you said, is to be above all the others. Actually, we moved a bit further in your core business and how people convert from China’s gaming freemium model to premium. Actually, before that, I wanted to talk about the beginnings of Falafel Games in China. I believe Shanghai and Hangzhou because you have been studying in Shanghai at CEIBS and you have your office in Hangzhou. Could you tell us more about how you started and with whom? Why games? Are you a developer yourself? Why did you start this business? How did you start to develop games for the Middle East from China, with which money, and with whom? I need a bit of understanding of how it started for people to get a better sense of what the start was.

 Vincent Ghossoub: It’s a long story. I like to say I started it when I was three years old, ever since I could hold a controller because from whenever I was three years old until I started the company after my MBA graduation, there had always been a very obvious lacuna in the Middle East market. And there were not many games with authentic Arabic content. And that was not like, ‘Oh, such a discovery’. It was so obvious. It turns out when I was doing my MBA in CEIBS (China Europe International Business School) in Shanghai, it was the time when the trend we just discussed—the growth of China’s gaming freemium model and the maturity of the internet infrastructure—was taking place. And I had a few classmates also who had been in China’s game industry. It just clicked in my mind—the fact that now you can make a game that does not need to be pirated, that is free, and that can still make money in areas where the internet is just coming of age and solving the problem of lack of content. It just made perfect sense. Now, it’s really a no-brainer. It’s a very simple proposition.

Matthieu David: I take myself as an example. I’m French. I grew in France in a very French family and environment. I didn’t know what I didn’t have. Suddenly, if some movies were not translated in French or games weren’t translated in French, I just couldn’t know them. But I believe that your ability to assess that there were more games in English that were not in the Arabic language is because you have been educated in a very international environment. Because when I go on your LinkedIn, I see that you have been at the American University of Beirut. You have been in Toronto. And you have been at CEIBS. So, from the very beginning, you had an international mindset in order to be able to compare with other countries, behaviors, and so on. Am I correct with that? 

Vincent Ghossoub: Now, you’re asking me to come out of my shell and look at it and analyze. Maybe. Maybe, but I don’t think it’s so extreme really. I think I wouldn’t attribute so much the realization and the articulation of the opportunity to, let’s say, my experience in living in many places and international outlook. I just used to play games. 

Matthieu David: Okay. 

Vincent Ghossoub: So, imagine you loved watching movies when you were a kid in France and all the movies were in English. Let’s say that was the case. I know that this was not the case, but let’s say that was the case. Then you don’t need to be like Marco Polo to realize that it would be nice to have a movie in French—or at least to have it translated to French or dubbed. So that was my trigger. It wasn’t like so much international outlook. I used to play games and they were in English. What can I do? And you don’t need a lot of languages to be able to play the game. But the actual lacuna I noticed is content, not language. So, it’s not just about a matter of translating the shape of the heroes, the story, the narrative, and all of that. So, that’s one, but I think that’s in terms of articulating the opportunity.

But I think in terms of execution, this is where the international outlook really helped me. So, just in terms of context, I also lived in France during the Lebanese civil war for a couple of years during my childhood and in North America and the Middle East, in Lebanon, in Iraq, and in China. So that’s like three or four continents and four or five countries. It just made things easier. I didn’t see the barriers like doing cross-border business of like negotiating with my first Chinese partner. For me, it was just like some dude. He’s a guy. There’s a lot of them all over though. I didn’t see a big barrier in doing that. The travel needed, the cross-language communication required, and all of that including my international outlook maybe made me reckless. It gave me a reckless attitude toward it, which in a way can be good as long as it’s not too reckless.

Matthieu David: So as far as I understand, you had an understanding but also a passion for games. And it was obvious to you that you would do something in games. I mean there was basically an attraction to games. And you were in China studying at CEIBS. Because you were studying in China, for you, it was a laboratory to see what’s happening, digitally speaking, with China’s game industry. And maybe, Korea as well as a laboratory for you. And you started that to get inspired to learn the best practices and so on. It’s a bit counter-intuitive for me because what I get from most people in the development and online businesses is that China is expensive. China is not a place where actually developers are cheap. It’s not a place where you can find developers easily. It’s not a place where they can develop for the world because it’s very China-centric compared to India for instance. So that’s why for me, it was a bit contrarian. How do you react to that?

Vincent Ghossoub: Yeah, I always get that. So why are you in China? Is it because of the costs? 

Matthieu David: That’s not the case, right? 

Vincent Ghossoub: Costs are very high. Yes, of course, there’s a lot of competition from most multinationals and from a lot of software companies to get the talent. And despite the big volume of talent supply, in fact, if you divide it by the number of companies competing on that talent supply, it’s quite competitive. And it just jacks up the salaries basically but there are a lot of reactions. There are a lot of justifications for that. First of all, it’s the best practice developed. So, China is a bloodbath in terms of China’s game industry and it’s leading in terms of competition.

Matthieu David: Would you mind sharing two examples of the best practices? What best practices have you learned from China?

Vincent Ghossoub: It’s just doing good game design. So, if you look around the whole world, teams that could do good game design develop a game efficiently. There are very, very few places. And China is one of them where suppliers are big enough or large enough. And if you compete, if you are able to acquire, you can come up with something. So, let me boil it down to you to a very simple equation. You want to make a game in China. You want to make games in China. So, let’s say you have a certain cost; let’s say $1M to make the game. So, your cost per game is $1M divided by one. You spent $1M to make a game. If you make it elsewhere, it might cost you $500,000, but you’re not sure you’re going to get a game. So, it’s $500,000 divided by zero. You end up with zero games and it’s practically infinite costs. So, per human resources, it might be cheaper elsewhere. But per game, you might end up with no games.

I’m not saying it’s only China that can deliver that. Of course, there are other places that are still much more expensive than China. Northern Europe, the US, and Canada can deliver good quality games. And there are even developing countries. It’s not like it’s the monopoly of advanced places. But the idea here is that you need to get a good game so that you can compete. And then you stop asking about the cost of your human resources, especially that your cost of human resources is practically not the cost of goods sold. It’s not like I’m buying cheap and selling slightly with a markup. In games, if you think of the cost structure, the development team is a fixed cost. You have to pay for the salaries every month. And then the revenue is variable. So, it’s very high operational leverage. The revenue can grow ad infinitum in theory. It can grow infinitely in theory without much growth in your fixed costs. I’m not mentioning here the variable cost of the marketing.

Matthieu David: Yeah, that’s the beauty of it. 

Vincent Ghossoub: Yeah, exactly. So, if you’re in a situation like this and you’re chasing the utopia whereby you get high revenue compared to the fixed cost, then you will accept to have a fixed cost that’s still okay and relatively high because the revenue is so much higher. And if you try to save a little bit on your fixed costs, let’s say bring it down by 20-30%, you might be killing the chances of the game even breaking even on your fixed costs.

Matthieu David: So, we understand that there is an investment.

Vincent Ghossoub: Yeah.

Matthieu David: Initially, you need to invest for a period of time to develop games for the Middle East from China. How did you invest? Was it your own money? Did you raise money from the very beginning?

Vincent Ghossoub: A bit of everything. So, early on, we just discussed the proposition. The proposition is quite simple. And if you look at the Middle East market, generally speaking, it’s around 400 million people, a homogeneous language or quasi-homogeneous religion, a lot of common cultural norms, they have a young population, and they are well-connected. So, it’s a good opportunity. So initially, I put in some of my money. I was able to convince a couple of friends to put in a little bit of money. And most importantly, I found a whole team because, in games, you need multiple skills. 

Matthieu David: What skills do you need?

Vincent Ghossoub: The art, engineering, game design, and management. You need to glue them all together. And then, of course, a few sub-skills within these. You need them all. You cannot have one link missing.

Matthieu David: Designers. 

Vincent Ghossoub: Yes, design. Game design. So, I was lucky to find a game development company based out of Hangzhou which agreed to partner with us for equity to go after the opportunity and put in their own team. 

Matthieu David: Wow. 

Vincent Ghossoub: And I had the option to bring that team in-house and I did exercise that option. So, I don’t have the exact numbers in my mind. We needed a few hundred thousand dollars to come up with that first game. And we only had tens, maybe a couple of hundred thousand, in cash commitments early on. But along with the team that was working on it for equity, we were doing progress and this allowed us to raise our first institutional round.

Matthieu David: How much time did you take to develop your first game for the Middle East from China? Did you talk about two months, three months, six months? 

Vincent Ghossoub: No, no, no. A lot of time. Generally speaking, our category of games has a very variable production cost. In our case, it’s about 15 people over 15 months.

Matthieu David: 15 people over 15 months. I see. 

Vincent Ghossoub: Yeah. So, 225 man-months. But you have similar games in the same category that might cost tens of millions of dollars—10, 20, 30 million sometimes just because it’s so easy to spend bottomless pits of money on, let’s say, perfect art, more art, and more stages. And you always have a critical decision of when you should launch and start harvesting or collecting money. When you’re at 50% or 99% or 150% of the development progress in the game, it’s something that affects your upfront investment. But generally speaking, now more and more, the upfront investment in developing games for the Middle East from China, whether a few hundred thousand dollars like our case or a few million dollars like many cases or even tens of millions in very few cases, is generally not the main upfront investment. The main upfront investment eventually turns out to be the user acquisition spend. 

Matthieu David: But this is like less of an investment and variable cost because you should cover your cost after the acquisition, right?

Vincent Ghossoub: Yes. So, I mean it also depends on policies cause it’s so variable. You can spend $100 on user acquisition per day or you can spend $10,000 per day. You can spend millions per day. It’s extremely variable. Essentially, it boils down not only to that, but an easy parameter is a cost per install. So, you put your target installs and then you know your budget needed per day. And that can be extremely highly variable. Let’s say you have a policy of like 90-day-payback on your ROI or your ad spend. So, you have this initial trust that you have to go through and you need the cash balance for it. Some companies go for a 360-day-payback. So basically, the idea is if I spend, let’s say, $100 on Facebook ads today, from the cohort of users that get acquired from this $100, how long do I need to earn back the $100? So, I keep optimizing my targeting and my budget allocations until I need a certain payback target. So, if my payback target is 90 days, depending on the game, the game quality, and the advertising quality, I might reach a high volume of players or a low volume of players. But the longer my payback target period target is—I know some companies who have 440 days payback period target—then your cash balance needs to sustain all that trust. That valley is huge.

Matthieu David: I think another question that many people who are listening to us are asking—and I am myself—is how were you able to connect with this Chinese company to convince these Chinese company to work with you and to actually work well with the Chinese company when you are just an MBA student or you just got out of the MBA? I think those three items—how you found, how you convinced, and how you worked with them—are kind of a mystery for us right now.

Vincent Ghossoub: It’s kind of a mystery to me too. The secret word here in my case in how I found this Guanxi. I’m sure you have like 50 podcasts where you discuss Guanxi. It’s a friend who knows a friend who knows a friend and then it’s a chain of favors. And then, things get done. I was very lucky that my MBA gave me sort of like a soft landing in China and I was able to build a small network of well-connected businesspeople in China. But you have to push through. The first layer of your Guanxi is never the one that gets you the connection. Then you have to ask one person for the next and build trust. Then they ask the next for the following and build trust. And you don’t know in which branch of your Guanxi network where you can eventually get the click where there’s a good synergy for good business.

So, I had a friend basically. I have one of my alumni who was into gaming too. And we were going around looking at opportunities in games and going to conferences. And then he remembered that he had that friend who had a development company who does things that I might be interested in. And then we discussed that. He was interested in my market and my proposition and he agreed to put in his team. Another thing in games and software, in general, is that you could, to some degree, build one cell infinitely many times. So, from the perspective of our first development partner who entered for equity, they could build our games skinned for us once and reskin it infinitely many times for other markets. And that was their idea. So, they had actually every skin of our very game in the Chinese market for themselves. 

Matthieu David: I see. 

Vincent Ghossoub: Let’s say his investment in nine months was $500K. But that $500K also went into his own games. 

Matthieu David: I see. 

Vincent Ghossoub: So, the margin of cost he had for us was not so much. It was like tens of thousands. So, that’s how we found it. How we worked was much more difficult. And I think luck and perseverance were big factors because I completely moved to Hangzhou. I stayed on top of it. I knew we were not going to understand each other. They barely spoke English. We barely Chinese. So, our proposition was bringing Arabs with Chinese together and develop games for the Middle East from China. I can barely work with Arabs. I can barely work with the Chinese. Now I have to work with both and let them work together. So, it needed a lot of perseverance, I think. And one of the mottos I had is whatever the problem is, consider it a cultural gap problem first. Put that off the table. Sometimes, it’s coordination. Sometimes, it’s bad code. Sometimes it’s implementation not as per requirements. I didn’t start like this, but I got to the point where whatever this problem is, let’s see whether it’s a cultural communication? Should we just sit and cross the cultural bridge and put it out of the way? And then if I make sure all the possible cultural gaps are not there, then it’s a normal professional problem that you handle normally and professionally. But guess what? Most of the problems were of that first category.

Matthieu David: I see. Very interesting. Very, very interesting. When did you raise your first round from institutional investors? I mean, understand it was from a partner first and then from institutional investors. Actually, I’m surprised about the investor you have. You have the iSME. I didn’t know about them—Irish SME Association. I didn’t know they would invest in it. And then you have the Middle East Venture Partners. I understand better because they are Middle-East focused. And then you have an Abu Dhabi based incubator. 

Vincent Ghossoub: We might be mistaking the iSME you are mentioning here. So, the iSME that invested in me is basically a Lebanese financial entity which is a joint venture between a large loan insurance company in Lebanon and the World Bank. Half, half.

Matthieu David: I see. So, it’s not Irish at all. So, my team wrote wrong. Right?

Vincent Ghossoub: It seems it’s the same name. Maybe, I shouldn’t say iSME. I should just say Kafalat which is the name of the loan insurance company because iSME is almost like an internal name for them. It’s that small initiative. It’s just a small fund of maybe $25M or $50M or something like that which they put half and the World Bank puts half. It’s for equity investment. In fact, it’s for equity matching. They don’t invest. They match. And in my case, they matched MEVP with this venture partner which is my lead investor in a couple of rounds—two rounds, basically. 

Matthieu David: When did you raise? One year after? 

Vincent Ghossoub: Yeah, about one year after. Like they say in the stories and when you listen to podcasts, I got Series A or Series B, very finite, opened round or closed round… maybe because I’m in a market with very little equity financing liquidity. So, it’s like an ongoing thing with me. My round is always open. My valuation is always going up and down and those windows are not so well defined. So, to tell you how it went—this kind of like flexible, ongoing thing—I got $100,000 convertible loan by MEVP first and they had three conditions to enter with their follow-up equity round. I think it was $500,000 or $600,000. One of them was getting a co-investor. Two of them are operational. One of them was getting a co-investor. And I was really, really lucky that the game we were working on, met the branding of a TV series that MBC (Middle East Broadcasting Corporation) was working on. So, they accepted to join that round and I cleared that condition. I also cleared the other two conditions. So, they entered with an equity round then of 800 more or less. Yes, 800, including the convertible and they converted their convertible note to equity with a discount. And then the following round was also led by MEVP and followed by twofour54 and iSME. 

MATTHIEU DAVID: Did you raise money because you were not profitable or did you raise money to go faster and develop new markets?

Vincent Ghossoub: Both.

Matthieu David: Okay.

Vincent Ghossoub: It went hand in hand. 

Matthieu David: Are you profitable now? 

Vincent Ghossoub: We are if we want to. 

Matthieu David: Okay. I see.

Vincent Ghossoub: So, we are investing heavily in our live streaming platform from China. And it’s eating from profits and from the capital in our live streaming business. 

Matthieu David: I see. 

We have not talked enough about live streaming and we’ve been talking for one hour already. So, I’d like to take five minutes to talk about the live streaming platform from China which actually seems to be the masterpiece of Falafel games. I feel that it’s the cornerstone of it. Could you tell us more about what it is, how you monetize, how important it is, and where it came from?

Vincent Ghossoub: Yes, of course. So, today the interactive live video multiplayer platform is indeed the masterpiece of our strategy moving forward. And in fact, it’s even a separate kind of department and even a subsidiary in the whole Falafel Group. So, we have the developing games for the Middle East from China part and the live streaming part set up in two separate legal entities, but it wasn’t designed that way at the beginning. In the beginning, it started as a simple product to solve one challenge we had in the game part, which was that the cost per installs (CPIs) were rising dramatically and significantly fast. And ROIs were thinning. So, we were thinking, “Okay, where is this going and what is an approach we can do so that we dramatically reduce our CPI?”. And we found a nice category of games with experimentation. And after the experimentation, we realized how nice it is and we were able to articulate it.

It’s basically games that are not in Arabic and cannot be played by Arabic users such as word games or quiz games. A competitor from, let’s say, the US can come with the best quiz game in the world but if it’s not good Arabic content, my crappy game in comparison will do better. And people will want to install mine because of the content. It’s basically the difference between necessary local content and nice-to-have local content. Consider yourself a user and going through a journey. And I tell you to come to play this tank battle game. Whether it’s an English or Arabic or French, it’s not going to make a big difference for you. The language is nice to have, but if it’s a quiz game or a word game or crossword game, whatever, it’s a must. So, we put out a crossword game which was a really cool game by the way. And it just sucked traffic like crazy. In fact, I don’t count this traffic as part of the official KPIs I gave you early on because it was more of an experiment and outside of our core back then.

But to give you a comparison, when we launch a mid-core game, let’s say a strategy RPG game, our cost per install is $2 to $7 depending on the channel and the quality. It averages out at about $4. It’s a bit less than $4. It’s $3.5. When we launched that crossword game, it was a must-have Arabic game so there was very little competition in that category. And although, in general, Arabic-speaking people don’t like too much reading games or games that involve texts, with only $13,000, we were able to get 500,000 installs. Make the comparison. Yes. In terms of CPI, it’s very big. I don’t know; is it like $0.3 CPI or something like that? So, it’s a very big difference and we concluded that the reason was that this game is a must-have. It must be Arabic. It doesn’t have much competition. And then we stumbled upon a second problem.

We thought, “Okay, let’s go after this category”. But then we stumbled upon the second problem. It’s that text medium doesn’t monetize as good as a strategy or role-playing games. So, lifetime value (LTV) of your user is very low. Then you go back to the problem of low ROI. In the case of mid-core, it’s a high cost to acquire and high lifetime value per user with a thin margin. In the case of a quiz, it’s low CPI but also lows LTV with a thin margin. So, what are we doing? And so, now we set out to bring up the LTV and we thought, “Okay, let’s move from the quiz or text medium to the live video medium where we have real hosts who present the game”. It’s much more engaging.

So basically, it turns out like Who Will Be The Millionaire game kind of whereby instead of having one participant, everybody’s competing at the same time on a leaderboard. Everybody’s talking, chatting, and interacting with each other and especially between themselves and an audience and the host who is streaming live. And the LTV was slightly better. So, we found a good chance here—high ITV, low CPI. We can go after this. And it solved in a way another problem which we had in China’s game industry and the world’s one, which was the sunrise, sunset reality. You know, for every game, you have to launch it, you harvest for a while, and then it sunsets. Then you have to go again with new games or revise the game somehow. So, there are almost always up and downs. But the live video content is basically kind of like YouTube. You always have new content that you can put out there. So, we’re hoping and it’s starting to prove that it’s much more sustainable. It grows slowly but it’s sustainable. 

Matthieu David: Sorry to interrupt.

Vincent Ghossoub: Yes.

MATTHIEU DAVID: Livestreaming platform from China. Live video. I mean Facebook, as you mentioned, is doing it well. How do you differentiate yourself from them for instance?

Vincent Ghossoub: Did you say Facebook? 

Matthieu David: Yeah.

Vincent Ghossoub: So, of course, there’s Facebook. There’s YouTube. There is Twitch even. But our proposition is basically mostly interactive live streaming platform from China with a lot of different ways to interact with the game. So, we have games set up on top of overlay—on top of our live video feed—where a host or an influencer can come and set up. So now we have variations of quiz games. We have roulette games whereby the host is practically the dealer in a social casino setting. So, no cash-out. And we are releasing, I guess, what’s in the box game. So basically, the video feed technology is the same but we have a lot of gamification on top, which I don’t think Facebook or YouTube even want to do. It’s not their DNA. So, we’re a completely separate DNA from what they’re doing. And we’re geared towards maximizing revenue for hosts and influencers. So basically, our product road map is going to the influencers and hosts and telling them, “What do you want now that can help you make more engagement and more money and we’ll just do it for you”.

Matthieu David: I see. Do I understand well if I say that during a live stream, for instance, you will have someone playing with cards with an audience of people watching and they may ask some people to pay if they want to interact in the game with him? Would it be this kind of live streaming?

Vincent Ghossoub: Almost. So, it’s not only cards. It’s not only a live social casino. 

Matthieu David: Yeah. It’s just an example.

Vincent Ghossoub: Yes. So, any interaction or participation will include some spending on virtual items of credits in the game. So, if you earn, you earn credits, if you lose, you lose credits. If you like the game enough, you reach a point where you run out of credits and then you want to top up.

Matthieu David: What’s the closest version in China to what you do? What’s the closest version in the US?

Vincent Ghossoub: Yes. So, there are a few attempts in China and the US to crack this system which is basically the interaction of traditional media and interactive games. Some went well and then crashed. Some are going well and some are exploring. So, I’ll name a few. The most famous one in the US was HQ Trivia and it had a couple of clones in China such as ChongDing DaHui where it’s one or two 15-minute sessions per day and there’s a cash payout at the end. So, it became really popular because of the cash payout or prize, but then it went down and people realized that they were not able to win so much because so many people were joining. And for a lot of regulatory reasons, this was stopped in China. You have other kinds of a live streaming platform from China or anywhere else which I allow myself to call soft sex cams. So, it’s basically Facebook Live but with tipping and gifting. But most of the monetization comes from quasi-nudity or at least users flirting with the host. 

Matthieu David: Do you have this issue? How do you tackle this issue with your own platform?

Vincent Ghossoub: Yes. So, let me go to the third category. Then I’ll tell you how I tackle this issue. 

Matthieu David: Yeah. Okay. 

Vincent Ghossoub: Another one is obviously live casinos—the real money gambling. They do it and they’re doing it well. It’s probably the fastest-growing category. And you have a horde of people exploring it to which we belong and some others belong. It’s like a company in the US called Joyride. Another one is called Tele. So basically, the reincarnation of live game shows on mobile is in a much more interactive way whereby the interaction is no longer message-in or call-in or rate or poll or vote. We have all sorts of possible interactions which you can do through the mobile. Now how did we tackle the issue of sex cam business when we started our own live streaming platform from China. In fact, we did have a host monetizing crazy amounts per hour of broadcast and we had to figure out why. And eventually, it was sort of like she was pushing a certain behavior from the users. She was incentivizing them to send her a lot of gifts. So, she was using us as an appointment platform and as a payment gateway basically because the gifts are paid.

So, they sent the virtual gifts on the platform and then we’ll give her her revenue share on the back end. Now, you mentioned it’s an issue for a lot of companies. It’s the core business. If you look at the numbers, they are not so bad. So many of these companies in China are listed. Some of them are listed in the US running this as a core monetization scheme for them and making billions a year. So, putting aside the ethical issue, we didn’t even consider it for ethical reasons. Luckily, we did not have to confront that dilemma. At least, for business reasons, we thought it wasn’t sound for us to do so. We were at the same time finding in one room housewives who wanted to play and males who just wanted to flirt with the host. And this could not cohabitate. So basically, we just removed all incentives to the host to redeem revenue shares from gifts and we focused the whole experience on the gaming part. So, you come and you play the game. You don’t just do social interaction forever without playing the game. You must play the game. 

Matthieu David: I see. Is the game designed by you or it’s just someone live streaming the game?

Vincent Ghossoub: It’s designed by us. So, it’s a functional overlay on top of the live video. Maybe in the future, but not very soon. We could open up an API for other people to put their functional overlay on top of the live video. But today, it’s too early. So, we’re just coming up with our own functional overlays on top of the live video feed which represents different kinds of games.

Matthieu David: I see. Thank you very much for your time. It’s already more than one hour. Actually, I had more questions. Maybe we could have one session on the live streaming platform from China part, but it was very, very interesting and instructive on how you partner with the Chinese company which invested in you at a very early stage. Thank you very much. I hope you enjoyed. I can tell you I enjoyed talking to you. 

Vincent Ghossoub: Thank you very much, Matthieu. I enjoyed too. 

Matthieu David: Thanks again. 

Vincent Ghossoub: Thank you. 

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This article Podcast transcript #86: A promising company developing games for the Middle East from China is the first one to appear on Daxue Consulting - Market Research China.

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The 2020 Spring Festival migration started on January 10 and ended on February 18. The estimated number of people who have had contact with confirmed cases gradually increased at beginning of the Lunar new year and stabilized until the end of it. That’s because flow of people participating in the Spring Festival Transport is very large, which makes the chance of cross infection increase and directly lead to the peak of the epidemic. Government restrictions on the flow of people helped to reduce the spread of the virus by decreasing contact and increasing physical distance between those who have COVID-19 and those who do not. However, within China, the confirmed cases have flattened since February 13.

How long will the coronavirus last in China?

As of early March, the number of infections in China continues to decline, with the exception of Hubei, the infection in all regions seems to be controlled. As long as no new infections appear during the duration of a full incubation period, then the epidemic can be considered to be officially over. Currently, the rate of infection is minimized by the quarantine efforts and shutting down of workplaces and public places.

What is the Coronavirus economic impact in China

Do we need to worry about the impact of coronavirus on GDP?

According to chief economist from Zhongtai Securities and Donghyun Park from Asian Development Bank, the coronavirus economic impact in China is expected to be between 1.5% and 2% in terms of GDP growth, which will not change the long-term trend of China’s economy. The epidemic has a large impact on the economic growth rate in the first quarter, or negatively affects the GDP growth rate of about 2%-3%. However, as the virus continues to spread globally, there will be many more factors to include in the coronavirus economic impact on China including global demand of Chinese goods and commodities. The largest economic impact comes from the service sector, especially the catering, transportation, hotel, tourism, and accommodation industries.

Up close on the economies of Wuhan & Hubei

The huge outbreak in Hubei province contributed a lot to coronavirus economic impact in China, as it is the most developed province in the central region of China with 3.9 trillion RMB GDP in 2018. Hubei has a large number of industrial clusters in R&D and manufacturing, such as automobile and electronics.

According to government work report of Wuhan in 2019, electronic information, bio-technology and new medical and medical appliance, and the automobile industry are the three pillars of the manufacturing industry. 

Hubei province is an important part of the global supply chain. It accounts for 9% of total Chinese auto production. German engineering firm Bosch, the world’s largest auto component manufacturer, has dozens of factories in China 2 of them are in Wuhan. Hubei also plays a significant role in the global supply chain of critical electronics components. The province is the production base of Taiwan’s PCB factories, including Taiwan Optoelectronics, Xinxing, Jianding, Nanzi Electric, and Dingying.  Industry insiders pointed out that PCB is the “mother of the electronics industry” and is an indispensable key component of all electronic products. If the PCB factory in Taiwan and the Hubei factory are obstructed, it will affect the global electronics industry.  

Hubei contributes much to the progress of the chemical industry. It is the largest province of chemical fertilizer in China, its output has reached to 596.56 tons in the first three quarters of 2019, which increased 19% compared to last year. Hubei has a high production capacity of sub industries including the phosphorus chemical industry, pesticide industry, and the vitamin industry.

COVID-19 affects industries in Hubei

Coronavirus impact on supply chain in China can be also seen in some industries in Hubei.

Electronics industry

After Wuhan postponed production of electronics, China’s supply chain of critical electronics components is facing a catastrophic disruption. About 70% of the world’s smartphones has been affected. According to Strategy Analytics, overall shipments of phones will reduce by 2% in 2020, some consultants believe that COVID-19 will cause demand side decrease. Besides, the first quarter is normally off-season of China‘s semiconductor industry, COVID-19 may further dampen the sales of semiconductors.

Automotive industry

China auto sales fell 2.8% in 2019 amidst global trade tensions, the first decline in nearly two decades, which also affect Hubei auto sales because Hubei province account for 9% of total Chinese auto production. Global automakers forecasted further sales decline in 2020, prior to knowledge of the coronavirus outbreak.

COVID-19 China economic impact: online industry growing

Due to the coronavirus epidemic, Chinese daily life goes online. For example, gaming industry experienced an unprecedented growth. While the Chinese mobile gaming industry is stimulated by the coronavirus, the development of 5G is expected to accentuate the trend and support the growth of the industry.

Coronavirus economic impact in China is also observed in short video platforms sphere. Between January 20 and February 2, 574 accounts on the short video platforms Douyin and Kuaishou each gained between 100k-500k new followers. The Coronavirus is accelerating the shift towards live-streaming, which already exploded in 2018, with a 745% growth year on year, thanks to improved connectivity and video maturity. The short video sector recorded 569 million daily active users in the post-holiday period, far exceeding 492 million on a regular daily basis.

E-commerce purchases during the Coronavirus outbreak in China

During the Chinese New Year in 2020, people were likely to purchase medical products, hygiene products and food online. To support the new growing online demand, more than 35,000 jobs were created across China from the following online retailers: Hema, Suning Xiaodian, Meicai, JD Logistics, JD daojia, and Dada.

Studying and working go online during coronavirus outbreak

Most companies have set-up remote work policies to avoid contamination at work. Hence, Enterprise Collaboration Apps facilitated remote working for 200 million Chinese workers after the Chinese New Year. To keep in touch, they use apps produced by two China’s online-giants: Alibaba and Tencent. During the outbreak, Alibaba’s Ding Talk skyrocketed to the very top of the App Store in a few days while Tencent Meeting and WeChat Work are in the second and fifth position, respectively.

The Coronavirus outbreak does not stop Chinese students from studying. Universities across the country organize online lectures to ensure the safety of their students. They rely on QQ, a Tencent streaming platform to carry out online teaching. The downloads of some education apps such as Tencent Classroom, and China University Mooc experience a significant increase. However, unlike fitness and co-working apps, the online education peak during the coronavirus may not last after the epidemic, with the return of students back to school.

Coronavirus impact on tourism in China

The damage to the Chinese tourism industry because of outbreak is equivalent to a loss of 1 trillion RMB GDP. Many travel enterprises estimated the ongoing shutdown costs the industry about ¥17.8 billion every day.

Only 2% Chinese tourism related companies felt that they had not been significantly affected after the COVID-19 outbreak. Coronavirus impact on tourism in China especially visible among travel agents, hotels, and retailers (related to tourism), as they badly need sales revenue during the epidemic. 

Chinese tourists contribute to the tourism industry in many countries. For instance, in 2018, Chinese tourists represent more than 70% total tourism in Hong Kong and Macao, similarly, more than 25% total tourism in Thailand, Japan, Vietnam and Korea. The impact on the economies of these countries will be catastrophic, if the coronavirus outbreak lasts for three to six months.

Coronavirus impact on tourism in China opened the opportunities for new online approach in this sphere. During the COVID-19 outbreak, many scenic areas and museums used live-stream to increase exposure and attract tourists, which attracted a lot of traffic. Even after the outbreak, the live-stream still can be watched by elderly and people with disabilities, it also can be used as a preview before travel.

Short-term and long-term coronavirus impact on tourism in China

Coronavirus impact on the food and beverages industry

Although many restaurants in China strengthened their delivery safety during the outbreak in China, food delivery alone is not enough to keep their profits in the positive. The Chinese New Year is usually a hot season for the F&B industry, the total revenue of Chinese restaurants in 2019 CNY has reached 724.1 billion RMB (occupied 15.5% of the whole revenue in 2019). Because of the Coronavirus outbreak, large catering brands have to reduce expense to balance their finance, such as permanently shut down some offline stores and redundancies. Many small restaurants are facing with the risk of bankrupt, since they have very fragile anti-risk capability. Many Chinese restaurants (around 62%) could not get rent reduction and they still need purchase epidemic prevention products, such as protective facemasks and thermometers.

Currently, many restaurants try to focus on delivery to get some profits, but actually revenue of online food delivery business is much less their normal business.

In order to manage the losses, some restaurants sell food materials to consumers and communities at low price and provide free food to medical staff and government units in epidemic areas. From 1^st February 2020, many restaurants temporarily lend employees to Hema (盒马鲜生) which relieved their labor costs. At the same time, KFC launched a contactless delivery service on food ordering platforms, such as Meituan (美团). Because of a lack of funds, some restaurants tried to seek investments and loans. For instance, Pudong bank offered 120 million RMB loans to Xibei (西贝) restaurant. The large food ordering platform Meituan (美团) worked with banks to finance some restaurants.

Coronavirus impact on supply chain in China: what businesses can expect

How Coronavirus will impact the Global Supply Chain by Mid-March

Most Chinese manufacturing slowly started resuming operations at the end of February, but the delays could have a devastating impact on the global supply chain.  For most companies, the inventory in stock will is enough to keep up with demand for two to five weeks. Shipping by sea to either the U.S. or Europe can take around 30 days. This implies that if Chinese plants stopped manufacturing prior to the beginning of the Chinese holiday on January 25, the last of their shipments arrived the last week of February. If lead time from China is shorter than 30 days, the disruption occurs earlier. This is already the case with Hyundai which announced on February 14^th the suspension of its production lines from its plants in Korea.

Assessing the coronavirus impact on supply chain in China, the electronics industry seems to be more affected. Intermediate products, which produced in China, are deeply integrated in the global technology supply chain.

Operations are concentrated near the affected areas (~290 of about 800 plants named in Apple’s global supplier list are located in regions that have delayed returning to work). Overall, 84% of manufacturers are concerned about delays related to the outbreak.  As the components are often heavily customized, it is challenging for factories to relocate outside of China in the short term.  

COVID-19 economic impact on Chinese manufacturing

As Chinese government shut down Wuhan and delayed the returning to work, many factories have to face the huge losses, limited supply chain and insufficient raw materials. Labor-intensive manufacturers (such as textile, clothing and plastic products) are significantly impacted, small and medium-size factories are worst-hit areas.

According to Morgan Stanley’s report in mid-February, Chinese production had only reached 30% to 50% percent of the usual levels. However, health and medicine related products have a huge demand during the COVID-19 outbreak.

Mask manufacturing demand

After the COVID-19 outbreak, the demand of masks has risen rapidly. Although many companies have started cross-border production, the shortage of raw materials could not be resolved in the short term. China contributes 50% of global mask production. Mask related manufacturers will benefit during the period, however most believe that it is a short-term demand. Expanding production would result in oversupply after the outbreak recession.

China is getting back to work

The week after 9^th February is the time for migrant workers to return to work, small and medium-sized enterprises need to resume production to boost cash flow.

Manufacturing learning points from COVID-19

Although epidemic outbreak is a black swan event in the manufacturing industry, it is likely that COVID-19 China economic impact will be positive. For example, it will promote manufacturing enterprises to strengthen the management of employees’ health and safety. The leaders of manufacturing companies will pay more attention to intelligent manufacturing. Due to online working, manufacturing enterprises will demand software such as task management, project management, and workflow management for remote collaboration. The Coronavirus economic impact in China will also be seen in science industry and smart technologies industry.

Coronavirus economic impact in China: what should exporters to China know

COVID-19 to impact China’s trading partners

After a slowdown in 2016, China’s imports and exports grew despite the trade war. Due to manufacturing and supply chain shortages during the epidemic, this growth rate is expected to slow down. A rebound in export activities may take place in April, while import activities would slow down until July. China’s top trading partners will suffer from the impact of the coronavirus on the main Chinese export products such as computers, broadcasting equipment, integrated circuits, and smartphones.

Coronavirus impact on supply chain in China is expressed in slowing shipments across the country, making transport routes congested. Currently, overall trucking supply resumed operation at around 60% and is a bit higher in the Southern areas of China. Overall intercontinental rail capacity has recovered to 60%.

How to improve supply chain during the epidemic

Government response to soften the Coronavirus economic impact in China

Policy support from the Chinese government

Production stop, isolation of staff and transportation restriction were a consequence of coronavirus China economic impact. Policy support and costs reduction are desperately needed. The Chinese local governments released some polices to relieve this situation, such as financial support of small businesses, flexible employment policies, social insurance, rent subsidy and tax concessions.

Long-term economic impact of the Coronavirus in China

The epidemic further boosted digitalization

During the epidemic, both the number of users and the time spent online had a dramatic increase. The total mobile Internet traffic increased by 36.4% compared with 2019 CNY. The number of daily active mobile shoppers grew by 14.6% during the 2020 CNY compared with 2019 CNY. In the meantime, some traditionally offline industries have turned to e-commerce to relieve losses.

Coronavirus China economic impact on the luxury market

COVID-19 is a downturn to the global luxury market. In Shanghai, Beijing, Shenzhen, Guangzhou and Wuhan, the passenger flow in large shopping malls and luxury brands stores declined more than 80% during the 2020 CNY. Also, due to the COVID-19, most Chinese consumers are more focus on healthy and rational consumption, many luxury products buyers plan to spend less on luxury goods, more on medical products and necessities. When COVID-19 is under control, this trend may still continue so long as the economy is impacted and until consumer confidence returns.

Coronavirus economic impact in China: big data innovation

During the epidemic, more than 20 provinces’ governments worked with technology companies to build “epidemic prevention system”.  The reports helped to see related data, epidemic feedback, quickly find and isolate suspected cases. The cooperation between government and big data platforms is promoting the practical application of big data in public crisis management and driving more technology innovation. Along with the development of the epidemic, more Chinese people are getting used to using big data tools in their daily lives, which speed up the process of digital life. 

Coronavirus economic impact in China: AI developments

The epidemic promoted the actual use of artificial intelligence products in medical and public safety areas. For example, in order to improve the efficiency of the diagnosis for COVID-19, Beijing Haidian hospital is using an AI assisted diagnosis system that can process 300 chest X-ray in 10 seconds. Many consumers fear the coronavirus cast a shadow over the food delivery industry. Therefore, JD launched autonomous delivery robots to reduce human-to-human contact during the Coronavirus outbreak. Besides, AI medical robots have started to work in Wuhan’s hospitals, they help doctors and nurses with disinfection, cleaning and delivering medicine.

Coronavirus China economic impact: financial assets may surpass fixed assets

Due to the COVID-19 outbreak, most Chinese people have to stay at home, real estate transactions are almost completely frozen. However, financial assets are not limited by places, the bond market has been very active since the Chinese New Year. The Chinese people have more time to invest bank financing products and bonds. Besides, growing savings may increase the demand for investments with stable income, such as bank financing and bond funds.

View our Coronavirus China economic impact report on slideshare:

This article Coronavirus China Economic Impact Report by daxue consulting is the first one to appear on Daxue Consulting - Market Research China.

Sam’s Club is a world leading membership store, which serves more than 2 million members in mainland China. In 2018, Sam’s Club in China achieved 8% same-store sales growth in China’s market, with almost 80% membership renewal rate.In 2019, Sam’s Club had double-digit sales growth driven by higher sales across all channels.

Sam’s Club China market strategy: Integration of online and brick-and-mortar store locations

“Offline channel (brick-and-mortar stores) is our primary channel, supplemented by online channel.” said Andrew Miles, President Sam’s Club China, “For online channels, self-own channels come first and cooperating with other ecommerce platforms to reach more customers.” 

From offline to online

Sam’s Club in China started its journey by launching its first store in Futian district of Shenzhen in 1996. Currently, the brand has 26 brick-and-mortar stores on the Chinese mainland and will have 40 stores opened or under construction by 2022.

In order to meet the need of increasing number of online shoppers, Sam’s Club China began to pay attention to e-commerce development in 2010. In 2010, Sam’s Club China opened its official online store (www.samsclub.cn) to provide direct delivery service in cities where Sam’s Club stores located. In 2014, Sam’s Club launched its own APP to offer more convenient shopping process. Thus, the club’s members can benefit from both the advantages of Sam’s digital platforms and the offline convenience of personal service and experiencing physical products. Thanks to online delivery services and electronic membership card introduced, the revenue of Sam’s Club increased by 8% in 2018.

Strategic cooperation with third-party e-commerce platform

Since both Sam’s Club’s official website and APP only serves its members live around offline stores, the brand is badly in need of expanding its customer base in China. Consequently, Sam’s Club China started the strategic cooperation with JD (one of China’s largest third-party ecommerce platform) in 2016. The cooperation helped Sam’s Club reach a large volume of potential consumers who are originally regular users of JD. In May 2019, the sales of Sam’s Club flagship store on JD global grew by three digits compared with the same period last year.

In addition, Sam’s Club is focusing on creating more online-to-offline experiences by bringing together its strengths in digital and physical retail. For example, Sam’s Club has introduced a new shopping method, which enables customers place orders in it’s JD store by scanning the QR code in offline stores. This way of “offline commodity display + online purchase & delivery” is now quite popular among members.

Currently, Sam’s Club China is continually opening more offline stores, and actively developing new business formats at the same time, such as compact hypermarkets, community stores and cloud depots. The Sam’s Club’s strategy of developing online and offline in coordination works well and enables it to implement omni-channel strategy successfully.

Sam’s Club’s membership system on online and offline channels

Sam’s Club China membership operation based on physical stores

The club, a pioneer in operating a membership model in China, achieved excellent results in recruiting members over the past 23 years, according to Andrew Miles. So far, Sam’s Club in China has about 2.8 million paid members (individual members & business members), made up largely by individual customers.

Based on the physical retail properties, members can enjoy two aspects of benefits: price-based benefits and value-added services. Sam’s Club offers two types of membership for retail members in China, one is the 260-yuan ordinary membership and the other is the 680-yuan premium membership. The premium one was introduced in 2018 which targets families that are looking for personalized purchasing experiences. Compared to ordinary members, premium ones enjoy five extra benefits. They are a 2 percent cash reward on membership fees for qualified purchases, 12 free delivery coupons per year, dental care at private clinics valued at 8,000 yuan per year, 12 free car wash coupons per year and 365-day free return policy on large home appliances.

[Source: Sam’s Club China official website, “Membership types and benefits”]

Sam’s Club membership operation on online channels in China: Membership-centered CRM

[Source: daxue consulting, “Sam’s Club membership-center CRM”]

Based on the membership–based CRM system which integrates membership data from all channels, Sam’s Club China is able to manage its customers’ information in one place and get a 360-degree view of members for greater insight.

For the external ecommerce channel, Sam’s Club is able to reach more customers on JD and JD cross-border platforms. By binding the JD account and club membership, customers who purchase goods from Sam’s JD flagship store become the club member system. And these customers’ data will be available in Sam’s Club membership system.    

Integrating data and driving traffic to brand-owned channels

For brand-own online channel, Sam’s Club in China integrates the membership data from WeChat, Brand official website and Brand APP. At the same time, the Club can drive a large volume of traffic from WeChat to Self-owned online stores and the Brand APP. In this case, the membership system can collect valuable information and data from the integration of self-owned online channels.

The Sam’s Club membership-centered CRM create a powerful loop between multiple channels and its membership system to transform membership data. This CRM system enables Sam’s Club to know every single transaction that happens in the club or online as well as each customer’s expectation by analyzing customers’ data. Thus, Sam’s Club China will know how they can maximize multi-channel’s shopping experiences both to satisfy member needs but ultimately to drive the types of behavior they want. With such membership-centered CRM Sam’s Club can exert full control and retain full ownership over their e-commerce traffic and consumer data.

Sam’s Club’s WeChat-centered digital membership system

Sam’s Club China opened its official WeChat account in August 2017, and made it as the center of the brand’s online membership system.

[Source: daxue consulting, “Sam’s Club’s membership service on WeChat”]

Apart from registering membership in offline stores, the “membership center” in Sam’s Club’s WeChat public account is the only channel for e-card membership registration. Through the member’s center in the mini-program, existing members can activate e-card and manage their membership while non-members can easily register and become the club’s members.

Sam’s Club’s e-commerce strategy in China

Self-owned online channels in China: Brand APP & Brand official website

Brand official website and brand APP are the online sales channels owned by Sam’s Club China. These channels are designed to provide exclusive service for club members. Most of the goods (except fresh food and imported products) can be delivered within one day. In 2017, Sam’s Club China started to offer “1 Hour Delivery”, which includes a large selection of food and drinks items that can be delivered in just one hour.

Self-owned online channels in China: Ensuring high quality services

[Source: daxue consulting, “Ratings of Sam’s Club APP & Consumers’ perceptions of Sam’s Club’s brand APP on Weibo”]

Sam’s Club in China is able to create a strong connection with customers on its own channels by serving exclusive members directly. With fully management of the brand APP and official site, Sam’s Club can create a tailored experience to target existing clients and ensure members can get premium service (higher quality after-sale service, one-hour delivery, etc.).

The ratings of Sam’s Club China APP on APP store show the club’s APP enjoys a good reputation among Chinese customers. From consumers’ perceptions on Weibo, we can see that most consumers are satisfied with the service and products provided by Sam’s Club’s brand APP. Thus, by ensuring high quality services provided by the club’s own channels, Sam’s Club successfully increase the customer stickiness.

Partnership with JD.com: Reaching more Chinese customers

Besides own channels, Sam’s Club also cooperates with largest Chinese e-commerce platform-JD. In Oct 2016，Sam’s Club China opened exclusive flagship store on JD.com and 7 months later Sam’s Club launched its Global Flagship Shop on JD Worldwide, the cross-border site of JD.com. In April 2018, Sam’s Club China joined the JD Daojia 京东到家 platform to offer fast delivery of orders in one hour.

[Source: daxue consulting, “Benefits provided by double membership”]

Sam’s Club in China uses a collaboration strategy to convert regular buyers on JD into brand’s own asset. Doubled benefits provided by Sam’s Club JD flagship store persuade more consumers to become the club’s members. In this case, Sam’s Club China is able to attract more members and broaden its consumer base beyond its current city-scope.

Leveraging e-commerce platforms for expanding consumer base

Since e-commerce platforms like JD are interlinked with Chinese consumers’ daily life, the cooperation with JD will expand Sam’s Club’s opportunity in e-commerce by access to JD’s online traffic. By servicing both club’s members and non-members on JD platform, Sam’s Club China is able to reach customers all around the country. However, since JD keeps Sam’s Club’s products in its own warehouse and then delivers to buyers, the quality of service and products cannot be control by the club.

Currently, Sam’s Club China and JD are expanding their cooperation to further integrate their platforms, supply chains and customer resources in China. Hopefully, the further partnership with JD will give the club a huge advantage in reaching China’s rapidly expanding target consumer class and will let the brand leapfrog its expansion.

Sam’s Club’s promotion strategy in China

Selling on brand official site increases brand visibility

[Data Source: similarweb, “Total Visits of Sam’s Club site in China”]

Here, we compare the visits of Sam’s Club official site in China. The line graph shows that in a 6-month period, Sam’s Club site attracts 2 times more traffic than Walmart’s site, since Sam’s official website in China has online shopping while Walmart’s site does not. Besides, Sam Club’s membership system ensures its website stable traffic volume in a long term.

Besides converting purchase, Sam’s Club China also benefits from a high-traffic site by improving its brand visibility and building the brand image among Chinese customers. Moreover, the official site allows Sam’s Club to create a strong linkage with customers through the membership system, which will retain customers and increase the customers’ loyalty.

Brand APP and WeChat account increase purchase demand

[Source: daxue consulting, “Posts connected to shopping page on Sam’s Club APP”]

Sam’s Club China APP and WeChat account are not only online shopping channels, they also create demand among customers apart from selling to members.

There are regular recipe posts on the “discovery” page of Sam’s APP, the products shown in the post will stimulate purchase desire and readers are likely to tap the link to buy the products directly. As for Sam’s Club WeChat account, most article posts are correlated with various products promotion and marketing campaigns. The attractive images of food or user-friendly products in the posts can always trigger purchase demand.

Sam’s Club China has good reputation among customers without frequent presence on media

[Source: daxue consulting, “Promotion strategy in China on variety show and WeChat”]

Sam’s Club China has relatively less presence on media and it only runs promotion for new store arriving and sales promotion. However, Sam’s brand promotion strategy in China based on high-quality products and service helps it build a power brand image and enjoy a good reputation among customers. For example, Sam’s Club advertises on a popular variety show, which presents Sam’s offline store in real scenario. Also, Sam’s Club did collaborate promotion with influential local media on WeChat to reach their members in different cities. With high volume and engagement, such strategies worked quite well and do attract more customers and drive high traffic to Sam’s online and offline stores.

[Source: daxue consulting, “Consumers perception on WeChat”]

From customers’ perception on social media, we can know that Chinese customers see Sam’s Club as a well-reputed brand. By offering high-quality goods for over twenty years, Sam’s Club has a good reputation among Chinese and becomes the top of mind when people mention bulk buying.

From the case of Sam’s Club, it is not difficult to see that if traditional retailers intend to seize a piece of cake in the fierce market competition in China, they need to develop online and offline in coordination to realize digital transformation. Besides, implementing omni-channel strategy works well with respect to building brand image and improve brand awareness. Last but not least, good brand reputation based on offering high quality service outweighs frequent promotions. 

Sam’s Club China’s strategy of driving traffic to their brand owned channels is known as brand independence, and your brand can do it too! Just contact our project team at dx@daxueconsulting.com to get started on your brand independence strategy.

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This article Sam’s Club in China: Case study on successful Digital Marketing is the first one to appear on Daxue Consulting - Market Research China.

“China’s fast growing 5G technology infrastructure, artificial intelligence, machine learning and digital related-business environment, as well as people’s willingness to connect with various products via digital applications, are creating many opportunities, Michael Martin, vice-president of Nike China, said. So, to succeed on the Chinese market Nike has expanded its digital presence in China.

Nike in China: Business is Blooming

US-based Nike, Inc., the world’s leading sportswear and apparel company, has had a customer presence in China since 1981. For Nike, China has been a significant growth driver for many years.

Nike China’s revenue surged 21 percent in 2018 to $5.13 billion, which accounts for 14 percent of Nike’s total global sales. In 2019, sales of Greater China increased at a rate more than double the company’s growth. Sales were up 20.9% in 2019, from $5.13 billion to $6.21 billion.

[Source: Nike, “Nike’s revenue in Greater China from 2009 to 2019, by segment”]

According to China Daily, a top executive at Nike has stated that Nike will continue to expand operations in China, which is a growing consumer market for many US companies.

Channel Strategy of Nike in China: Digitalization

[Source: daxue consulting, “Nike’s digital direct retail framework in China”]

Nike’s strong sales growth is largely thanks to its digital strategy in China. In 2012, Nike  started its online journey in China by open its flagship store on Tmall, one of China’s largest e-commerce shopping platforms. Then, Nike launched its official website store, SNKRS App and WeChat Store in next several years. In November 2019, the widely acclaimed Nike App was launched in China, which takes a further step in Nike’s China digital transformation. Currently, Nike is focusing on developing its digital platforms, including innovative platforms and digital channels.

DTC strategy of Nike in China

[Source: daxue consulting, “DTC revenue of Nike China”]

Nike has established a Direct-to-Customer (or DTC) retail framework covering online and offline, 7975 offline stores and digital supply chain since 2012. Nike is always placing a heavy emphasis on direct-to-consumer channels through Nike.com, brand own Apps, Nike WeChat store and its own retail stores and DTC’s revenue share in Greater China increased from 23% in 2014 to 40% in 2019.

Nike’s China brand-own digital channels

[Source: daxue consulting, “Brand-owned channels of Nike in China”]

Apart from Nike Tmall flagship store and Nike’s China official website, Nike China also sells online through its WeChat mini-program. On the one hand, WeChat has 1 billion monthly active users, providing a huge pool of potential members for Nike. On the other hand, the Nike’s China mini program offers Nike’s consumers a full range of products and services. Leveraging the power of WeChat, Nike is able to connect with their Chinese consumers closely and personally.

In 2019, Nike launched Chinese version of Nike App and built its digital DTC system. Nike drives traffic from website and WeChat to its brand-owned apps, where it can deliver the most personal access to its products, events and exclusive content including coaching tips and personalized services for Chinese members. Since launched, the Nike China App is widely acclaimed due to its multifunction and convenience. At the same time, Nike gradually transfers its sales to brand-owned channels, especially the Nike App, since self-own channels mean higher profits and more loyal members than e-commerce platforms. Such strategy works well and currently, around one third of Nike’s digital revenue comes from its brand-owned Apps. 

“Nike has reported that its revenue for the second quarter of 2019 grew 10 percent. Nike’s international business grew 18 percent, led by Greater China at 23 percent thanks to Nike’s digital advantage in the marketplace. The Nike app and the SNKRS app are outperforming all other channels, driving digital growth of 38 percent for Q2”, Mark Parker, the executive chairman of Nike, Inc. said.

Cooperation with e-commerce platforms

The cooperation with Chinese e-commerce platforms like Tmall has great impact on Nike’s business in China. Opening the Nike flagship store on Tmall not only enables Nike to win international and local competitors in a short time, but also contributes to Nike’s China digital strategy in the long run.

Nike is driving growth through partnership with Tmall. For example, Nike placed as the top apparel-industry seller on Tmall and its flagship store’s transaction volume hit 10 billion yuan in hours on the Singles Day in recent years (2017-2019). Also, thanks to Tmall’s large customer base all around the countries, Nike has seen an impressive increase in new members in China. For example, the number of Nikeplus members increased 3 million in 2019 Single’s Day.

Nike also collaborated with Tmall for data-driven marketing projects. With the partnership with commerce platforms, Nike can access vast consumer behavior and industry trend data from third-party online platforms, which together with data collected from its own channels, to develop its consumer study and offer new products and better services to Chinese consumers. Currently, Nike China is deepening its partnership with Tmall, especially when to comes to innovating New Retail.

New retail strategy of Nike in China: Starting from Nike 001

[Source: Nike, “Nike Shanghai 001 shop”]

“Nike’s lead in retail and sports innovation is also redefining the future of sports retailing,” said Heidi O ‘Neill, President of Nike global Nike Direct. “Opening up digital and offline retail services is critical to providing seamless connection to the personalized consumer experience.”

Opened in Oct. 2018, Nike’s first global flagship store (Nike 001) aims to bring digital driven sports retail innovation, design and personalized services to the Chinese market. The launch of Nike 001 can be viewed as a cornerstone of Nike’s new retail and digital strategy in China.

“The ‘House of Innovation’ is set to propel our consumer-direct strategy as it provides the best that Nike brands has to offer through the integration of digital and physical retail,” said Angela Dong, vice-president of Nike Inc. and general manager of Nike China.

Digitalization, personalization, online-and-offline integration, the key elements of “new retail” can be found at each corner of Nike 001. The store is equipped with a mobile-checkout so the customers do not have to wait in line. Through advanced or in-store booking, the Nike Expert Studio of the Nike 001 gives NikePlus members unrivaled access to try on exclusive and personalized products in one-on-one sports expert sessions. As for online and offline experiences, Nike members have access to their customized products and private services in the store through online reservation. Also, from Nike’s WeChat Mini-program, members can get information about Nike’s latest products and exclusive members’ benefits.

Starting from Shanghai 001, Nike is leading the transformation of sport retail in China.

Nike’s Membership Community in China

Brand’s community allows two-way interactions which can draw regular customers closer to then brand and through them the band has access to more precious data about their customers’ behavior and need. Nike’s lifestyle community which evolves around the platform Nike+ is a good example in this context.

Nike online community in China: the troves of consumer data

Nike+ is a modern digital platform that integrates many products and features. The content of Nike+ is created by the members themselves through sharing and interacting on the platform. On the one hand, Nike+ motivates members to actively connect with each other, which further leads to strengthening the connection between the brand and its users. On the other hand, Nike+ online community collects rich data regarding user’s sporting behavior, which enables Nike perform an evolving consumer study.

Nike has delivered a fully localized version of the Nike+ membership program to reach and engage millions of Chinese members. For example, Nike creates and keeps updating the Nike+ Run Club (NRC) official account on WeChat, in order to build a single place for Chinese runners’ needs. With action points such as run routes and crews provided by NRC WeChat account, new runners are able to run with experienced runners and crews. Such a good running partner is widely acclaimed and popular among Chinese runners: within 2 months of the launch of the account, more than a hundred thousand users had a signed up.

Nike China App collects consumer data for important business decisions

Additionally, in Nov. 2019, Nike launched the Chinese version of the Nike App — Nike’s one-stop shop, which aims to provide Chinese members with a personalized, immersive experience, and to inspire every Chinese consumer to live a fit lifestyle.

The Nike+ ecosystem allows Chinese runners to share their experiences, track their running progress and create and meet challenges for themselves and their running networks. It is the information and data uploaded by runners that have become an important basis for Nike’s business decisions such as product design, new product promotion, and online and offline marketing. The collection of users’ running information can help Nike find potential customers and understand them better by analyzing how the fans and consumers behave, what they like about Nike’s footwear and apparel. Thus, Nike is able to conduct data-driven marketing campaigns more accurately by leveraging the troves of consumer data.

Nike offline community in China: increase members’ loyalty

Nike has garnered the power of community and learned more about what Chines users want through holding a series of offline activities. The sports brand has organized a series of ‘social’ sport events (for example the China High School Basketball League, races) annually and also held theme activities regularly through many community clubs such as Nike Runs Club, Nike Training Club. For example, Nike “JUST DO IT SUNDAY!” runs campaigns are hold on a regular basis in different cities around the country, and new elements like technology, books, music, charity, etc. are added to the events in order to make running more interesting and meaningful.

[Source: Nike, “Nike ‘JUST DO IT SUNDAY’ event”]

Events like races provide consumers with a platform for immersion in the Nike experience, through their willingness to engage personally and interact socially online and offline, Nike and its runners are co-creating an experience together. Therefore, members are motivated to actively connect with each other through taking part in the Nike’s offline events, which further results in more sense of belongings and loyalty of the members to the Nike. Through the offline community events with specific theme matched with Nike’s spirit, Nike is able to established emotional resonance with its members and in this case, the connection between Nike and its Chinese customers is deepened.

Digital Marketing Strategy of Nike in China

As more consumers start adopting various digital technologies in their daily lives across the country, Nike has developed its new digital marketing strategies in order to continue engaging the Chinese audience.

Female-focused strategy

Data from the Nike+ Running community proves the growth in women’s running around the world especially China. In China, female Nike+ runners are growing at an even faster pace than men. In recent years，Nike has laid more emphasis on Women’s business by launching various community campaigns and providing tailored services targeting women.

[Source: Nike, “Nike Women China ‘Better For It’ Brand Campaign”]

How Nike China targets women runnersNike has activated Nike+ Run Club and Nike+ Training Club to provide women runners of all levels with more comprehensive running programming and elite coaching. Nike also launched NikeWomen WeChat account, which aims to provide a social platform for Nike’s female customers and advertise women-based products and events. Therefore, with the digital platform base (integrating Nike+ Run Club, Nike+ Training Club, Nike App, Nike and NikeWomen WeChat account), Nike is able to realize its woman-based marketing strategy and build a more cohesive female community in China.

Nike markets to women by empowering them

In addition, Nike launched its global “Better for It” campaign meant to spark women’s interest in sports and Nike China localized the campaign under the tagline “Just for better (只为更赞)”. For the Chinese campaign content, Nike leveraged female influencers like actress Wang Luodan relating to the frustrations of every day exercise and the love-hate relationship many have with working out. Influencers on WeChat and Weibo helped Nike connect with the target by sharing their training stories and inspiring women to be “Better for It.”

Also, Nike drove traffic and downloads of the N+TC app, that provides a community and personalized workouts with professional trainers for women to complete at home. For offline marketing, Nike’s N+TC Tour officially kicked off in Shanghai on March 8，2015 and has since completed its first-ever Greater China tour, connecting with over 8,000 women across 4 cities. Two-time tennis Grand Slam winner Li Na joined over 1,000 young women for the inaugural Shanghai N+TC Tour celebration and is joining the #betterforit call to action with her own story.

Nike China opens women’s only store

Moreover, Nike opened its second, women’s-only store in Shanghai. In this store, specialized services, weekly programming and tailored events are designed to inspire and enable the community of active women. It is from the store, we can see the key of Nike’s digital marketing strategy: Integrating online communication and offline retail terminals around digital community platforms. For example, Nike Women Shanghai also features a digital community area displaying updated calendars for the Nike+ Run Club, Nike+ Training Club classes and store events. Profiles of Nike coaches and trainers, the latest product and campaign information, Nike+ content and downloads will also be easily accessible.

[Source: Nike, “Nike Women store in Shanghai”]

Brand community on social-media

Nike shows the successful creation of a strong relationship with its online brand community demonstrated by an active customer engagement.

Nike encourages its brand community members to post photos of their workout on social media by offering templates and hashtags. That way, sharing goals, struggles and achievements with either friends or strangers motivates Nike+ users themselves as well as other brand community members. Additionally, community members spread information about Nike and its products and act as stealthy brand ambassadors.

[Source: Weibo, “Posts with #NikeTraining hashtag on weibo”]

Particularly on Weibo, one of the top social networking platform in China with 516 million monthly active users, Nikes’ brand community members transfer their experiences in form of individual images and words under a collective hashtag #NikeTraining or #Nike+训练营. Thereby they express their commitment to both, the brand and the brand community. Currently, there are around 1.955 million reads on Weibo #NikeTraining topic. With the help of social media, brand stories created and shared by users influence not only existing community members but also new ones, who might get confirmed in their brand spirits and gain more trust towards the brand. In this case, Nike successfully promote itself among billions of users in Chinese social media platforms, and this further leads to long-lasting relationships between the Chinese customers and the brand. 

Digital strategy is the key to Nike’s success

“The digital economy will bring huge market opportunities for China and the other parts of the world, as technology has profoundly affected consumer behavior and raised the expectations of potential customers.” Iris Yen, vice-president of Nike Direct China said.

Nike believes digitalization as a strategy in China will help it perform better in Chinese market. Focusing on digital platforms, Nike aggregates segmented users to create different communities and provide diverse online services and offline experiences. Also, for brand marketing and promotion, Nike integrates the resources such as retail terminals, digital platforms, and offline experience activities, etc. With the digital strategy in China, Nike is creating its brand ecosystem, which covers consumer insight, products innovation, customer experiences and value creation. The pattern is expected to constantly drive growth for Nike in China and help it lead the future of retail.

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Astrology is defined as “The study of the movements and relative positions of celestial bodies interpreted as having an influence on human affairs and the natural world.” It originated from the western society. Nevertheless, astrology is popular in China and has affected Chinese people’s daily lives and consumption. Astrology has even made its way into China marketing campaigns targeting young consumers.

The popularity of Astrology in China: western Astrology is more popular with Chinese people

Internet activity reveal the popularity of western Astrology in China. According to Baidu Index, during the period of 2012- 2020  Astrology was searched 16 times more on Baidu than Chinese zodiac. According to Zhihu, 474 topics that are related to Astrology are discussed by Zhihu users in China.

[Photo source: Baidu Index, ‘Search index of Astrology VS Chinese Zodiac’]

The history of Astrology in China

Even though Astrology has been widely discussed by Chinese people in the last decade, it has existed in Chinese society for more than 1000 years. In Sui Dynasty (581-618), Indian monks firstly introduced Astrology to Chinese society. During Qing Dynasty (1636-1912), Kang Youwei, the famous Chinese philosopher and politician standardized the translation of Astrology in China, which has been used in the following years until now.  In the 1990s, Western astrology began to seep into Chinese people’s daily lives. The internet has fostered and spread the popularity of Astrology in China.

Some Chinese consider astrology in who to date and who to hire

During social occasions, Chinese people discuss the latest gossip and tidbits about their astrological profiles. According to The New York Times, social media accounts with millions of followers share weekly horoscope forecasts. On dating APPS, users show their zodiac signs alongside their age, salary, car and home ownership status. More and more Chinese consider astrology  during all kinds of major life decisions including relationship advice, making friends, having babies, and even hiring employees.

Profile of Chinese Astrology fans: dominated by females and youth

Chinese people with different backgrounds hold diverse attitudes and perceptions towards Astrology.

According to a survey conducted by woshipm, 82% of the responders believe in Astrology and females tend to believe it more. Additionally, people aged below 25 are more likely to be Chinese Astrology fans. 47% of the responders read articles related to Astrology occasionally while merely 9% of them read them every day.

[Data source: Research Center of Cheetah Mobile, ‘Chinese people’s attitudes towards Astrology (2019)’]

[Data source: Research Center of Cheetah Mobile, ‘Frequency of browsing content of Astrology (2019)’]

Regarding to content, Chinese Astrology fans are likely to know about personality analysis, lucky numbers/dates/items and relationship insightsadvice.

[Data source: Research Center of Cheetah Mobile, ‘Popularity of Astrology in China’]

In terms of the channels, Chinese Astrology fans access the information regarding Astrology, websites, Astrology apps and influencers’ social media accounts are the common platforms.

[Data source: Research Center of Cheetah Mobile, ‘How Chinese access Astrology related content’]

Rationales for the popularity of Astrology in China: obtaining psychological comfort matters 

Gaining psychological comfort, self-recognition and entertainment, and socializing with others explain Chinese Astrology fans’ obsession with it. Many responders indicate that they turn to astrology for clarity during tough times, which can provide psychological comfort. Chinese Astrology fans feel their lives are out of their control, and reading articles related to Astrology would ease their mind as they can understand the forces behind their destiny. For those who responded gaining self-recognition, they believe that people from different zodiac signs has specific talents. By discovering and  amplifying the talent, these people can maximize their success.

Some answers from Zhihu users have verified these reasons and they are in favor of Astrology. Psychological comfort or related terms is a common  reasons put forth by Chinese astrology fans. Many of them feel that the description of their zodiac signs are accurate as these match their personalities. Some of them mentioned that their belief in Astrology is related to their relationships.

[Photo source: Zhihu, Chinese netizens explaining why Astrology is popular in China]

From the academic perspective, an author from The Outlook Magazine argues that Astrology has been prevalent since ancient China as it was a mean of forecasting national incidents, wars and harvest. Thus this has been a tradition in China, anticipating one’s fate based on Astrology. Nowadays Chinese people prefer the western Astrology instead of Chinese horoscope is due to the fact that the west Astrology is more complex and supported by art works and literature, while Chinese horoscope is relatively abstract and hard to understand.

Astrology market in China: fostered by social media behavior

Social media has been an incubator that has fostered the Astrology market in China as astrology features low barrier to entry, entertainment-orientation and socialization. According to WeChat official accounts, 313 results are tagged as “Astrology” and Uncle Tongdao is the most popular with the search index of 974.1. On Weibo, Jin Li Da Wang (Koi) and Tao Bai Bai have 20.78 million followers and 7.95 million followers respectively. 

Some companies have developed Astrology apps in Astrology market in China. In comparison with Astrology promoted on social media accounts, Astrology apps provide diversified services such as paid Q&A, paid anticipation and Astrology lessons. Moreover, their services are not limited to Astrology but also dice, luck tests and personality tests.

[Photo source: woshipm, ‘Astrology apps in China’]

Case study: the success of Uncle Tongdao

[Photo source: meihua.info, ‘Uncle Tongdao’]

Uncle Tongdao is a successful Astrology brand in China. In 2014, Uncle Tongdao went viral on the Internet as its cartoons and images fitted Chinese netizens’ appetite. By combining Astrology related culture and the 2-dimention culture, Uncle Tongdao is able to win the heart of Chinese Astrology fans. By the end of 2018, Uncle Tongdao had more than 60 million followers on social media and become the representative in Astrology in China. 

The business model of Uncle Tongdao is innovated in China as it combines IP operation, IP authorization, IP E-commerce, IP community and IP crossover marketing. As a result, the company generates its business eco-system and keeps producing business value for its partners. Uncle Tongdao has become one of the most valuable Intellectual Property entities in China.

Astrology co-branding in China

Apart from the online sector, Uncle Tongdao also expands its business area to offline sector by establishing subsidiaries that carry on publishing, souvenir and dramas, etc. On May 20th, Along with many other co-branding ventures, Uncle Tongdao alongside with I-ORANGE, an advertising company set up pop-up wedding dress stores. It was an event for single people and encouraged them to face their relationship status regardless of people’s judgments. It turned out to be a successful campaign as the societal pressures of singles is quite a headache for Chinese young adults.  

[Photo source: meihua.info, ‘Pop-up wedding dress store, an Astrology marketing campaign in China’]

Astrology in the hospitality industry

Uncle Tongdao also collaborated with Atour and established a hotel that features Astrology culture in Chengdu. The business vision is providing a comfort zone for young people to alleviate stress.

[Photo source: meihua.info, ‘Uncle Tongdao x Atour Hotel, an Astrology marketing campaign in China’]

Ride your start sign to work

In 2017, Uncle Tongdao collaborated with ofo, a bike-sharing company in China and launched some Astrology-themed shared bikes in China. Uncle Tongdao claimed that,  riding the personal zodiac signbrings luck to commuters in China. 

[Photo source: meihua.info, ‘Uncle Tongdao x ofo bikes’]

Future trend of the Astrology market in China: focusing on platforms, core values and big data

In the foreseeable future, the development of Astrology market in China ought to innovate its channels and content of products. Finding the right platform

Chinese Astrology fans cannot bother downloading apps to access Astrology information. Instead, WeChat official accounts or mini programs are the more convenient platforms.

Focusing on mainstream culture

Secondly, brands should focus on mainstream culture and subculture that are popular with youth in China so that they can alter their products and tailor to different needs. Astrology is a trend to watch for marketing to millennial and gen Z consumers.

Providing comfort

Furthermore, Astrology companies in China should always maintain the core value of satisfying users’ needs by including psychological comfort, positive energy and stress relief in their messages. Considering the fact that Chinese Astrology fans turn to the art for clarity during tough times.

Getting technical

Last but not least, AI and big data will be applicable in Astrology market in China since they are able to make Astrology more convincing. Since 2018, some Astrology APPs have been developing and testing the feasibility of this application and the result is yet to be known.

Popular Astrology topic: How Chinese people from different zodiac signs behave in the relationship?

Speaking of relationships, Chinese youth, especially girls, like to relate personalities to zodiac signs. Undoubtedly, Astrology serves as a reference when they make decisions on their relationships. The table listed below is the summary of characteristics of different zodiac signs. Whether it is reliable or not, it varies case by case!

Author: Amelia Han

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This article Why Astrology is popular in China is the first one to appear on Daxue Consulting - Market Research China.

The 2020 Lunar New Year will be remembered for more than just the year of the rat. In addition to celebrating the New Year with family, China also had its hands full containing the outbreak of the Novel Coronavirus. The economic impact of the Coronavirus can be felt around the world. On 23^rd January, the Wuhan’s Government decided to seal off the city from all outside contact in an effort to stop the spread of the Coronavirus. Since then, other cities in China have decided to cancel public events and citizens are suggested to stay at home. In a few short weeks, the streets of Chinese cities went from bustling with traffic and pedestrians to eerily empty. As the virus spreads, many cities in the coastal province of Zhejiang are now also getting sealed off. To prevent more spread, a majority of Chinese are cooped up in their homes. While Wuhan fights the virus, Chinese people are fighting off boredom. Lets look at the Chinese daily life during the coronavirus outbreak

Chinese are active on social media platforms during the coronavirus outbreak in China 

Weibo: share updated information of the Novel Coronavirus

Weibo (similar to Twitter) is the most popular social media platform which enables Chinese people to share and discuss up-to-date information regarding the Novel Coronavirus in China. According to Weibo, on February 4, 2020, approximately 13 out of 23 topics are about the Novel Coronavirus in China. In addition to the information of the Novel Coronavirus, topics related to as celebrities, like Kobe Bryant’s death, are being discussed on Weibo. Some topics reaching over 1 million reads per minute.

WeChat Posts: Chinese are staying updated on the virus

WeChat (similar to WhatsApp) is also a popular social media platform which enables Chinese people to access up-to-date information regarding the Novel Coronavirus in China. During the period of Chinese New Year, the updated Novel Coronavirus is placed in the top on every user’s page so that they are able to access this information easily.

[Photo source: WeChat, ‘Update of Novel Coronavirus’]

Chinese are extensively using video platforms  

According to the ranking in App Store, in the entertainment sector, 7 out of 10 apps are video platforms. This has proven that Chinese people are keen on watching movies or TV dramas during the Coronavirus outbreak. Cinema in China has temporarily shut down during this period. Nevertheless, this does not impede the release of New Year Movies. One example is the debut online premier of Lost in Russia. By the 27^th January, it has reached 0.6 billion of views from 0.18 billion  viewers. Since then more than 26 New Year Movies, including ones from previous years, have been on via video platforms such as Youku, TenCent and iQIYI.

[Photo source: App Store, ‘Ranking of entertainment apps’]

[Photo source: 36Kr, ‘New Year Movies in 2020’]

Online shopping: medical products and daily necessities  

E-commerce is a major part of the Chinese daily life during the Coronavrus outbreak. Since Chinese people are not suggested to go out, they do even more shopping online. According to JD’s Big Data Research Institute, during the Chinese New Year in 2020, people were likely to purchase medical products ( medicine and masks), hygiene products (hand wash and disinfectant) and food. From 24^th January to 4^th January, JD has delivered 19, 000 tons of staple food, 5.9 million liters of cooking oil, 15 million units of instant noodles and 4000 tons of fresh food.

During the Chinese New Year in 2020, several food sectors have prominent performances. Sales of cooking oil experienced a significant growth with 556% YOY. Compared with the same period last year, sales of prepared food and instant drinks increased by 423% while that of dairy products rose by 300%. Sales of staple food were 20 times more than the figure last Chinese New Year and sales of frozen food were 7 times more than that in the same period last year.

As for the fresh food sector, sales during the Chinese New Year in 2020 were 370% more than that prior to this period. Furthermore, the sales of vegetables were 9 times more than that in the same period last year. The sales of meat were 7.5 times more than that of the last Chinese New Year. The below graph shows how the proportion of sales on JD changed between 2019 and 2020.

[Data source: JD Big Data Research Institute, ‘Change in consumption during CNY (2020 VS 2019)’]

Mobile Gaming: multiplayer online battle arena sector is the most popular. Plague Inc. rises ahead

The outbreak of the Novel Coronavirus caused Chinese citizens to turn to gaming for in-home entertainment. Data has revealed that Chinese people have spent more time gaming during the Chinese New Year in 2020. According to Baidu Index, the searches related to mobile gaming has boosted from 26th January onwards. According APP store rankings, Honor of Kings and Game for Peace are the most popular mobile games among Chinese people. During the last Chinese New Year, the daily active users of Honor of Kings was consistently 70 million whereas that of Game for Peace was 30 million. However, the performance during the Chinese New Year in 2020 is more outstanding. The daily active users of Honor of Kings has reached 120 to 150 million  while that of Game for Peace has reached 80 to 100 million during this period.

Coronavirus inspires gamers to play Plague Inc.

Besides, it is noticeable that Plague Inc. has become increasingly popular along with the expanding influence of the Coronavirus. According to the ranking in the App Store, since  January 19th, downloads have surged rapidly and it is now ranked first in the paid game sector.

[Photo source: Baidu Index, ‘Search index of mobile gaming’]

[Photo source: App Store, ‘Ranking of game apps’]

Online fitness: Rejoice Sport and Keep are keeping Chinese active during the Coronavirus outbreak

During the Coronavirus outbreak, Chinese are looking for ways to stay in shape. Mobile fitness apps such as Rejoice Sport and Keep are gaining traction, as they can do exercise at home. According to qimai, from 27th January onwards, the search index has increased drastically and maintained at 9407. Prior to the Chinese New Year in 2020, the figure fluctuated around 8600.

[Photo source: qimai, ‘Search index of Keep’]

[Photo source: zcool, ‘Page of Keep’]

Education Platforms: Chinese students study through the  Coronavirus outbreak

The Coronavirus outbreak does not affect Chinese students’ passion on study. The downloads of Some education apps such as Yuan Fu Dao, Ren Jiao Dian Du and Xueersi Online School experience a significant increase. Moreover, from 9^th January to 30^th January, the period prior to the Chinese New Year, the search index of the mentioned apps remained stable. However, from 30^th January onwards, the 6th day of the Chinese New Year, their search index have risen significantly to around 9000.

[Photo source: qimai, ‘Search index of education apps’]

Discussion forum and cooking apps get traffic during the coronavirus outbreak

Other mobile apps such as XiaChuFang (cooking app), Zhihu (similar to Quora) and Douban (similar to Reddit) are also popular with Chinese people during the Chinese New Year in 2020. Moreover, it is noticeable that the search index of Xia Chu Fang has boosted from 27th January onwards and has reached 9000. During the coronavirus outbreak, Chinese people dare not dine out. Cooking at home seems to be an alternative for them. On 4th February, the app was out of order and it had terrified lots of users as they claimed to rely on such an app for cooking.

As for the discussion forum, Zhihu and Douban, Zhihu has maintained its search index around 9250 during the Chinese New Year in 2020 whereas Douban has stable increase in search index since 27th January.

[Photo source: qimai, ‘Search index of discussion forum and cooking app’]

Traditional games and activities during Chinese New Year in 2020 have been brought online

In general, traditional games in Chinese New Year such as paying a new year call (拜年), and playing Chinese poker and mahjong are common activities during Chinese New Year. However, these activities require gathering and are likely to spread the coronavirus among families. In order to avoid such activities, there are now penalties for gather to play games, and people are encouraged to report these to the police. Despite the fact that gathering to play Chinese pokers and mahjong is prohibited, online Chinese pokers and mahjong are the alternatives. According to qimai, on 7^th February, the search index of different types of Chinese pokers occupied the top-5 positions in the ranking of game’s search index. This has indicated the popularity of these traditional games.

In the image below of top searched APPs during the Coronavirus outbreak, all poker games are circled in red.

[Photo source: qimai, ‘Ranking of game’s search index: Chinese poker games are circled in red’ ]

[Photo source: yiwan, ‘Online mahjong’]

Coronavirus made a 1000 year old tradition go digital

Chinese people normally go to the temple fair during Chinese New Year to pray for luck and health for their families. With over 1000 years of history, it is hard to imagine a Chinese new year where families do not gather at local temples. However, owing to the outbreak of Coronavirus, the temple was banned in every Chinese city.

Nevertheless, there is an alternative for this event. For example, the temple fair in Foshan, Guangdong has switched to a online temple fair. Every year, on the 16th day of the Chinese New Year residents from Foshan carry handmade windmills and lettuce  through a bridge, which can bring luck and happiness to people. This year, people from Foshan attended the temple fair via their mobile phones. By browsing and clicking the handmade windmills and lettuce that appeared on the page, users were able to “walk through the bridge” as if they did so in reality. Photos of the temple fair are placed on the page so that users could feel the event’s atmosphere.

[Photo source: Sohu, ‘Temple Fair in Foshan (2018)’ ]

[Photo source: WeChat, ‘Online Temple Fair in Foshan (2020)’]

Unusual activities that combat boredom during the Coronavirus outbreak

Even though Chinese people can access a variety of activities via electronic devices, some people feel extremely bored at home. According to Baidu Index, the search index of “Boring” and “Stuck at home” has surged significantly during the Chinese New Year in 2020.

[Photo source: Baidu Index, ‘Search index of “boring” (on the left) and “Stuck at home” (on the right)’ shows boredom in the Chinese daily life during the Coronavirus outbreak]

Therefore, what to do at home has become a popular topic on social media. On Weibo, Chinese people are likely to search “how to kill time at home”, “what to do at living room”, etc. Some Chinese have funny ideas like fishing at home and making crafts with seeds.  

[Photo source: Sina, ‘Fishing at home’]

[Photo source: Sina, ‘Seed craft’]

On 27^th January, residents from Wuhan launched an event, singing at the window, in order to cheer themselves up. At 8 PM, residents from different communities in Wuhan played the music and sang at the window. Lately, this event was criticized by doctors as it increased the risk of coronavirus infection.

Coronavirus memes created by Chinese netizens: embody non-mask phobia

Even if the current situation in China is serious, Chinese have faced it with a sense of humor. The following memes and funny pictures embody this.

People are suggested to wear masks in the public area. On 26^th January 2020, Guangdong government has established a policy regarding wearing masks in public areas. Penalties apply to people who refuse to wear masks. A lot of memes are created and are related to masks during the Coronavirus outbreak. Chinese people tease that masks are trendy, even putting masks on their pets. Moreover, masks are precious and are thought to be luxurious gifts, sharing them in Red Envelopes which are normally used for gifting money.

[Photo source: Zhihu, ‘Memes of Coronavirus’]

When the coronavirus started to break out in China, the older generation were in contempt of it and refused to wear masks. It was hard for Chinese youth to convince them. Thus, they create lots of memes which embody their helplessness.

Thankfully, the situation has reversed. Due to the spread of the coronavirus in China, the older generation has gradually been aware of how serious the situation is and now wear masks while going out.

 [Photo source: Zhihu, ‘Memes of Coronavirus’]

During the Coronavirus outbreak, Henan province has been widely discussed on social media due to its effective precaution. Every village in Henan has implemented a strict rule, that is, people are not allowed to visit the village that they do not come from. Villagers take turns to guard the entrance and prevent other people from entering.

[Photo source: Huxiu, ‘Villagers from Henan, guarding the entrance’]

Author: Amelia Han

The ultimate Coronavirus economic impact in China report

This article Chinese daily life during the Coronavirus outbreak: Facing boredom with humor and digitization is the first one to appear on Daxue Consulting - Market Research China.

2019 brought creative China marketing campaigns from many industries. Our team looked at the marketing campaigns of 2019 and chose ten of the most epic to analyze. Some of the trends observed in 2019 that we expect to stay for 2020 were co-branding, social media marketing, and the merge of online and offline in advertising. Additionally, TV commercials have maintained a positive affect on Chinese consumers, especially those that are emotionally moving or humorous.

How two classic brands’ appeal to young consumers through co-branding in China

Co-branding is a marketing campaign where two or more brands partner up to achieve mutual marketing benefits. This China marketing campaign combines the market strength, brand awareness, and cachet of multiple brands to increase customer base, profitability and market share of both brands. Although successful co-branding in China can bring many benefits, companies should choose co-brand partners carefully to avoid decrease of positive brand association that arise from unsuitable collaboration.

2019 was a big year for many ‘time-honoured’ Chinese brands as they collaborated with younger brands in order to reach a broader and younger customer base. Many famous ‘time-honoured’ Chinese brands struggled to maintain presence in the Chinese market as the age group that constitutes the consumption backbone in China grows increasingly younger. This is mainly due to younger generations’ rising discretion in the choice of brands and their preference towards a novel experience over exquisite craftsmanship. For millennials, who are the main consumers of the current Chinese market, older brands wish to induce a feeling of nostalgia that targets their childhood memory. By co-branding with younger brands, these two older brands increased brand awareness through nostalgia marketing in China.

1. White Rabbit x Scent Library (大白兔x气味图书馆): Co-branding and nostalgia marketing in China

White Rabbit is a 60 years old shanghai-based brand that produces milk-flavoured candy. In 2019 it collaborated with Scent Library, a domestic fragrance brand, and launched a variety of skincare and home décor products including perfume, fragrance, and lotion. All the products from the campaign were infused with White Rabbit’s signature milk candy flavour. The products were strategically launched during Children’s Day, which triggered a rise of nostalgia among millennial consumers. More than 14,000 co-branded products were sold out in the first 10 seconds after the crossover collaboration was launched on Tmall on May 23. As a result, the collaboration range had resulted in 15 times more visitors and 1.6 times increase in sales revenue in the two months after White Rabbit debut its online store.

Scent Library is not White Rabbit’s only co-branding partner. The brand also  launched a limited-edition lip balm with Maxam(美加净) and milk-candy gift box with agnes.b which tested the water for its future brand collaboration and provided a base measure for its future cross-over. Through co-branding in China, White Rabbit has capitalized on taste, smell, and appearance. White Rabbit re-captured target consumers and successfully morphed its brand image from an old brand to a classic, fashion and living brand.

[Source: Tmall App Co-branding in China – White Rabbit x Scent Library’s China marketing campaign]

2. Wang Wang x Nai Xue’s Tea (旺旺x奈雪の茶): Co-branding and nostalgia marketing in China

Wang Wang, a food manufacturer famous for rice crackers and flavoured drinks, joined hands with Nai Xue’s Tea this year. Similar to White Rabbit, Wang Wang also chose to launch its collaborated products on Children’s day, a day where their target consumers reflect on childhood memories. The collaborated products include Wang Wang milk flavoured drinks, Wang Wang milk custard, tea cups with Wang Wang logo and more. This brand collaboration went viral online and was very successful given its limited edition nature.

Marketing strategies that use emotion are proven to be successful. Moreover, nostalgia marketing in China often resonates with millennials. Therefore, brands can leverage optimistic feelings and encourage consumers to take action.

[Source: Nai Xue’s Tea Weibo Co-branding in China – Wang Wang x Nai Xue’s Tea’s China marketing campaign]

How these two fashion and cosmetics brand collaborations created excitement in 2019

Many fashion and cosmetic brands have launched co-branding campaigns in China with unlikely partners. Given the limited edition nature of their goods, co-branding campaigns in China use hunger marketing, in which there is a limited quantity or limited time offers on the product to create an illusion of excess demand. The first round launch of limited edition is a good means to test the demand of collaborated products and then increase supply accordingly. Scarcity can casts a luxury feeling on the products and hence adding additional value to products.

3. Uniqlo x KAWS (优衣库x KAWS): FOMO marketing in China

In 2019, Japanese clothing brand Uniqlo teamed up with KAWS, an American visual artist and designer, to launch a collaborative capsule worldwide. This collaboration went especially viral in China. The images of the line of people rushing into the Uniqlo China store to grab a hold of this collection went viral online. Of a total 22 products, 6 million pieces were completely sold out on launching day. In addition, the hashtag #优衣库联名款遭哄抢＃(#Uniqlo collaboration was snapped up#) reached 470 million view and 5.5 million engagement rate on Weibo on the launching day.

Notably, Uniqlo has actually launched a few collections with KAWS in the past two years. Although the market response was always positive, this year’s performance was unprecedented. In fact, the hype of this year may be attributable to Dior’s KAWS collection as well as the public statement that KAWS himself had made on social media. He mentioned that the 2019 collection will be his last with Uniqlo. Both factors have probably induced some fear of missing out. The limited temptation did provide some kind of luxury side to this collaboration, and made it seem more attractive than ever before.

[Source: 36Kr Line of Co-branding in China – Uniqlo x KAWS’s China marketing campaign]

4. Perfect Diary x Chinese National Geography (完美日记x中国国家地理): Unlikely 11.11 collab and KOL marketing in China

Perfect Diary launched four eye shadow palettes this year with Chinese National Geography, a magazine similar to National Geographic. Such cross-overs of different industries are increasingly common in China. The colour theme of the eye shadow palettes mimicked four different geographic sceneries in China. KOLs and influencers were invited to implement pre-excitement of the launch. The amount of exposure of this collaboration reached over 400 million, while over 130,000 palettes were sold during the Double Eleven shopping Festival in 2019.

[Source: Digitaling Co-branding in China – Perfect Diary x Chinese National Geography’s China marketing campaign]

One outstanding social media marketing strategy in China 2019

Social media marketing in China is becoming increasingly prevalent. A successful social media campaign can build brand engagement, drive private traffic and increase sales. The major social media platforms in China include Weibo, WeChat, Douyin and Xiaohongshu.

5. Starbucks cat claw cup: Pre-launch heat generated by social media marketing in China

The Starbucks cat claw cup released in 2019 generated craze in China. The cups are transparent and double-walled with a claw built within. The claw shape will emerge as colored drink fills the cup. The cups sold out on the day it was debuted in offline stores. Due to the high demand, Starbucks released another 1,000 cups online that sold out in one second.

On top of being limited edition, Starbucks used social media such as Douyin, Weibo and Xiaohongshu as a marketing tool for pre-launch and pre-heat. The adorable outlook has generated high discussion volume and excitement for the actual launch, which allowed the cup easily become viral across all platforms. Due to being limited edition, people were compelled to craze and fight to get a hold of the cup. Some would either resell it for a much higher price or show off their purchase on social media.

[Source: Zhihu.com Starbucks used social media as a marketing tool in China to pre-launch products]

Three TV commercial campaigns in China that built top-of-mind awareness in 2019

There are also many successful Chinese TV commercials in 2019. However, different from co-branding in China which aim to boost short-term brand awareness and short term revenue growth, TVC campaign in China aim to build long term brand awareness and inject brand value through storytelling. Although TV ads may seem outdated compared to digital marketing, they are proven to be increasingly effective globally, and can leave a long lasting effect in consumers’ minds. Consumers usually expect a few things from TVC campaigns in China in order for them to keep watching and consider an Ad as successful. For one, an ad can use story or humour to keep consumers engaged. Secondly, an ad can be memorable in a positive or moving way. Lastly, an ad can identify the brand itself and allow consumers to get a better understanding of the core brand value. Notably, TVC campaigns in China are not limited to TVs anymore as many now appear on online video playing platforms such as Tencent Video, Iqiyi etc.

Meaningful emotional marketing strategies that convey brand value

6. China Mobile x Migu – What is Peppa Pig? (中国移动x 咪咕 – 啥是佩琦): Pulling the heartstrings of Chinese families

‘What is Peppa Pig?’ is ranked in the top in almost any ad rankings of 2019. The ad doubles as a preview for the Peppa Pig movie, and a marketing campaign for China Mobile. The ad campaign centers around a grandpa in rural China, who is on a journey to find out what is Peppa Pig, which is what his grandson requested for a Chinese New Year’s gift. The commercial went viral among Chinese audiences and received 400 million views on Weibo by the end of 2019.

The story strikes a chord with Neitzens as it connects with the issue of China’s rapid urbanization. China’s elderly are becoming increasingly isolated from their children who migrated to the cities. This TVC campaign had built Peppa Pig into a Chinese socio-cultural context and resonates with viewers’ relationships with parents or grandparents. Moreover, Chinese Mobile also had the chance to convey its brand value, which is that it can connect and bring together families from all across China.

Funny and down to earth TVC campaigns in China

7. Nike – It is stylish to be talented (耐克 – 够来噻，才腔调): Play on Chinese dialect with humor

Nike released a few TVC campaigns in China featuring the Shanghainese phrases  ‘够来噻, 才腔调’. ‘来噻’and ‘腔调’ which carry broad meanings. The former is often used to admire someone who did a terrific or impressive job, while the latter one means stylish, classy and good taste.

The most notable commercial of the campaign was released in early November. The commercial features a loyal guard on a journey to find ‘腔调’ (good taste) is for his boss. He tried to find it through different sports and then resigned at the end. It suggests that style, class or good taste is built upon the fortitude and courage to master a sport. The commercial is funny, yet meaningful, in which consumers can receive the motivational message behind the video. As the campaign breaks through the topic via different sports, it also conveys the core brand value ‘Just do it’ insisted by Nike.

[Source: Tencent Video Screen shot of TVC campaign in China – ‘It is stylish to be talented’]

8. Cadillac – No rear wheel drive, not premium (凯迪拉克 – 没有后驱，不算豪华): Play on Chinese social phenomenon

Cadillac also used a humorous approach to present its recent TVC campaign in China named ‘No rear wheel drive, not premium’ or ‘没有后驱，不算豪华’. The commercial featured a series of eight words phrases that follow the sentence structure of ‘没有    ，不算    ’ to point out different Chinese social phenomenon. The heavy social problems are twisted using humour that intends to appeal and connect to target audiences in a light hearted way. The phrase ‘No rear wheel drive, not premium’ is repeated throughout the ad. However, the repetition is engaging and perhaps even brain washing, as the slogans did not pop-up in nonsense order and are connected to other parts of the ads.

[Source: Tencent Video Screen shot of TVC campaign in China – ‘No rear wheel drive, not premium’: If there’s no Trap, he’s not a boss’]

[Source: Tencent Video Screen shot of TVC campaign in China – ‘No rear wheel drive, not premium’]

Two brands that joined an online and offline marketing campaign in China

Like new retail, advertising is also merging online and offline. More and more brands are choosing to hold joint online and offline marketing campaigns in China. Such a campaign can attract attention and create buzz across all channels. Large amount of organic private traffic maybe expected. People are likely to post and share on social media if they see or experience an offline event on the street. With joint online TVC campaign in China, brands are more likely to increase brand awareness, and in these cases, increase sales.

9. Huawei Mate P30 – 5G brings us together (华为Mate30 – 让距离跨越距离)

In order to promote for its Mate P30 5G, Huawei launched a joint online and offline marketing campaign in China. Huawei cut a piano in half and placed each half in a different city. People walking by are encouraged to play the piano, and sounds played by each half are synchronized using Huawei Mate 30 5G. This campaign did not only break down the distance between people, but also sent the message that 5G can actually bring people together. Apart from the offline campaign, a TVC campaign in China by Huawei was also released in which the experiences were recorded. The joint campaigns are likely to generate more engagement then just a pure online or offline campaign.

[Source: Huawei Joint online and offline marketing campaign in China – ‘Half piano’]

10. DeRucci – Dream at the Great Wall of China (慕思 – 追梦 长城夜)

DeRucci organized a concert on the Great Wall of China with musician Max Richter. The brand invited 350 people to enjoy the 8 hour sleeping concert on its branded bedding products. As the campaign was live streamed online, the Weibo topic #长城8小时睡眠音乐会# or in English, #8 hours sleeping concert on the Great Wall of China# reached over 20 million views in just a few hours. This was not only a novel joint experience, but also a creative co-branding initiative as the concert was held by a world famous musician. Moreover, the campaign was special in the way that it reached into modern consumer lives. This event created a spectacular environment and provided an excuse for people that live in the fast pace society to slow down and have a good rest and a memorable experience. Clips of the event were promoted on social media and went viral, bringing the offline experience online.  

[Source: DeRucci Marketing campaign in China-DeRucci Night’s China marketing campaign]

Indeed, there are many successful marketing campaigns in China 2019. Brands are seeking more creative channels and interesting ways to create an experience and deliver brand value.

Author: Chenyi Lyu

How can your brand have one of the most epic marketing campaigns of 2020?

Get started with the right China market research. Brands first need to identify their target consumer needs and understand the competitors. From there, find creative ways to target consumers through a digital strategy, the right KOLs, or perhaps find a co-branding partner that shares the same target consumers. Contact our project team at dx@daxueconsulting.com to start your China market research project.

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Entering the Chinese market is a challenging process. Understanding China’s business culture and political environment, and adapting to that, can help your brand, product, or service development in China. Daxue Consulting provides comprehensive market entry support for any international brand or company looking to enter the Chinese market.

Step-by-step China Market Entry plan

In the strategic set up of your China market entry plan, we highly suggest a formulated market entry structure, which includes:

1. Market Overview and Potential Assessment

Analyzing the business environmental conditions to realize the challenges, potential risks and opportunities, knowing how those factors would impact your brand in China to have an overall “picture” of the competitors’ landscape based on the market and its evolution.

2. Benchmark analysis with business cases of successful market entrants

Competitor benchmarking provides insight into what competitors are doing, their strategies’ pros and cons, and ultimately, your advantages comparing with them – either through adopting successful practices or avoiding ineffective ones.

3. Concept and Consumer Experience Testing

Concept and consumer experience testing help collect first-hand data both end-consumers and local professionals (brand managers, retailers, importers, traders, etc.), which validate the value proposition and also the concept of the brand. Moreover, these interactions with end-consumers, often through focus groups, will allow you to gain knowledge on the preferred purchase channels, information sources, as well as the acceptance of marketing messages.

4. Consumer Segmentation

Each key criteria need segmentation and breakdown of the total demand, which help the brand to identify consumers and quantify the potential of market share to be captured by a newcomer in their market entry. After the key segmentation, a generate “marketing personae” could represent the different consumer types, data-driven to well meets “their” needs.

5. Allocation of investment and implementation design

The final step will materialize the market entry plan by combining and correlating the findings from the research. An actionable road-map could be designed for the first 2 – 3 years in China, including:

• Initial and yearly investment
• Portfolio of marketing actions
• Initial “Day 1” focus of consumer targeting and step-by-step scaling up operations
• Partnership and network building
• Financial statements and revenue generation models

READ MORE ABOUT CHINA MARKET ENTRY PLAN

Match the key requirements for successful market entry in China

The Chinese market is an attractive target for many foreign companies for such reasons like rising incomes, rapidly changing demographics, and increasing consumer spending, etc. Knowing the Chinese market and understanding the opportunities and challenges are necessary to create the correct market entry plan:

Market knowledge:

Entering and growing in the China market can be a daunting task for managers of foreign-invested enterprises. Due to the size and diversity of China and the lack of reliable centralized/official information databases, it is difficult to obtain information on certain industries, ripe markets, or companies. Thus, market knowledge must be obtained “on the ground.”

Regulatory environment:

Due to the particularity of the Chinese regulation in terms of multiple authorities is an oversight or the loose interpretation; foreign companies must ensure that they fully understand the regulatory environment before entering the china market.

Strategic consulting:

Strategic insight into the local company advantage within the competitive Chinese landscape is vital for foreign companies to gain market knowledge and insights into its competitors. Also, in some cases, international entrants may need to work with local partners incapacity.

READ MORE ABOUT CHINA MARKET ENTRY CASES

Follow the step-by-step China entry plan and have a good understanding of the Chinese market, regulations, and strategic consulting are the basic keys to success in the Chinese market. To have a further inform, thanks for contacting us and subscribe to our newsletter.

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Social media platforms like WeChat and Sina Weibo, as well as e-commerce marketplaces like Taobao,  are no strangers to foreign marketers. Compared to these well-known names, Xiaohongshu (小红书, also known as Little Red Book or RED) is relatively less talked about. In this insights report, Daxue Consulting will provide you with the most recent facts about Xiaohongshu, along with the Chinese netizens’ attitudes towards it. Additionally, we prepared a list of takeaways for international companies, who are leveraging or planning to use Xiaohongshu to engage Chinese consumers.

1. First of all, what is Xiaohongshu?

According to its official website, Xiaohongshu is a lifestyle sharing platform. The company was founded by Mao Wenchao and Qu Fang in 2013. Xiaohongshu reached over 200 million registered users in Jan. 2019, with the post 90s generation being the most active user group. It allows users to share short videos and photos about fashion, beauty, food, travel, and much more.

Xiaohongshu is one of the fastest growing mobile platforms. According to its co-founder, Qu, the number of monthly active users (MAU) doubled between the end of 2017 and the middle of 2018, reaching 30 million. The total number of registered users doubled between May 2018 and Jan. 2019. Xiaohongshu users are predominately young and female; a significant part of them are living in China’s first and second-tier cities. As a matter of fact, they are getting even younger,  “70% of new registered users were born after 1995.” Said Qu in an interview in 2017, “and in addition, the user base is also slowly stretching into the lower tier cities.”

Although Xiaohongshu describes itself as a content-oriented social platform, it has already become a hybrid of Chinese social media and e-commerce. On June 6, 2017, Xiaohongshu held a shopping festival to celebrate its fourth anniversary and the sales revenue exceeded 100 million RMB (around 14 million USD) in only two hours.

2. The evolution of Little Red Book

From a shopping guide to a community to e-commerce

[Source: Daxue Consulting “Xiaohongshu Evolution”]

It all started in Hongkong, one of the favorite overseas travel destinations for Chinese people. Despite the western ambiance and exquisite Cantonese cuisine, one of the main purposes of travel was shopping. Yet, due to the language barrier and lack of knowledge about foreign brands, many Chinese travelers were asking the questions, “Which handbag should I buy as my first luxury item? Which skin moisturizer is worth a try? How can I do a tax-refund?” Xiaohongshu co-founder Mao saw that information gap and started the first version of Xiaohongshu – Little Red Book Hongkong Shopping Guide – offering shopping-related information for mainland Chinese consumers from those who traveled or lived in Hongkong.

Chinese consumers do thorough pre-purchase research, especially for overseas products!

A couple of months later, more and more user-generated content about shopping overseas had been shared and it was not only limited in Hongkong. Shopping experiences in other countries such as Thailand, South Korea, and Japan were also being exchanged and discussed on the platform. Seeing that, the company decided to adapt the name to Little Red Book Shopping Notes. After obtaining all the knowledge about foreign brands and “window shopping” the products from all over the world, Xiaohongshu users were eager to purchase the goods they have learned about. Late 2014, Xiaohongshu e-commerce was established. That was how the app became the Xiaohongshu we know now – a social platform/e-commerce hybrid.

[Source: Daxue Consulting “Xiaohongshu interface”]

When you open the app on your phone, there are three buttons on the top of the screen: Follow, Discover, and Nearby. Follow allows users to keep up with the content from accounts they are following. With Discover, you can explore “random” content generated from all kinds of Xiaohongshu users. Under the Nearby section, content from users near your location will be shown. It is especially practical when the users are on a trip, they can easily discover shopping spots, good restaurants or anything interesting close to them in a foreign city.

At the center bottom, you find a big “+”, which encourages users to generate and share their own “notes”. On the left side of the plus sign, you can directly go to the shopping platform of Xiaohongshu.

The value of Little Red Book (RED) app in the daily life of Chinese consumers

Users often search for reviews and recommendations on RED before they make purchasing decisions. Some people simply use Xiaohongshu for “window shopping”, searching for fashion inspiration for things like clothing and hairstyles. Xiaohongshu has become a very important step for many Chinese consumers’ pre-purchase journey. Moreover, it has become a leisure time activity of many young women in China to browse the app and let themselves getting inspired and entertained by something new, funny or glamorous.

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3. To leverage Xiaohongshu for international brands

Official brand account, Influencer collaboration, Xiaohongshu marketplace

There are two options to leverage Xiaohongshu for foreign brands: firstly, as a social platform to improve brand visibility and interact with potential consumers; secondly, as a cross-border e-commerce marketplace to sell products.

[Source: an official account from French brand AGATHA on Xiaohongshu]

Similar to famous platforms like WeChat and Weibo, to set up an official brand account on Xiaohongshu is also possible for foreign companies. Companies need to submit various documents such as business registration for verification and depending on the product category, required documents can be different.

On the brand homepage:

• Little Red Book users can browse the “notes” the brand posted;
• It also shows the posts from other users when they mentioned (@) the brand in their own notes, this feature helps to strengthen the relationship between the brand and consumers;
• If the brand’s products are also available on Xiaohongshu’s marketplace, consumers can simply click on “Products” to browse the list of goods. From the product description, consumers can directly go to the brand’s Xiaohongshu store.

3.1 Pros and cons of setting up an official store on Little Red Book (RED)

There are a couple of advantages to setting up an official online store on RED: lower startup costs and a less complicated procedure compared to Taobao or JD.com. In addition, after Alibaba invested in Xiaohongshu last year (2018), we can already see some integration between these two platforms, e.g. Xiaohongshu posts appear in the reviews section of a product on Taobao. We definitely can expect more partnership in the future. The disadvantages of setting up an official store on Little Red Book can be the smaller range of consumer reach compared to bigger Chinese e-commerce platforms and the high commission charged on brands.

3.2 Working with KOLs: Online influencers in China

Even if a brand has neither an official account nor a shop selling its products on Xiaohongshu, it could still be very beneficial to leverage this app to engage Chinese consumers. Working with KOLs is crucial in China since Chinese consumers assume that online influencers are more trustworthy than “official” ads; that makes a positive word of mouth more impactful in China than in the West. If you decide to collaborate with a KOL, find the right person, whose image is compatible with your brand and whose followers are your target groups. The simplest way to reach out to a KOL is by sending them free samples of your product. Regarding the KOLs’ classification and costs, following analysis from Daxue Consulting can be helpful as an orientation. (Click on the link to view the full report about Chinese KOLs)

[Source: Daxue Consulting “Working with KOLs in China”]

4. RED: Is Content becoming money driven?

RED’s success is largely due to its content-driven nature. No matter it is the latest fashion trend, the new lipstick color from a beloved brand or a mystery travel destination, Little Red Book users want to learn more about it. Instead of formal source of information, Chinese consumers would rather discover it by themselves on social media. Often times, when a Chinese consumer hears about an interesting brand or product for the first time, he/she will check it out on Xiaohongshu. Buyers will check product reviews on the platform, which will influence the likeliness of purchasing the product. If it is already available on the Xiaohongshu marketplace, they will immediately add it into the shopping cart within the app. If not, users can share the links to products in the Xiaohongshu post directly or in the comment section.

However, as a former social media platform, becoming a better e-commerce marketplace could still be a big challenge for Xiaohongshu. Although many consumers have experienced huge convenience shopping on the App, there is also the voice of criticisms online. Some of them are accusing Little Red Book of providing fake content or even selling fake products. A recent hashtag on Weibo –  #Xiaohongshu ghostwriting 50 RMB/post# – has caused huge responses among Chinese netizens. This post revealed a price list for various service packages, according to the source, an “ultimate hitting the top” pack providing 8888 likes with 8888 times “saving as favorite” and 50 comments on Xiaohongshu would cost 1388 RMB (around 200 USD). Just within a couple of hours, this post had thousands of comments. The top comments expressed their disappointment and many of them agreed that Xiaohongshu is no longer the Xiaohongshu it used to be. “After celebrities also opened their accounts and made recommendations on Xiaohongshu, I don’t use the app anymore.” Says one top comment. Nevertheless, lots of netizens claiming still love to use Xiaohongshu for different purposes: Some search for recipes, others want to find out how certain clothing or fashion accessories look on a real-life girl rather than a model.

[Source: Screenshots of Weibo post regarding content ghostwriting on Xiaohongshu (Mar. 14th, 2019)]

5. Is Xiaohongshu the right place for your brand?

Daxue insights for foreign brands:

• • Make sure your target group in China is compatible with Xiaohongshu users, which can be basically described as young affluent women living in the urban areas. However, this may be different in the near future because of the increasing number of users in low-tier cities.

• • Compared to “traditional” advertisements, content on RED appears more trustworthy for Chinese millennials. It is an ideal place to create word of mouth and increase brand awareness, especially for smaller or less well-known brands.

• • Use Xiaohongshu as a part of a marketing plan, instead of just leveraging it as a cross-border e-commerce platform, e.g. detecting the latest interests from young consumers in China.

• • Little Red Book could be especially useful for niche / less-known brands. Numerous consumers are searching for content regarding brands or products they are not familiar with.

• • Xiaohongshu is a great place to partner with KOLs, make sure you find the right KOL based on their content and audience and not just their personal profile.

• Nevertheless, be careful of celebrity endorsements. Chinese consumers are getting more and more alert to “recommendation” which appears “too commercial”.

Author: Chencen Zhu

When it comes to China market insight why to choose Daxue Consulting?

Do not hesitate to reach out to our project managers at dx@daxueconsulting.com to get all answers to your questions.

This article Xiaohongshu is becoming a giant in both social media and e-commerce | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.