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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History of Marie Dalgar

In December 2006, Marie Dalgar ((玛丽黛佳) created its first grafted mascara, which completely overturned traditional view on mascara. It achieved an amazing sales performance: Marie Dalgar claimed that they sell one mascara every 15 seconds. In May 2008, the Chinese cosmetics brand formally established Shanghai Feiyang Cosmetics Co., Ltd., the marketing center. The brand has followed the rapid development path based in Shanghai and expanding to the whole country. In the same year, it launched its official website, providing consumers with a comprehensive information platform. 

In January 2010, Marie Dalgar opened its’ international factory in Shanghai Fengxian Industrial Park, covering an area of ​​20 acres, which is the largest mascara production base in Asia. Besides, it won the “China Cosmetics Annual Best Single Product Award” at the 2010 China Cosmetics Industry Conference.

In March 2011, Marie Dalgar won the 2010 “Best Makeup Brand” and “Best Single Product” awards in China’s cosmetics industry. In the same year, the brand joined hands with the well-known fashion women’s website Kimiss, and organized makeup contest with international brands such as Armani, Bobbi Brown, and MAC.

Currently, Marie Dalgar is one of the most promising cosmetics brands in the Chinese market.

Marie Dalgar’s brand concept

As the brand claims, besides the perfect effects, makeup is also an artistic master piece. It enhances confidence and it is a factor for different life expression. Marie Dalgar represents the spirit of modern woman’s personality and the attitude of women in this era.

Focusing on young consumers

From the user portrait, Marie Dalgar’s target group is 18-24 year old college students, and 25-35 young white-collar workers in China who have just started work.  Brand has a strong focus on young consumers and builds products that are easy for them to use on different occasions. The youthful brand naturally attracts young consumers through its product innovation and engaging cross-over marketing in the ‘new retail’ environment. Having its own research and development centers and manufacturing bases allows Marie Dalgar to innovate and meet changing demands quickly.

Data Source: NetVoices, 2018 Top Cosmetic Brands in China Report, Marie Dalgar’s consumers by age

Marie Dalgar’s marketing strategies

The domestic brand embraces the “New Retail” concept, taking a unique approach to increase the consumer experience and build brand awareness. On top of this, it has been a pioneer in collaborations.

Cooperating with third parties for campaigns

Co-branding is a key marketing strategy. These collaborations are through co-branding, such as collaboration with KFC and Heineken, and through collaboration with social media platforms like Douyin.

Co-branding rather than embassadors

Every year, Marie Dalgar holds Crossover Art Project. The brand invites artists to express themselves by using its make-up products. For example, fashion photographer Paco Peregrin chose the theme ‘Facing’ in 2015. The following year, photographer Damien Dufresne opted for ‘Through your eyes’ . For its products packaging, the brand also calls on artists, like the young Chinese artist JINLE, invited to celebrate the year of the pig. Out of a limited edition run of 3,000 units, Marie Dalgar sold 1,000 units within 10 minutes. The campaign reached 62 million consumers online, with a total of 50 million engagements.

Source: Marie Dalgar, Wechat, Year of the pig campaign 

Cooperation with KFC

The young makeup brand decided to take advantage of the expanding retail ecosystem by cooperating with third parties for special campaigns. Marie Dalgar outsourced sales efforts and found other ways to use partners’ e-commerce platforms in China. In 2017 Marie Dalgar cooperated with KFC on campaigns and advertising, pulling in traffic from KFC’s huge consumer base.

Source: Chinessima, Marie Dalgar’s cooperation campaign with KFC

Marie Dalgar and KFC created the “Pink is Cool” theme cross-border lipstick gift box. “Pink” and the shared target audience became the basis of this cross-industry cooperation. Marie Dalgar used this collaborative lipstick to create a cool makeup look, and attracted the attention of makeup consumers through the sharing on the Weitao platform. KFC used stores and offline resources to create a cross-border offline theme store to promote this cooperation. The campaign helped the brand win 1.4 million visits on Tmall’s official store and make over RMB 12 million in sales. Most of visits were from selling limited edition gift sets, which included both KFC coupons and lipsticks.

Cooperation with TikTok

In April 2018, Marie Dalgar and TikTok jointly launched challenge event. Being the first collaboration of its kind in the beauty industry, the video challenge had a maximum number of participants of 75,000. The event and related advertisements reached approximately 288 million people.

Cooperation with CCTV

Marie Dalgar partnered with the CCTV documentary series “National Treasure” for a limited-edition lipstick. It helped to build a well-earned reputation among consumers for championing Chinese heritage. Collaborations don’t even need to be in the realm of high culture as long as it will reach the masses in popular spaces.

Cooperation with Heineken

Marie Dalgar teamed up with brewing giant Heineken and Tmall in 2019 to release a “forgiveness” gift box. The gift box was released on Tmall’s “Fans Day” to coincide with the European Champions’ League soccer final, which Heineken sponsors. The hook: soccer lovers could give their partners a gift box to beg “forgiveness” and apologize for ignoring them while watching the final. “Wearing a green cap” in Chinese means “to cheat on your loved one”–in this case, with soccer. Two boxes were offered in “his” and “hers” editions. One box featured green lipsticks and green tea flavors, while the other contained limited-edition Champions’ League bottles of Heineken.

Marie Dalgar uses AR to attract customers

Marie Dalgar and Ali jointly launched the “unmanned color vending machine” and the beauty unmanned store “TO GO “ combined with the platform’s big data to reach more potential consumers.  Marie Dalgar’s “TO GO” store features an augmented reality (AR) mirror to link offline consumers’ experience with their online purchase. This application of AI in beauty  boosted both offline and online sales.

Source: Chinessima, Marie Dalgar’s “TO GO” store in Shanghai

WeChat and Tmall are key platforms for brand’s retail and marketing

Marie Dalgar established the “Playing Color Academy” on WeChat. They use this mini-program to make more customers to reach offline channels. On top of this, Marie Dalgar uses WeChat database for analysis of user portraits and then send it to product development department.

Marie Dalgar actively uses Tmall and gained popularity among its users. In 2018 its rating there was even higher than such cosmetic giants as Armani, Estee Lauder and YSL. Besides, brand’s live streaming on Double Eleven was equally astonishing, with a total of nearly 100 live broadcasts for 300 hours and 1.3 million views. 

Data Source: NetVoices, 2018 Top Cosmetic Brands in China Report, Make-up brands rating among e-commerce users in China

Marie Dalgar is one of the leading cosmetic brands in China

Marie Dalgar is one of the fast-growing brands in the make-up market in China. Such foreign cosmetics brands in China as YSL, Dior and MAC are on the top of ranking.

Data Source: Kantar, Top-5 fast-growing make-up brands in China

Innovative products push Marie Dalgar’s sales in China

In its early stages, Marie Dalgar attracted attention thanks to its “grafting” mascara, especially adapted to the relatively short and sparse eyelashes of Asian people. “It lengthens eyelashes by 300% and increases their density by 700%”, according to Jumeili.

Marie Dalgar’s Innovative products:

• The world’s first grafted mascara
• The first micro-vibration electric mascara in China
• The first domestically baked eyeshadow and blush
• The first mascara with retractable brush in China
• The first vibrating mascara in China
• The first domestic mascara with adjustable thickness and variable extension brush

Pioneering projects:

• The first domestic mascara with 360° rotating brush
• The first custom-made DIY eye shadow in China

Marie Dalgar was the number one domestic makeup brand during the 2018 Double Eleven festival

On Double 11 shopping festival in 2018, Marie Dalgar’s online flagship store was on the Tmall’s Top Beauty brands list. Its mascara also was in TOP 3 hot single products. The daily turnover of offline shopping mall channel stores increased by 414% year-on-year during 11.11 festival. Marie Dalgar participated in Tmall Double Eleven many times, and won the “New Retail Outstanding Contribution Award” from Tmall. The relationship between Marie Dalgar and Tmall are complementary.

Marie Dalgar expands to the Asian market

All of these steps helped to make Marie Dalgar one of the best-selling local brands and advanced the company onto the global stage. It became the first Chinese brand to sell its products in Sephora stores outside of China.

Expansion to Singapore

At the end of 2018, the brand entered Singapore via Sephora. To Mary Dalgar’s CEO, Chen Haijun (陈海军), Southeast Asia is only a preamble before Europe and the United States. “Worldwide markets will represent 20% of the brand business within 5 years”, he said.

Because of it’s strong innovation power, and collaborations to expand it’s consumer base, Marie Dalgar is one Chinese brand that is worth learning from.

Learn more about China’s cosmetics market in our report

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This article Marie Dalgar: a Chinese cosmetic brand gaining international momentum is the first one to appear on Daxue Consulting - Market Research China.

The founder of the Chinese e-commerce site Biyao, Bi Sheng was first to propose the C2M model in China. The C2M model is when consumers connect directly to manufacturers to purchase a product. In the C2M model, consumers place orders directly through the platform, and the factory receives consumers’ personalized orders.  

The C2M model short-circuits all intermediate links, such as inventory, logistics, general sales, and distribution. It cuts off all unnecessary costs, allowing users to buy ultra-high-quality products at ultra-low prices.

A major point of the C2M model is that it produces on demand. The user places an order first, and then the factory produces it. There is no inventory-sales ratio, which eliminates chronic inventory problems. The defining feature of a C2M model is highly competitive pricing brought about by connecting factories with consumer insights, such as preferences, location, and behaviors.

Victor Tseng, vice-president of corporate development at Pinduoduo said that “C2M is essentially evolving traditional manufacturing from an R&D and marketing-driven process into a consumer-driven process”.

Biyao – first C2M platform in China

A C2M model Chinese e-commerce platform, Biyao, started in July 2015. This is the first application of the C2M model in China’s e-commerce. This platform includes a number of companies in the automobile, home furnishing, clothing, eyewear and related industries.

After the user places an order on the platform, the order will be directly sent back to the factory. Then, the factory produces and delivers the order. E-commerce platforms can use big data to get customer group portraits and analyze consumption characteristics. It helps manufacturers to select products, transform processes and reduce inventory pressure.

Source: iResearch, Biyao C2M platform

Advantages of C2M model

First of all, C2M model realizes the direct connection between the user and the factory, removes all intermediate links, which increases the price. It also connects designers and manufacturers, and provides users with “big brand quality, factory price” products.

For consumers, the C2M model emphasizes user-centricity and organizes production according to users’ individual needs.

For manufacturing companies, the C2M model improves productivity and promotes the transformation of enterprise production lines, supply chains and internal management systems.

C2M in China as a driver of e-commerce

C2M in China is a new driver in the e-commerce landscape. In 2019, $420 million worth of C2M-related bookings and sales were made in a single day during China’s Double Twelve shopping day. According to data from iResearch, this figure reached $2.5 billion in 2018. Forecast shows it will reach $6 billion by 2022, which includes a compound annual growth rate of 24.4 percent. Though still a small percentage of China’s total e-commerce market, it’s a model that crucially enables brands to better address issues of inventory and supply chain efficiency. C2M is another indicator that brands which fail to listen to consumers on product preferences will miss a trick.

Data Source: iResearch, C2M in China market size

Big data and AI in China push the development of C2M in China

Companies like Alibaba and JD.com have both been utilizing C2M in China. JD.com, for example, has been testing the C2M model since 2017. The company launched its fashion technology research institute in 2018 to explore the application of AI, VR/AR in China, as well as big data.

Through the application of AI-powered data analytics, online retailers, consumer brands, and AI companies are jointly making mass-customization possible in China. The key for C2M is to connect consumers and manufacturers through data and computational infrastructure.

Young generation in China – the key users of C2M e-commerce platforms

Chinese millennials have diversified needs, while user channels have significant segmentation. They include a host of online marketplace platforms such as Taobao, Pinduoduo, and Douyin.

Customization options for consumers were previously costly and limited to luxury product categories. In the current e-commerce industry, the post-80s and post-90s generation is the key consumer group. The younger consumer groups have a stronger demand for product customization. C2M caters to the needs of personalized and differentiated products that young consumers pursued.

Data Source: iResearch, Age structure of Chinese online shopping app users 2019

Key e-commerce players in the Chinese market use C2M marketing

Pinduoduo is gaining popularity among Chinese consumers

Pinduoduo (拼多多) is an e-commerce platform that allows users to participate in group-buying deals. Using the app is simple, the consumer can buy a full price item or get a discount if they invite other people to participate in the purchase. After paying, there are many ways to invite friends, not only through WeChat, but also with QQ, QR code, image, or with a voice recording. In the end, they ship the discounted order when the required number of people purchase it.

It is especially popular in third and fourth-tier cities. More than 65% of users come from third-tier cities, while only 5.9% come from first-tier cities. Unlike other e-commerce apps such as JD.com or Taobao, it has decided to focus on small towns. This policy has made it possible to attract low-income families to the App. We can make a conclusion that people in the third and fourth-tier cities are more likely to use the C2M model.

Data Source: Statista, Pinduoduo user distribution in China as of October 2019, by city tier

In June 2018, less than three years after the launch, Pinduoduo’s monthly active users reached 195 million people. In 2020, 487 million shoppers use Pinduoduo for their online purchases every month. In addition, many international brands such as Huawei and Apple have launched their single-brand stores on the platform, further consolidating the company’s credibility.

Data Source: Statista, Number of monthly active users of Pinduoduo

Jiaweishi case

Shenzhen’s Jiaweishi is a manufacturer of brand-name consumer goods, including Philips and Whirlpool. In 2018, they established their own brand of robot vacuum cleaners. When they started selling online through Pinduoduo’s “New Brand Initiative” program, they got direct access to huge buyer traffic.

Following the success of the initial sales of the original robot vacuum, Jiaweishi is now able to greatly improve their product and further increase sales. Based on the data collected from Pinduoduo, the robot vacuum’s randomized cleaning route to a more orderly one. Besides, Jiaweishi redesigned product’s appearance to make it more appealing to consumers.
They also addressed consumer concerns with regards to the quality of an unknown brand’s product via live streaming videos. These live streams make the manufacturing process transparent to consumers, while simultaneously spreading Jiaweishi’s brand name.

The advantages of using Pinduoduo for manufacturers

E-commerce giant Pinduoduo has been able to tell manufacturers not only how to customize in great detail, but has also been able to advise on packaging redesigning and price point setting.

Pinduoduo saw the launch of 106 manufacturer-owned brands last year and is aiming to establish 1,000 more. Even automakers are engaging with C2M firms amid a prolonged slump in sales. Pinduoduo held a team purchase promotion with car dealers during the Double Eleven shopping festival in 2019. Some 3,100 cars from five major auto brands were sold in just nine hours. Carmakers were able to gain an insight into demand and better predict consumers’ intent to purchase. This could help them optimize manufacturing and save money at multiple stages, and these savings could trickle down to consumers.

JD.com enters C2M in China

JD.com rolled out its C2M unit Jingzao in 2018. The platform now offers products including custom shirts, luggage, towels, and bedding. Moreover, JD partnered with electronic brands such as Lenovo, Konka, HP, and Dell to develop tailored products under the C2M model.

In 2020 JD.com has signed a partnership with South Korean manufacturer LG Electronics to sell RMB 5 billion ($707 million) worth of products on the e-commerce platform. Under the partnership, the two companies will cooperate in a range of areas, including product development under the C2M model.  The two companies have already worked under the C2M model for small home appliances. In May 2018, they started to develop C2M air purifiers, beauty tools, hand-held vacuum cleaners, and clothing care steam “styler” systems based on JD.com data. 

Besides, in 2020, the Italian designer brand Sergio Rossi co-designed a new product based on JD’s big data analysis of customer preferences. The new product is a short boot (a style quite popular with JD customers) that features the brands’ recognizable Icona logo.

Alibaba launches C2M in China through Taobao

In March, Alibaba launched a new app on Taobao called Special Offers, which works with factories to create C2M products. Its goal over the next three years is to help 1000 industries build ‘super’ factories that can directly supply customers. By 2020, more than 500,000 factories and 1.2 million production-capable suppliers in China have signed up to the platform. Chinese apparel, sportswear, and fashion companies, such as Anta and Bosideng Group, have signed up for the app and opened authorized stores online. Bosideng already collects and shares information through enterprise resource planning that helps them penetrate consumer preferences and consumption habits.

Backed by Alibaba’s AI algorithms and cloud technologies, the C2M team was able to offer real-time analytics. It helps companies to respond to changing consumption trends and identify new growth points.

Data Source: Taobao, Taobao YoY sales growth on Women’s Day 2020

Odis case

Odis started producing car-cleaning products that consumers wanted and needed. These included portable sanitizing sprays containing at least 75% alcohol. In 2002, with the help of Alibaba, Odis was able to adjust its production lines in three days to create these items. The process would have taken Odis three months to complete on its own, said the factory. Based on analyses of consumer preferences, the factory also started making their sprays in plastic bottles instead of aluminum cans.

“Alibaba’s C2M team worked with us throughout the entire product-development process. We had a clear roadmap of exactly what consumers wanted and how many units they needed,” said Qu, Odis’s general manager.

To bring consumers closer to their products, Odis leveraged Alibaba’s digital ecosystem and organized a campaign on Tmall. It allowed consumers to pre-order the sanitizers in China before production kicked off. They sold more than 200,000 bottles of the spray within 24 hours. Alibaba also created a new section for car-sanitization solutions across its online marketplaces.

Thanks to the C2M team’s efforts, online sales accounted for more than 90% of Odis’ revenue during the pandemic. When the coronavirus spread overseas, Odis’ clients in other countries also started showing interest in the product. Since March 2020, the factory has sold close to 30 million more bottles overseas.

Prospects of C2M marketing in China

C2M model gains momentum during COVID-19 outbreak

First the US-China trade spats hit China’s huge manufacturing base with delays and uncertain revenue, which was then followed by the COVID-19 pandemic. Demand plummeted both domestically and overseas. The C2M model proved especially crucial during the COVID-19 outbreak in China. Factories across China had to halt production. Even when operations resumed, manufacturers have struggled to generate pre-pandemic levels of business.

When many of China’s brick-and-mortar factories found their production and sales channels disrupted during the Covid-19 crisis, digitization of operations became a new lifeline for survival. China’s e-commerce platforms are able to use their massive databanks of consumer behavior and algorithms to analyze and predict what China’s factories should make to respond to demand.

C2M will benefit in the long run

The move to C2M will benefit manufacturers in the long run. Firstly, it makes them more flexible in times of crises, by pivoting online and selling directly to users. Secondly, factories can also save an average of 20%-30% in production costs. The model has huge potential in China’s lower-tier cities. According to a study by Morgan Stanley, these consumers are in search of bargains but are also increasingly willing to pay more for things of higher quality.  Getting factories to embrace the C2M model, however, is not without its difficulties. Manufacturers need to be open to engaging with every step of production in order to succeed.

Author: Valeriia Mikhailova

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Full transcript below:

Matthieu David: Hello everyone, I’m Matthieu David, the founder of Daxue consulting and its China marketing podcast, China paradigms and today I am with someone I’m very impressed by when I looked at their resume, Dr. Renata Thiébaut. You are a partner and head of the business intelligence of Web2Asia since 2013. On the side, you’re a researcher at Harvard University and you have a Ph.D. from Jiao Tong University in Law. So that’s why I’m saying that I’ve been very impressed by your resume.

But we are here to talk about Web2Asia. Web2Asia is a TP – so Taobao partner or Alibaba TMall partner agency– you will tell me which formula we need to use, which is an official name for companies that are able to represent companies and sell on their behalf and manage marketing budget and media buying on Alibaba. So, you need to be accepted by Alibaba to get this name to be an Alibaba Tmall partner agency. Size of business, you started in 2006, it’s about 200 people now. You can work in eleven languages and you have worked for companies like Marks & Spencer, Esprit, Bausch, Swarovski, Intersport and one I’m very interested in – Metro, Aldi, and JellyCat which you won a reward for by Alibaba, and I hope that’s something we can talk about. Thanks, Renata, for being with us, and could you tell us more about Web2Asia?

Renata Thiebaut: Thank you Matthieu for welcoming me today. Web2Asia is a full e-commerce service provider in China, so we have three different core services. The first one is the market entry strategy for foreign brands that want to open an online shop in China. The second service is the e-commerce operations in China and sales. As you said, we have around 200 staff that take care of the design of the shop, also customer service and company preparations. So, we have the whole ecosystem to offer to our clients, especially foreign clients that want to come to China. And the last service, as an e-commerce service provider in China, is digital marketing, because it goes hand in hand with e-commerce to leverage the sales.

We’ve been in the market since 2005 and we were doing more marketing at that time. Around 8 years ago we switched to do more e-commerce operations in China and we were one of the first ones to do cross-border e-commerce in China. So, let’s say we have very deep expertise, especially in cross-border e-commerce in China, since the beginning that everything was manual – we need to collect ID cards manually. It was a bit complicated in the beginning but now we narrowed down the whole process. And we’ve been awarded a couple of prizes from Alibaba group. The latest one was with Aldi and we won the innovation prize from ele.me which is Alibaba’s food app, and most of our clients are from Europe, are from North America so we focus more on foreign clients that want to come to China.

Matthieu David: For all the revenues, could you share a bit an idea of number of clients, revenues, some idea of where you are now? 200 people is not small, so I believe you are a sizeable business now.

Renata Thiebaut: Yeah it is very interesting that when we started we had roughly 15 people right, so we had a very start-up mindset and a do it yourself – we had a lot of struggles in the past but because of our positioning as one of the few foreign owned TP’s in China – also our management is all done by foreigners, myself and other partners as well, so we could tackle better different foreign markets, especially Europe right. So, we have many German clients, many British clients because of our background. So, it was a matter of positioning, of having a clear strategy of how to position our business and define where we want to go to, and I think 5 years ago we started growing a lot. Now we have clients either for consulting or e-commerce operations in China and we have more than 30 fixed clients let’s say.

Matthieu David: About 30 clients now you manage operations for?

Renata Thiebaut: Yeah for operations only for TMall but we have other services as well.

Matthieu David: I see, that’s something I’d like to know more about is that you mention a lot TMall, you mention a lot TP – that’s something I’d like to understand if Pinduoduo or WeChat is part of your work as well, but let’s go back – let’s talk about this later. So, what you are doing is to mainly manage – you started in 2003 when Taobao just started. I think TMall was not existing, just to think about it – it was pre-iPhone – the iPhone is 2008. 2003 I think Taobao started, Alibaba was started in 1999 – it was a B2B marketplace and they had no C2C, and Taobao was C2C, then TMall appeared much later (read about setting up a Taobao shop). You seem to talk about the beginning as if you were at the beginning, but I think you joined later. So at the beginning what was the vision? Was it about selling on Taobao which like eBay or like the C2C platform? What was the vision initially?

Renata Thiebaut: Well the vision was purely C2C platform and I was working at that time with Taobao, so I have a Ph.D. in law and I was doing a lot of IT protection, so my role was to shut down all of the stores on Taobao that were selling fake products. So at that time, it was very interesting because there were no rules or regulations to tackle this issue and we had to do everything manually, we had to do mystery shopping and contacting the store to ask them to close. So, my first big client for this type of service was Swarovski. There was a very good finding actually that most of the products were actually not fake. They were original. So, there is a big problem with the supply chain that the factories leak the products. The products are original from the factory.

So, there are many situations like these that China has this problem with in the past, but it has improved a lot. So yeah – at that time Taobao was clearly C2C but now you can even have some brands opening on Taobao, a store on Taobao. Miranda Kerr – the Australian model for example, she opened her brand first on Taobao and then she migrated to TMall Global. So, this is a tendency actually from all of these platforms. They do not only adopt one business model; they try to follow consumers and see the tendencies to shift their business and it happens quite often.

Matthieu David: Initially, so Taobao is a C2C platform that’s maybe where some people would sell products, some Chinese companies would sell products, but at that time in 2003 I don’t believe there were many European and American companies which wanted someone to help to sell on Taobao, so initially when Web2Asia was started – what was the vision? Was it to be a TP? It could not be because it was not even existing. Once TMall was created the word TP emerged. So, what was the vision initially – it was to create websites? To be in the digital space? And then it evolved into a TP? Is this the story?

Renata Thiebaut: Yes, this is the story. At that time, we were doing more websites and more marketing on Baidu for example, and then we had to shift our business model because we saw e-commerce was booming and there would be many opportunities in this industry. So, we became Alibaba certified Tmall Partner agency when e-commerce started in China basically and now, we are one of the top three TP’s from Alibaba, so most of our clients are referred by Alibaba. We have a very close relationship with Alibaba, because they are the marketplace and we do the store operations. So, there is a lot of coordination we have to do on a daily basis.

Matthieu David: So let’s talk about some of the rewards you got from Alibaba – one of them is of course attracting the eyes of everyone, reading your presentation which is JellyCat.  Would you mind sharing a bit more about what you did for them as a case study for those who don’t know JellyCat, it’s a British toy, but in China it seems that what you have done is that you’ve found a different market in China. You a massive amount of the product on TMall, I read in your presentation double digit million USD if it’s correct, within a year I believe, and you have been rewarded by Alibaba for those campaigns’ management of this shop. Would you mind telling us some more about what you did and how it was successful?

Renata Thiebaut: I think JellyCat is our biggest store – biggest successful case actually, because it is a small brand out of the UK and when they started in China back in 2015, they had no awareness in China- yet their price point is a bit higher compared to other local products. So, we had to position ourselves very well to have a very strong storytelling to prove to consumers they should pay around 300 RMB for that instead of 50. So, we used a lot of UK related elements to show the product was premium and to create a storytelling, and the royal family was the theme that we used at that time. We could use also some pictures because some Hollywood actors or actresses, they give JellyCat to their kids, and also the royal family itself, they use JellyCat toys. So, we could use all of this materials to show to consumers that for foreign people and for famous people as well they all love JellyCat.

So, Alibaba created a video for us, we were featured in one of the best case studies of Alibaba group, and the video was very interesting because the story was all of the JellyCat were coming from the UK to visit shanghai. So again, content was the key for JellyCat to be successful here and they have cute products. Chinese culture is a cute culture – so the product is good. Sometimes of course we cannot make miracles if customers do not really like a product or if it’s not suitable for the Chinese market, but JellyCat we could adapt the content, we could create new content, we are very flexible about that. Also every year we launch the animal of the year, that is related to the Chinese zodiac and this is very important, this localisation to the Chinese market. So, within one year we became the top one plush toy in the Chinese market and we keep winning awards for JellyCat, expanding their business here in China, so now they sell on different platforms and also, we are going offline with them. So JellyCat I think for me is the best successful case because it’s a very small company. So, if you have limited budget and if you are not well-known, it’s much more difficult to develop your brand in China, which was the case – so that’s why I like sharing JellyCat’s story.

Matthieu David: And Alibaba like it too – they share it and they gave you a reward. May I summarise and see the key point is that the royal family is using JellyCat, was it the key point? I feel it is something when you have an endorsement from a very famous and very respected people, Chinese would tend to buy it. Second question you said in your presentation that it’s not used as a toy, would you mind sharing then what it’s used for?

Renata Thiebaut: So, we even had a Chinese artist using JellyCat. We never paid for any KOL for any artist to showcase the plush toy. It was purely because of its cuteness. So, we had for example Angelababy, the Chinese Kim Kardashian – she was holding a JellyCat in one of her TV shows, so of course it was a free PR for us.

Matthieu David: Incredible, it’s incredible. For people who are listening and may not know China very well, she’s one of the most famous person – KOL I would say – people would love to have, would give millions of USD to have her as a KOL.

Renata Thiebaut: Yes, so as soon as they like a product, they can do some free advertisement and we were not even aware of that and we got a lot of feedback from consumers and we were like – oh what’s going on! So, we found out that she was with a JellyCat in one of her shows. So, it happened quite often in China actually, not only with her, but even with some others. So, we could grab all of these materials and use as a marketing material to promote our brand, without having any extra cost.

Matthieu David: The thing which is surprising and in some way it’s something – it looks random. The way you talk about it, it looks that by chance you were successful, but I don’t think that’s the case, I think it requires a lot of work and a lot of thinking. So, what’s the strategy behind it and the tactics which were not costly, but made a big effect?

Renata Thiebaut: The first thing that I believe was the key milestone for JellyCat in China was data. We saw in the beginning that our approach was wrong. Our strategy was wrong. So, within 6 months we had to re-shift and to re-strategize the brand, because like you said – we thought it would be a toy for a kid, but in the end most of our consumers were 25 years old plus. Young women going to work and they had the need because they work so hard, they had the need to be with a JellyCat either inside of the bags, to bring their JellyCat around, to go to a coffee shop, or also go to work with a JellyCat. And this is so true because most of my colleagues they have a JellyCat on their desks and they work holding the JellyCat.

So, we positioned ourselves at that time – we had to change our mind-set and also our strategy to show that JellyCat is a fashionable accessory. So, you have these smaller ones that you can carry around, put inside of your bag. So, if you go to a coffee shop or if you go to work and also of course we cannot just eliminate the case that it’s a good gifting for new-borns. So, we had to differentiate different audience and to work in a different communication message to these different audiences to show that the product is 100% safe, you not have allergy with the product. So content was the second thing that we really, really worked hard on to position JellyCat at the top plush toy in China.

Matthieu David: How did you find out that you had to change the positioning, because you were targeting children and it seems that it was not working, so you found out that the few sales you had were actually more 25 year old and from that – with the few sales you had, because I believe it was not many – you tried to differentiate and started a campaign targeting them and that worked. And then you scaled that and you put even more investment into it because you saw there was a momentum – is that correct?

Renata Thiebaut: It is correct – so in the first 3 months sales were very low, but we saw this tendency that most of the buyers and the visitors of the shop for example – the ones who would put the product in the basket but not convert — were 25 year old plus. I think the most important factor that year in the first year was 11/11 – we were definitely not prepared for the campaign.

Matthieu David: Which year was it?

Renata Thiebaut: It was in 2015. So the first 11/11 we sold so much more than we expected, let’s say 10 times more, 15 times more and the warehouse of JellyCat in the UK they were shipping the products 24/7. So you know in Europe usually people do not work on weekends right, you have restrictions with even transportation, trucks are not allowed to transport during the weekend and especially on Sundays. So, it was very stressful but we managed to deliver all of the products we had and from that time on, the first 11/11 on, we became the top one plush toy brand in China. So, I want to say that – 11/11 was very helpful for us as well.

Matthieu David: As I’m listening to you I understand that the shop is managing the cross-border e-commerce in China, so it is TMall Global right – and the warehouse – for people listening to us who are maybe not very familiar with TMall and the ecosystem of e-commerce in China — you can sell in China when you have a warehouse outside of China, and this is called TMall Global, JD is doing the same, JD Global, and you don’t need to have the registered company in China – you ship from the warehouse which actually could be a free trade zone as well in Shanghai, maybe as what you do now, with the free trade zone in shanghai or in Hong Kong to ship, and at that time it was UK.

Renata Thiebaut: Yeah, so that time it was the UK – we are using Alibaba’s logistic network which is called Cainiao to ship the products out of the UK to the final Chinese consumers, but then we were only on TMall global at that time. So JellyCat started expanding. And this is what I tell all of my clients, I do not think it’s a good strategy for you to come to a new market like China and have many sales channels for example. Sometimes they want to open on JD, on TMall and on different platforms like Kaola, The Little Red Book – it’s always good for you to start slowly, to choose first the best platform and then you do a trial in the market – if the product is not good you can adjust or the communication because you need to select a hero product for you to push the brand in the Chinese market.

So, we started first with TMall global shipping out of the UK but as soon as we expanded our business and we opened a JD store, then we open on TMall domestic that business model was no longer valid. We needed to again re-strategize. So, this is the message I think with JellyCat we always needed to rethink your strategy and think fast actually because e-commerce is so dynamic in China.

Matthieu David: It took you about 3 months before changing – as the sales were not good, 3 or 6 months I don’t remember how many months. Initially when you have a new product –and let’s take JellyCat as an example, how do you get clients? It is said by many people that when you need to get a client and you’re not known – and JellyCat was not known at that time in China I believe, you have to spend a lot of money in marketing, and you said this was a small company that did not have a lot of money to spend, so how did you get your traffic on your TMall? Was it still on Baidu what you were doing initially? Was it purely on Alibaba platforms? Could you tell us more about how you drive traffic and the specifications of JellyCat?

Renata Thiebaut: The best way for you to drive traffic to your online shop when you have a limited budget is to focus on the marketplace. You have a banner display, you have keywords, you have many different ways of driving paid traffic to your store, plus all of the free traffic that you can also have if you join a campaign for example if you do corporation with other brands. So, there are many ways for you to drive traffic.

So, I do not think Baidu would be a good strategy in the beginning if you have a limited budget because you might not convert. So, the focus should be to do marketing within the platform. As a rule of thumb, we suggest a marketing budget of around 20% compared to your sales target to be invested within the platform. So, it is a bit high but as soon as you gain more free traffic, you can drop it to let’s say 15%.

Matthieu David: I see, I think the next question for someone listening to us and who would like to have his shop on TMall is – yes, I’m spending 20% but then do I have the data, or is it owned by Alibaba, and can I retarget them? I believe you can retarget through Alibaba platforms and everything which is owned by Alibaba, including ele.me and so on, but I don’t believe you can really drive your traffic and convert them through WeChat or email because I believe it’s still the ownership of Alibaba. Would you mind sharing about this investment that companies do – 20% as you said of sales – it’s sizeable, and then do they own the data?

Renata Thiebaut: The company does have access to the data. If you have an online shop, you have access to the industry data and also to your shop’s data. So, you need to be able how to use this data for you to understand what is wrong and what is right in terms of strategy. So that’s why we are 100% data-driven and especially myself, I am in the business intelligence unit of Web2asia so my role is really to take data and strategize the business or re-strategize the business of our clients.

I can give you a very clear example of what I did with Aldi. We are selling milk – fresh milk and UHT milk of 1 liter in China. Sales were good but we noticed that we are not selling as well as other brands, especially European brands and I tracked all of the attributes of this type of product in the industry and also the top-selling brands or Chinese brands as well, and we saw a trend that Chinese consumers would prefer two different types of milk. One was 250ml instead of 1 liter, and the second one was milk with enhanced calcium for kids.

So, if you do not have this data, you are not able to understand the consumer’s behavior, right.

Matthieu David: I’m sorry to interrupt but you got this data through the fact that TMall or Alibaba is sharing with you industry data because you have a shop on TMall. When you have a shop on TMall you have access to data on the industry – but you cannot access all the industry but only your own industry. One thing I’d like to add about Aldi – people may be surprised by listening to us that Aldi is selling through a platform – a marketplace. Like Aldi is not selling on amazon or – but TMall is a place where you open a shop. It’s like a street. It’s like a department store and you open a shop. So, you find out the data on TMall which helps you to reallocate your effort and maybe redesign the product?

Renata Thiebaut: Yes, we needed to redesign the product, we needed to be able to follow all of these trends and see what the Chinese consumers want. We localize a lot of products as well. Aldi is a German supermarket so we are very, very strong in Europe, but European food consumption is very different from China. So, in China, we sell hotpot for example, that we do not sell back in Europe. So, we need to do this – whenever you go to a different market, you need to have a certain level of adaptation and localization of the product as well.

Matthieu David: My understanding is that the key advantage of Aldi is the ability to source European products which are more qualitative and maybe at a discount price because Aldi has a bit of image of discount in Europe if I’m correct, and the ability to actually bring in a hotpot – European vegetables, European products would be the asset – that’s what you concluded?

Renata Thiebaut: Yes, so we adopt a very different strategy in China, we wanted to be very competitive with lower prices just like in Europe, but also offer products that Chinese consumers are used to, like hotpot, or noodles. Chinese noodles. We ship from Australia because of the cost. It’s much cheaper to ship from Australia than Europe, but then our Aldi started procuring within the Chinese market as well, but with European standards. So, for the Chinese consumer, food trust is the key. So, you can manage to leverage what you do in Europe, cheap products but very high quality, and to adapt to the Chinese market as well. Because there were many food scandals recently in China, so this is very important. And Aldi like you said, they started with a TMall Global shop. I think this is their standard strategy so you can test the market first. Then you move to TMall domestic, then you start opening your own shops. So our first store was launched in June last year in Shanghai, and right now we have a few of them in shanghai, around 5 and we plan to expand to other cities as well, for a couple of thousand shops within the next 3 years.

Matthieu David: Yeah, for people not to be confused when you’re saying shop now – you’re saying offline shops.

Renata Thiebaut: Yes, simple shops.

Matthieu David: Yeah and it started with the TMall global and then they had a beautiful shop actually – very well designed – are you managing them at all?

Renata Thiebaut: We manage the shops and we integrated our system with the physical shops and the online shops as well on ele.me or on TMall, for example, because we also need to understand the consumers, if they were repeated buyers – how we could target these offline consumers to drive traffic to our online stores and vice versa. And, our key strategy for Aldi is O2O, online to offline (more on O2O in China here). With the integration of this data, from all of the sources that we have of the sales channel from physical stores, online stores to also social media on WeChat, Little Red Book – that’s what we use to strategize the business.

To give you a concrete example – we were expecting to grow around 23% this year, it was our very let’s say, simplistic way of thinking last year to take things slowly and really use data to grow the business more in China. But because of the corona virus I think our projections are off and they are going to expand much faster and much, much more than this. Only in February and in March we saw that the sales grew 20 times more than the average.

Matthieu David: So, the crisis was beneficial to Aldi because people were delivering home.

Renata Thiebaut: Extremely beneficial. For some industries we could see an impact of let’s say 40-50% in their sales. Fashion industry – perhaps a bit less, and shoes for hiking for example – we saw a drop of 40-50% in sales. As for other mummy and baby products and also food related products, there was a big increase. So, in Aldi’s case I can tell you, it was around 20 times more than our standard sales.

Matthieu David: Interesting. What about now, the post coronavirus because – people who may listen to us who are in Europe or in the US may not know, but in Shanghai now we are going out, bars are open, even night clubs are open, everybody’s wearing masks but everything is working. Is it back to normal or people keep their habits?

Renata Thiebaut: Right now, we’re still very, very up because not being the whole of China is normal. So big cities like Shanghai are slowly going back to normal. Even though it’s not 20 times more than the usual sales, it’s going to be much higher because you gain awareness, so people who did not shop from Aldi before now know Aldi, and they’ll probably keep shopping from Aldi. That’s why it was also beneficial in the sense that the brand will gain awareness and also more buyers. Our delivery is very fast, it’s up to 30 minutes in Shanghai for example if you’re nearby. Since we are going to expand to other cities in China, this will spread all over the country. So, we’ll keep these 30 minutes – our consumers should be comfortable. If they either want to shop online and receive their products in their office or at home or if they want to pick up offline.

Matthieu David: How did TMall react to the fact that you opened offline shops? Because in some way you are driving traffic out of their shop, I mean you are getting your independence which is something that I think Alibaba tries to avoid, even working with JD, they may try to avoid that their brands work with JD.

Renata Thiebaut: Now I do not think that the market places are as concerned as before for two reasons. One is we are facing a new era of new retail. So, this is the trend, even Alibaba is doing the same with Hema for example. So, we needed to change the mentality that offline compete with online. It really goes hand to hand, because the more people know your brand, they can also go and shop online, so you can leverage also the data you have from offline to convert to online. So there are many ways to do this, if you offer QR codes with coupon discounts for example or when you do an online campaign you can have offline events to drive traffic to your online shops so you really need to be creative when you do O2O when you have different sales channels instead of thinking that it will hurt your online business, but actually it will create more awareness to drive more traffic and business to your online shop.

Matthieu David: How do you organize your team? That’s one thing I’m curious about – you seem to expand in very different directions and to do a lot of different things. Managing a TMall shop is not only setting up technically speaking the TMall shop – it’s creating banners, it’s about managing PPC, managing media buying, it’s about also doing brand reputation on Baidu and it’s listed on your presentation, for instance, social media, and now offline shops! How do you organize your team to have the talents? Could you help us understand do you have designers’ insight or do you actually partner with other company’s?

Renata Thiebaut: We do mostly in-house, and actually we did a change management implementation in the company. Before it would be a very up-down model that we had in the company and let’s say you had a director – an account director, then you had the manager and you had different people like a designer, customer service representative to do different tasks and nobody would be aware of what the other ones are doing, which is not too good for e-commerce because we all need to speak the same language and to be 100% aligned to grow the sales and avoid returns or problems that may arise with e-commerce.

So, two years ago we changed our management structure to be more project-based and it is called flat management. We divide the teams by different projects and they only take care of projects that are in similar categories, so they can have more expertise. For example, if you have a food client, all of the team members will take care of food-related clients, or mum and baby, or fashion, because if you do food and fashion at the same time, you cannot really focus and have a concise strategy because it’s completely different. So that’s how we work. Even though we have people to do different tasks, all of them need to be aware of what they are doing.

Matthieu David: In terms of talents and functions, how is a campaign organized? You have a creative person, who is going to design the campaign, then you have some people who activate the campaign? Would you mind describing a little bit the different steps of a campaign and the different people involved in it? It seems to be a lot of different talents and resources.

Renata Thiebaut: Yeah it requires a lot of resources. I’ll just say between 7 – 10 people per project because customer service is so important in China to not only upsell the product but for crisis management as well if the product is broken to avoid bad reviews. So, we start with customer service and you need to train them, they really need to understand the brand and all of the characteristics of the product. Because they are the face of the brand – they really represent the brand.

Then it goes to design, you cannot write the wrong price on a design for example to set up the wrong price within the shop. So, you always need a double to triple layers of double-checking, because the campaign period is so stressful that you need to have everything in place before midnight. Right. If the campaign starts at midnight. So, you need to allocate one project manager who will coordinate with all of these different people in the team.

So we divided the campaigns to give you a concrete example into stock first, we do the stock preparations and also the pricing strategy. And then you have the pre-warming campaign, so only a few selected products will be part of this pre-warming campaign. Consumers pay a deposit and they get extra discount or they get a special gift, limited editions, and things like that, and then you have the campaign day which might have another set of discounts, another set of gifting. So, you need to prepare the campaign through different phases and to be ready before the campaign starts.

It was very funny actually – well, of course, it was interesting, very stressful, but thinking back at the beginning, especially cross-border e-commerce in China, or even e-commerce in China, the campaigns they were so stressful, when a lot of manual work that we had to do and the system – like the marketplace system would freeze for a couple of minutes and you would not be able to buy the product and then by the time the product was online, it was sold out. So, these were the type of issues we would have before with the campaigns but every year it becomes much better. I would say around 6-7 years ago, the system would freeze for about 30 minutes, so each year it was less and less. 20 minutes, I remember 2 years ago it was only 3 to 5 minutes. So, this 11/11 in 2019 it was nearly perfect.

Matthieu David: Yeah, you’re talking specifically about Double 11 campaigns which are nationwide campaigns (learn more about the online record-breaking sales “Singles Day”).

Renata Thiebaut: Well 11/11 is the world’s largest campaign. So, we are talking about trillions that are sold within these one-month long campaigns. But it is not the main campaign. For some industries, you sell much more in other campaigns than 11/11 itself.

Matthieu David: Which one would you emphasise, there is 9/9 for one, there is 12/12 – which one do you think is interesting and not well understood?

Renata Thiebaut: The main campaigns in China are mainly for the Queens Day which is March 8^th, then you have 6/18 – then you have 11/11 and Chinese New Year, but Chinese new year campaign is very good for food and beverage, for example, it’s not too good for other industries, so we see sales really down in that month for different industries, and very high for food and beverage. So, these are the main campaigns, and then you have the smaller ones, like Black Friday type of campaign, 12/12 and then you have Chinese Valentine’s Day. Back to School is a very good campaign for kids for example, not only for backpacks or products that you usually buy for your kid to go to school, but also shoes and clothing for kids. So you need to think also that your campaign is not only 11/11 driven – so there are many campaigns, let’s say once a month or even more, that you need to consider, and Flash Sales as well that you can be a part of, it drives a lot of traffic for your brand. So, when I talk about preparing for a campaign, it’s not only 11/11 – it’s pretty much every month you need to have everything ready before a campaign starts.

Matthieu David: Does it mean that it isn’t worth making a campaign on your own, does it mean that you have to target those moments? Doesn’t exist some independent campaign – you want to celebrate? Maybe the brand is from the UK and they want to celebrate the UK’s day and then you do a campaign on your own. Is that something which is existing or it’s something you don’t even have to care about, you have to focus on those big days organised by Alibaba?

Renata Thiebaut: No it really exists, you can do your own internal campaign. Especially if you have a CRM system in place, you can target your silver, gold, platinum members and you can offer different discounts but it is not as big as being part of an official campaign because you are going to get all of the traffic from a bigger campaign. So, this is the difference – traffic-wise, and being part of an official campaign will give you much more visibility within the marketplace than just doing on your own.

Matthieu David: To share one data on Metro, one of your clients, and again the same as Aldi. People will be surprised that Metro has a shop on TMall. That’s very common, so you go through another distributor to sell and within one day in your presentation, it was 11/11, Metro sold 17 million renminbi, if I understand the graph correctly, because next week you put TMall, which is 91 billion and we were thinking, you made 91 billion! And then I saw it was TMall. So Metro did like 2 -3 million USD within one day, for 11/11.

Renata Thiebaut: I think it was within one hour, because usually what shops do for 11/11 are much more than these, let’s say 50 million or 20 million, depending on shops like Zara, Uniqlo, it’s nearly 1 billion renminbi.

Matthieu David: Yeah, I don’t understand then the graph correctly, it should be more you say – or maybe it’s in USD I don’t know.

Renata Thiebaut: Yeah it should be in USD because the campaign starts one month before, so it is not a one-day campaign. So the way that TMall does is, you need to have the pre-warming part. Let’s say 11/11 starts around October 20, so people start putting products in the basket, or they pay the deposit, and then before the campaign starts you have another round of the pre-campaign phase, and the official campaign starts at midnight of 11/11 and it will last 24 hours. So, from midnight to 1 AM, we have a huge peak of sales, and then it goes down a lot so around 1 AM, who paid the deposit will have to pay the remaining one at 1 AM. So, this will be much less – we’ll have fewer sales at 1 AM than at midnight and then again – sales will slow down and in the morning around 10 AM, you’ll have another peak and before the campaign starts around 8 PM or 9 PM, we’ll have another peak. So, we’ll have let’s say different peaks of sales throughout the campaign, but the main one that you have most of the sales, most of the traffic is at midnight.

Matthieu David: We talked a lot about TMall, we talked a lot about Alibaba, but now JD has emerged, I think it’s been already 8-9 years that JD was created. WeChat is selling; you have also Pinduoduo; you may have Douyin preparing something to sell online. What’s your take on those other platforms? JD is very similar to TMall, but what about WeChat, Pinduoduo and other platforms?

Renata Thiebaut: The best platforms in China are the ones that are more relevant but you need to consider also your type of product. So, if you compare TMall global and JD worldwide in terms of let’s say health supplements, for example, TMall global is much stronger than JD worldwide. So then when a brand wants to select a platform, they would prefer TMall global because there you have more exposure.

So, you need to see that JD is very good with electronics, I actually think they can be better than TMall for this, even though TMall is trying to catch up, JD is very good I think with logistics, first of all, and also with electronics and house appliance. There are other platforms that are doing super well in China, one of them is Kaola, especially for cross-border e-commerce in China.

Matthieu David: Owned by Alibaba now. I didn’t mention it because it has been bought by Alibaba at the end of the day, I wanted to talk about other platforms, but let’s talk about Kaola because it has been recently bought by Alibaba.

Renata Thiebaut: Yes, so Kaola is a very good example, they are out of the Tencent, JD, Alibaba ecosystem, and they are from NetEase which is their traditional business model is to have the search engine and online games. So Kaola adopted a direct import business model to sell foreign products, especially beauty products and supplements, and they started growing a lot. So that’s why they got acquired by Alibaba, but only their cross-border business branch got acquired by Alibaba, especially because they were doing very well.

And the same happened to The Little Red Book, it is a social media app, or it was a social media app, but now its social commerce. You can also open your e-commerce website within The Little Red Book, but it’s very good only right now for beauty products or health supplements. It’s not good for house appliances or other products. So, you need to see these categorizations (find the ultimate guide to leading digital platforms in China). Some platforms are better for some types of products and others are not. So, Alibaba also acquired Little Red Book –

Matthieu David: Oh really? I didn’t know that. Very, recently right?

Renata Thiebaut: Yes.

Matthieu David: So, what you are saying is that platforms are segmented now. The maturity of the internet in China makes it possible to segment with JD, with its origin in electronics, to keep this identity into electronics, maybe male-oriented. TMall is a lot of fashion and so on and there is a platform for health supplements. Is it what you’re saying?

Renata Thiebaut: This is what happens in the industry, especially because of JD’s background, they were purely an electronics platform before, but this is not what they intend to do. JD really wants to grow their business to fashion and to cosmetics, to beauty. They are doing a big push also to expand their categorization, so people do not think that JD is very electronic-driven and it is happening very often with many marketplaces in China. Suning was also very electronic-driven with home appliances, then you have Yihaodian, which was very food-related before, a top food seller marketplace in China, but now they sell everything as well. So they really want to adapt and move very fast to cover different categories.

Matthieu David: It’s evolving fast. We are at the end of the interview and I’d like to ask you more personal questions. My team found out that at Harvard you published some papers, how do you find the time to cover topics like an analysis of the US-China trade war, how the section 301 China intellectual property case may impact new directives to promote the Made in China 2025. Seems so technical, how do you find the time? How do you organize your days?

Renata Thiebaut: I know that e-commerce customers are a lot of work and also energy from my side, but I am at that stage of my life let’s say that I really want to pass the knowledge I acquired as being one of the first ones to do, especially cross-border e-commerce in China. And I do believe that this is very helpful for business in other regions as well. So, whenever I publish something, either a book – I have published a book with them and I just finished the second book, our second series and I really try to be very practical.

Matthieu David: What’s the name of the book?

Renata Thiebaut: The book is about the digital supermarket, One Belt One Road, how we can bring cross-border e-commerce in China show to this area. So everything is related to my work, which makes it very easy because I want to write about something very practical, like how governments and how companies can learn from China and what we have done in terms of cross-border e-commerce in China strategies, for them to also grow their domestic business to disrupt technology in their countries. So, this is for me more of a contribution to the students and governments to learn from China and apply these strategies or business models back home.

Matthieu David: It’s interesting and I do the same. You are saying, we are Chinese, and I do the same with Chinese people living overseas and they say, why do you say “we”? Do you consider yourself as Chinese?

Renata Thiebaut: Well, I’ve been in China for 14 years, so I am very proud of being half Chinese, let’s say, I do not look Chinese but I really consider myself as a local and I am very proud of being able to represent China somehow in my own way.

Matthieu David: I have a few last questions. You have been contacted within my team and we sent you the usual questions that I ask interviewees, what books inspired you the most in your China journey and entrepreneur journey?

Renata Thiebaut: I like a lot of philosophical books, for example, Sun Tzu was the very first book I read about China.

Matthieu David: Art of the War?

Renata Thiebaut: Yeah. So, I really try to take the main meanings and the main teachings to my career, so this is a very good book, The Art of the War, to how you strategize your business and also your career plans, your goals.

Matthieu David: What would you like to share, what did you learn from The Art of the War?

Renata Thiebaut: You should not compare yourself to your competitors, for example. So, I think this is very good learning, even at Alibaba, Jack Ma repeats this, I do not want to be like Amazon, right. So we need not copy each other’s business model, but also try to innovate and to bring different perspectives, different offerings to consumers. Everything is about the consumers, right. If you are stuck at being like your competitors, you’re not going to provide the best you can to your consumers. So, I think this is the meaning I got from the book, that even though he does not directly say like this, but this is how I translated this into my business and into my career. I keep pushing hard in terms of data, for example, to really innovate what we currently do.

Matthieu David: I remember a conference I attended where the founder of 360 was saying — I kept looking at Baidu because at that time 360 was also a search engine and it failed, it was actually just an anti-virus software at the end because it was too much focusing on the competitor. We have this actual feedback from Chinese entrepreneurs as well. What do you read to stay up to date about China?

Renata Thiebaut: We need to read daily, right, all of the news about e-commerce, regulations. Well, I have a lot of background, I really need to actually know all of the new regulations, the new laws regarding e-commerce and cross-border e-commerce in China, advertisement law. So there are some good sources. Some good websites like TechNode, even your reports from Daxue Consulting – I read them a lot with consumer trends. So, I would suggest your reports, for example, McKinsey, PwC like the ones that we can trust. Because you see so many things online, sometimes they are not necessarily a good source for you to be inspired by. You need to be very careful when you read things and the things you can really trust and take that as learning as well.

Matthieu David: What book on China you would recommend to someone who wants to know more about China? Maybe it’s not a book, maybe it’s a movie or something else, but what would you recommend to read, to watch, to do, to learn more about China?

Renata Thiebaut: There is one very good book about AI and China in the US – so I would suggest this book because it is about the future.

Matthieu David: AI Superpower by Lee Kai Fu?

Renata Thiebaut: Yes, AI Superpower, it is a very good book for you to understand the future and how to adapt your business to the future as well, because many businesses – you know, you need to go tech. you need to implement AI for you too – let’s say, survive in the business. You cannot just keep˙ having the same traditional type of business as before.

Matthieu David: Yeah, I was speaking to someone on the podcast mentioning this book and it has been really a very best – it’s a bestseller right, has been very successful.

The two last questions I would be very interested in your answer because you have been in China for 14 years and you have been in a spot where you could witness a lot of things and see a lot of evolutions. What unexpected success and unexpected failure have you witnessed in China which was a surprise to you? As an example, I always use Carrefour. When I arrived in China it was successful, they were all over the place,˙ and then they left. They sold to Suning and I was crossing Carrefour there were two logos, that was so surprising to see the two logos.

Renata Thiebaut: I think failures can inspire us more because we have to avoid committing the same mistake, and mostly it’s the same mistake that they do. They do not understand the Chinese market, so most of these foreign companies, especially the big ones, when they come to China, they adopt the same business model as in Europe or in other countries or in the US. Marks and Spencer, they had a very wrong strategy for China. We worked with Marks and Spencer before with the social media, for their content, but the thing is, if you are not willing to adapt to Chinese consumers, you are prone to fail and that’s what happened – they had to leave China.

Matthieu David: Yeah, they had an offline shop as well close to People’s Square in Shanghai right? And, what’s surprising you actually is that even though big companies who are making so much efforts to succeed don’t make the efforts to actually really understand the Chinese market.

Renata Thiebaut: Yes, this is true, plus the competition. So, you are competing for price with other Chinese brands as well. If you do not want to change your style because Chinese consumers, they do not exactly dress the same as British consumers. So, they were very classic, everything was black or grey or white, so nothing different that they could buy from Taobao for a cheaper price or nothing that it would strike the eyes for the Chinese consumers to buy. So that’s why they didn’t adapt, plus price point – that’s why they failed in China.

Matthieu David: And the opposite, what success has been surprising to you in China? I’m asking this question because the thinker and consultant Peter Drucker was looking at unexpected success, unexpected failure, to assess innovation. I think your perspective is very interesting to that concern, to see what success you have not seen coming and which came?

Renata Thiebaut: I will say Intersport is a very good example, because they resell other brands, like Nike and Adidas, and this is a very difficult thing for you to be a reseller in China, especially if the brands you are reselling, they have established business in the market. Nike, Adidas is very well established in the Chinese market. So, what Intersport did to be the first one sports brand in China or retail in China was to focus on limited editions for example, or products that Nike and Adidas official stores would not have. Also, they did a partnership with Alibaba to implement technology and to give a better consumer experience to the buyers. For example, in Beijing, they have a big screen that is automated, so whenever you pass by, let’s say it’s a woman that is passing, they offer women related products and you can see the products. Then you enter the store, in which everything is touch base, you can try on the products, you can shop online, you scan the QR code; so this is very AR driven. They use a lot of technology to leverage their business in China to be more competitive and to be more well known. So usually consumers could buy from Intersport instead of the brand itself.

Matthieu David: Intersport was a success you were not expecting initially to be as big as it is?

Renata Thiebaut: I would not expect because they resell other brands. That’s the reason. So, I worked with them for this consulting strategy on O2O and how to leverage their brand. We had to do product selection, push different products, and then they signed this agreement with Alibaba to do special technology to leverage their brand in China. I think they are doing very well, it’s a very cool brand, a very cool case, let’s say, that we could learn from.

Matthieu David: Thank you very much, was very, very instructive, was very interesting. I have to say – I was a bit nervous before interviewing you because of everything you did and you do and you are doctor, you have time to write papers, you are a researcher at Harvard and you work on e-commerce in China, managing a business. That’s very, very impressive. Thank you for spending time with us and I hope that you enjoyed it and I hope everyone listening to us also enjoyed it.

Renata Thiebaut: Thank you very much, it was my pleasure.

Matthieu David: Bye – bye everyone.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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

This article China Paradigm transcript #101: Managing cross-border e-commerce operations in China: Successes and failures is the first one to appear on Daxue Consulting - Market Research China.

Click to jump to sections of the guide on clothes distribution in China

• Fashion market overview
• E-commerce
  • Taobao and Tmall
  • JD.com
  • Pinduoduo
  • Brand owned channels
  • Social commerce
• Offline stores
• COVID-19 impact

China’s fashion market growth is not slowing anytime soon

The fashion industry in China has performed well over the past five years. Industry revenue grew at an annualized 5% over the five years through 2019, to total $324 million. Forecast shows that the performance of clothes industry in China will increase to $359 million in 2021.

Data Source: Statista, Revenue in the clothes market in China

Clothing occupies 1/3 of all online shops. The three most popular e-commerce websites for clothes distribution in China are Taobao, Tmall and JD. Forecasts show that 52% of total revenue will come from online sales in 2020.

Data Source: Statista, Sales channels in the clothes market in China

Though offline channels attract less traffic than online, they play a more important role in the purchase stage, accounting for 60 percent of all transactions. Offline conversion is almost 4.5 times as high as online. Chinese consumers buy 43 percent of unbranded clothes online. However, they tend to buy branded clothes in physical retail stores. When it comes to branded clothes distribution in China, offline channels account for 80 percent of sales.

E-commerce market is an essential channel for clothes retail

Taobao and Tmall – the key e-commerce players for clothes distribution in China

There are three major types of clothes brands sold in Taobao: designer brands, commercial brands, and fast fashion brands. In recent years, international apparel brands have accelerated their expansion into the Chinese market. In general, Taobao targets the fast-fashion category of middle-income consumers seeking diversified fashion. For example, Zara is also developing rapidly in the Chinese e-commerce industry.

From the perspective of key brands, in December 2018, the online sales growth of most listed apparel companies continued to decline year-on-year mainly due to the fierce online competition.

Luxury clothing distribution on Tmall and Taobao

Luxury fashion has trouble differentiating from counterfeits on Taobao

There are no official stores of luxury brands on Taobao platform, as it focuses on fast-fashion. Besides, luxury brands worry about counterfeiters, which are hard to regulate on Taobao. In 2015 Gucci, Yves Saint Laurent and other brands filed a suit accusing Alibaba of being a conduit for counterfeiters. Starting in 2016 sellers of luxury products have to upload an invoice or authorization letter from the luxury brands, for examination by Taobao.

Tmall is an ideal alternative for luxury brands

51% of 45 top global fashion brands now have official flagships on Tmall. It’s a big uptick from previous years. Luxury brands that now sell on Tmall include Valentino, Versace, Isabel Marant, Coach, Bottega Veneta, Givenchy, and Burberry. At the end of September 2019, online fashion retailer Net-a-Porter and its men’s site, Mr. Porter, opened a shop on Tmall too. They are offering more than 130 luxury and designer labels. However, luxury’s mega-brands, such as Louis Vuitton and Gucci, haven’t come around to Tmall just yet. But for independent brands and so-called affordable-luxury labels such as Coach and Michael Kors, the reach Tmall provides is particularly beneficial.

Data Source: Quartz, Share of brands Luxury China Index selling on Tmall

Fast fashion distribution on Tmall and Taobao

E-commerce accounted for 20% of Uniqlo’s sales in China accounted in the first half of 2020, an increase of 30% over the same period last year. The brand expects e-commerce to account for more than 30% of sales in the fiscal year of August 2021.

The growing middle class in China are mostly seasoned shoppers who have a long-standing relationship with online retailers like Taobao. If we look at top selling clothes brands on Taobao, Uniqlo occupied the top position in the brand store category. In 2019 on 12.12 they got around 5 million yuan revenue in one day.

Up to now, Tmall has attracted 90% of the world’s fast fashion brands. Taking Uniqlo as an example, the financial report released in 2018 showed that thanks to the strong growth of the Chinese e-commerce market, the performance exceeded expectations. Co-operation with Tmall brought Uniqlo space for lane change and overtaking. In 2019 during 11.11 festival after 16 minutes, the turnover was around 5 hundred million RMB. Uniqlo became the leading Tmall apparel brand.

Data Source: Zhiyi Technology, Top ten brand stores on Taobao

Does Tmall and Taobao have more domestic or foreign brands?

Domestic brands are key on Taobao

Despite that foreign brands started actively participating in selling on Taobao, domestic brands still play a key role. In 2019 among top 5 best-selling brands on Taobao during 12.12. festival four brands were Chinese. For example, Semir brand established in 1996, has become a leading brand in China’s casual clothing industry. It made around 600,000-yuan revenue during the 12.12 festival.

Unlike Taobao, Tmall’s top brands in terms of sales are mostly foreign brands. Good performance shows Handu Group. In April 2019, the number of followers of the HSTYLE Tmall Flagship Store exceeded 20 million.

Foreign brands turn to Tmall

Foreign brands like Levi’s, GAP and Uniqlo actively distribute through Taobao and Tmall. Adidas also established an online store on Taobao and Tmall. Adidas claimed while most of its sales still come from offline stores, the company’s online sales in the country has seen rapid growth.

Tmall has become the core position of global brands in the Chinese market. According to Tmall data, the number of global brands that have entered Tmall has exceeded 50,000. Such foreign brands as Uniqlo, ZARA and Monki participated in Spring/Summer Tmall Fashion show, bringing nearly one million new products to the Chinese clothes market.

Data Source: Yunguan data, China’s top clothes brands on Tmall

Clothing distribution on JD.com

The data shows that JD.com clothes industry went online in 2011. It became the second largest occupant of clothes categories in China’s B2C market in 2014. It has now become one of JD.com’s fastest-growing categories. JD.com’s key brand layout has attracted many well-known international and domestic brands to settle in.

Luxury fashion: JD can help with brand awareness, but not all brands use it

Louis Vuitton Group has no official store on JD platform. However, other luxury brands in China actively cooperate with this e-commerce giant. In 2017 JD.com and Farfetch announced a strategic partnership that created the premier platform for luxury e-commerce across China. Farfetch has well-established operations in China and is already the partner of choice for 200 luxury brands. JD will help drive further brand awareness, traffic and sales for Farfetch in the market. Such brands as Armani, Swarovski and Zenith have their official stores on JD platform.

Fast fashion is not a focus of JD

As JD.com initially specialized in tech, there are not so many fast-fashion brands on the platform. The key players are Vero Moda and Only. From the brand lineup, JD.com bags, watches and jewelry account for a higher proportion, while Tmall focuses on clothing and beauty.

Domestic vs. foreign brands on JD

According to JD’s clothing brand ranking, domestic brands prevail in different categories of clothing. Taking the category of “women’s dresses” as an example, we can see that the top 5 products are Chinese brands.

Source: JD.com, Top 5 products in “women’s dress” category

Pinduoduo – discounted clothing with group buying

Founded in 2015, the Chinese e-commerce platform Pinduoduo offers a wide range of products from daily groceries to home appliances. Counting 536.3 million active buyers and 7 billion products sold in the first half of 2019, the platform is essential for retailers and brands.  When looking at a product, users have two price options, a standard price to buy directly and a discounted price. Discounted prices are unlocked when users form ‘teams’ of at least two buyers.

Luxury fashion slowly join Pinduoduo

For most brands, Pinduoduo is not going to be as good of a fit as a platform like Tmall or JD.com. This is particularly true for premium or luxury brands, which after years of resistance have turned in droves to Tmall’s Luxury Pavilion but are as resistant to discounting and promotions in China as they are elsewhere. However, in 2018 such luxury brands as Armani and Givenchy joined the platform. It can give other luxury brands in China an impulse to cooperate with Pinduoduo.

Brand owned channels

Brand.com is key for luxury

With higher platform fees and increasing user acquisition costs, only 10-20% brands are making profits on Tmall. Thus, building brand-owned ecommerce channels may be more worthy of investment. Besides, the issue of fake goods sold on public marketplace is a common concern of Chinese ecommerce consumers. Brand-independent ecommerce platforms in China can ensure brands full control on the whole retail process. 

Louis Vuitton in China – like Gucci and Hermes – has ventured online but on its own terms. In 2017 it launched a standalone e-commerce site. The site will let customers buy Louis Vuitton leather goods, shoes, accessories, watches, jewelry, luggage and perfume. Vuitton is fiercely protective of its distribution as a means of controlling prices and supply.

Many fast-fashion brands using their own website for clothes distribution. For example, UNIQLO has its own web-based store in China. Customers can also receive the latest information including the weekly mail magazine and the latest UNIQLO campaigns.  Customers will be able to choose from approximately 500 different items of UNIQLO mainstay products.

Using own website is more common for foreign than domestic brands

Most of global foreign websites such as Zara, Uniqlo, H&M, Nike, etc. have their brand-owned websites in China. For example, Zara in China launched an online store back in 2012. The website offers online shoppers the same full range of merchandise for women, men and kids as the one found in physical stores.

As Chinese companies are aware of rising costs of e-commerce in China, they actively distribute clothes using brand-owned websites. For example, Chinese company Peacebird launched a variety of sales models during Spring Festival, such as discounts and live broadcasts on its online shopping platform. It invited fans to “cloud shop”.

Social commerce in clothes distribution in China

Xiaohongshu- the fastest growing social media platform for shopping review

Xiaohongshu is a startup that’s part e-commerce portal and part social media platform. It also has its own e-commerce mall to which the posts on its site can link. The company is backed by Alibaba and Tencent, and has 220 million users. The top 10 content are the categories of “clothes”, “hairstyle”, “skincare”.

With the rising of Xiaohongshu many domestic brands started using it to achieve sales breakthroughs. For example, in June 2020 the domestic women’s clothing brand Zhizhi and the Orange Desire held a brand day event in Xiaohongshu. 12 different fashion bloggers shared live broadcast, promoting clothes of these brands. After this event, both brands saw rapid growth in sales.

Using hashtag “fitting room” on Xiaohongshu, most of results will show popular fashion bloggers taking photos of themselves trying on clothing in a store changing room. Zara, H&M, Uniqlo and COS are the most mentioned brands with fitting room hashtags. The article will give a description of the items, what the KOL did or didn’t like about them (such as material and fit), the prices, and which items the Chinese KOL suggests buying.

Source: Media Production, A typical ZARA fitting room try-on post

Luxury fashion use Xiaohongshu for brand awareness

Luxury brands like Dior and Chanel actively use Xiaohongshu to increase awareness. The number of mentions of luxury labels such as Hugo Boss and Max Mara by users has increased quickly on the platform. In 2017, users mentioned Chanel 2.24 million times, with Dior following after at 2.14 million mentions. Meanwhile, Hugo Boss recorded a 271 percent jump in mentions, with Bally and Max Mara both achieving growth of 133 percent.

Xiaohongshu shows fast growth in Fast-fashion

In 2019 the search volume of brand specific information on Double 11’s Eve brand has skyrocketed. In recent years, Uniqlo, a clothing brand that repeatedly created sales campaigns during the Double Eleven period, has also increased its search volume by 148% during this period.

Clothes brands embrace WeChat e-commerce

WeChat is a key channel for Luxury fashion

Since Louis Vuitton became the first luxury brand to open a WeChat public account in November 2012, other luxury brands have also rushed to open service numbers.

For example, on Chinese Valentine’s Day 2016, Dior launched an online customization campaign for its Lady Dior handbag. Users could choose the accessories for a small Lady Dior bag and directly purchase it using WeChat’s payment system or Alipay. 

Data Source: LadyMax, Top luxury brands in WeChat by number of followers

Uniqlo set the pace of WeChat for Fast fashion

UNIQLO was the first brand to test the WeChat mini-program store in China. At the same time, it introduced smart shopping guides Xiaoyou and Xiaoyou Zongsha to provide consumers with a better-quality experience and make its omni-channel closed loop more complete, thereby targeting more consumers. Uniqlo has taken the lead in WeChat, a traffic pool with 1 billion users, and has introduced offline self-promotion and LED digitization in all e-commerce channels and physical stores.

Domestic brands

Domestic brands use WeChat to increase awareness and communicate with customers. According to statistics, such brands as Eichitoo and Li Ning have the best results in WeChat promotion of their clothes.

Data Source: Sino-Fashion, Top domestic clothes brands in WeChat

Foreign brands

Nike, Adidas, Tiffany&Co, H&M and many other foreign brands launched WeChat accounts in China in order to expand clothes distribution. Users are staying on WeChat more frequently and longer, but for domestic brands, it is easier to attract traffic, gain customers, and convert sales on WeChat. For foreign brands, wanting to enter the Chinese market towards it requires a lot of capital investment and months of account opening.

Offline stores still make 60% of the total transaction volume

Despite the enthusiasm of Chinese consumers for online shopping, most still prefer purchasing luxury products at bricks-and-mortar stores. These enable them to see, touch, feel and try out products. Besides, it helps to enjoy high-end customer experiences such as refreshments, invitations to private lounges, and other customized services.

Particularly in the luxury sector, offline stores are still an important marketing and sales channel, where consumers are engaged in a highly experiential way through activities and events that reflect the brand image of the retailer. According to a report by Tencent, in 2017, 95% of luxury purchases were made offline versus merely 5% of luxury purchases done online. Taking Louis Vuitton as an example, China has the third place in the ranking of countries with the biggest number of LV physical stores. It shows the importance of physical clothes distribution in the Chinese luxury sector.

Data Source: Louis Vuitton, Number of Louis Vuitton stores per country

However, between 2015 and 2017, 138 new leading luxury brand stores were open in China, yet 144 stores were closed, therefore the aggregated number of the leading 20 luxury brand retail stores fell slightly down to 1,119 in 2017, compared to 1,125 shops in 2015. It can reflect the growing importance of the e-commerce in China, as more and more consumers choose to shop online.

Fast fashion brands continue to open offline stores

Companies with ambitious expansion plans include European company C&A Mode, which has more than 40 stores and plans to have 150. The Japanese brand Uniqlo, one of the first entrants into the scene of the fast fashion industry in China, plans to open 100 new fashion stores in China and already holds 2.4% of all apparel and retail footwear values.

Foreign fashion brands focus on offline ‘flagship stores’ in China

A number of players have expanded local store networks and launched their first/ largest global flagship store in the country. For example, in June 2019, Spanish fast fashion brand Mango signed a cooperation agreement with Hangzhou Jingzhe Clothing Co., Ltd. to accelerate its development in Asia, especially in the China market. Under this cooperation agreement, the brand will further develop both online and offline channels – it plans to open 16 physical stores in China.

Brand stores in China dominate in terms of clothes distribution in China

At the moment, in Asia – and in China in particular –mono-brands dominate the market. More precisely, 95% of the market in China is mono-brand retail stores. Adidas alone has 11,281 stores in China. The only exception in Asia is Japan, which already has a mature market. Nevertheless, the multi-brand trend is constantly evolving.

Multi-brand stores are rising in China

Department stores in China are still an important channel for clothing sales. According to the statistics, in 2005, the monthly sales of clothing in the top 100 shopping malls were 4.9 billion yuan. 44% of the total amount, with an average sale of 100 million yuan, indicating that despite the rapid development of the apparel wholesale markets in various regions, large department stores is still the main channel for clothes distribution.

COVID-19 impact on clothes distribution in China

Data Source: McKinsey, Traffic fell during COVID-19 outbreak in China

COVID-19 outbreak in China influenced the clothes industry in China. Discretionary categories, such as food service outlets, apparel stores, and department stores were hit hard during the crisis and their recovery has been slow. Absolute traffic levels fell dramatically in all categories. Some 80 percent of apparel stores have reopened, but footfall in discretionary categories is still 40-50 percent below pre-COVID-19 levels. To engage with these dynamics, hard-hit categories such as apparel have ramped up their digital activities. In February, when coronavirus struck China hard, Taobao saw the number of livestream sessions on its app double. It is a sign to the e-commerce platform that brands are relying more on livestreaming to get customers.

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This article The complete guide to Clothes Distribution in China is the first one to appear on Daxue Consulting - Market Research China.

Matthieu David interviews Josh Gardner, CEO at Kung Fu Data. The e-commerce sector has never been more relevant and richer in China than the present and Kung Fu Data is a big reason why businesses succeed in this field. Gathering the right data combined with having the right business relationships and taking advantage of present opportunities has made Kung Fu Data a force to be reckoned with in the e-commerce business. Find out why in this new China Paradigm podcast.

• 0:15 Guest introduction and Kung Fu Data’s history
• 6:48 Current company size and workflow – pre and post COVID-19
• 17:13 The quality of the shopping experience – is it changing?
• 19:55 Calculation of conversion rates during a live stream – the new way of shopping
• 25:23 What other changes might occur as a result of the coronavirus outbreak?
• 28:50 Owning the marketing strategy – shopping platforms are integrating with social media platforms in China
• 31:51 Learning about e-commerce – how did Kung Fu Data come to be?
• 39:41 Rigging the Game – building strong professional relationships makes long term sense
• 47:46 How does Kung Fu Data gain it’s clients’ trust?
• 53:39 Valuable Intel – sacrificing a year to learn the market
• 58:57 Kung Fu Data strategies for optimizing e-commerce marketing
• 1:06:49 The smallest details matter – a Kung Fu Data approach to e-commerce today
• 1:13:48 What books about China has inspired Josh Gardner the most in his entrepreneurial journey?
• 1:23:47 What surprising success or failure has Josh Gardner witnessed in terms of business in China?

 China Paradigm website

One relevant episode

We believe, that China, with 20% of world population and as the second world economy, is impacting every single business, small to big. That is why it is a new paradigm. How does China impact your business is the ultimate question we will answer through those podcasts.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

This article China Paradigm 110: How to score a 1.5 million RMB sales day through live-streaming twice is the first one to appear on Daxue Consulting - Market Research China.

Two drivers of China’s counterfeit production

The counterfeits industry in China: a consequence of economic growth

The counterfeit industry in China is seen as a problem but it should also be studied as a symptom of economic growth. In 1978, Deng Xiaoping started reforming China’s economy. For the first time, foreign investments where encouraged. Many companies wanted to relocate there because of low wages and domestic potential. The industrial power grew and the country became the factory of the world as the the international production process. Global brands like Nike or Adidas have a part of a part of their production there. In many sectors, the country started to adopt new technologies.

While China’s living standards improved greatly, the new industrial power lead to counterfeits, as factories could cheaply re-create brand products. The counterfeit industry in China seems like a minor symptom of industrialization. Hence, even if it is necessary to tackle counterfeits, it was just the result of a growing Chinese industry.

China counterfeiting is linked with brand culture

Since the early 1990’s, the counterfeit phenomenon increased quickly in China. During this decade brand culture emerged as the opening of western luxury stores in country. Fashion brands became hyped, and counterfeits were a mean to obtain luxury goods without spending years’ worth wages. Since, fakes continue to progress fulfilling the domestic market of China.

In 2015, China and Hong-Kong represented 86% of the global counterfeit industry, which is around 400 billion USD every year, according to Europol. Thanks to years of relocating for foreign companies, Chinese factories now have the skills needed to copy almost everything. In Chinese stores, 60% of luxury goods are imitations and you can also find some complete fake stores who just looks like a real one. For instance, A fake supreme store opened in Shanghai. The counterfeit phenomenon highly increased following the luxury market starting in China.

Size of the market for counterfeit products in China

The global counterfeit trade for all items, from purses to electronics to software, is worth USD 461 billion, about 2.5% of all trade worldwide. That is more than the global drug trade. Despite attempts regulation, international trade in counterfeit goods has almost doubled since 2008.

According to the 2018 Global Brand Counterfeiting Report, worldwide losses suffered due to counterfeiting amounted to USD 323 billion in 2017, with handbag companies alone accounting for $20 billion of that.

80% of the world’s counterfeit goods come from China, and many of the market’s consumers are in China as well.

The market for fake goods in China

There are several distinct market segments of consumers who purchase fake goodsin China. The primary segment is buyers unaware that they are purchasing fake products. This deceptive counterfeiting is rampant, but the market for fake goods in China is largely driven by consumers who actively search for and purchase counterfeit products. 

Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive counterfeit market. They can afford the occasional $500-$1000 bag, but not the luxurious $15,000 Louis Vuitton or Birkin. These aspirational Chinese shoppers purchase fake goods for the same reason the wealthy buy real products: to emulate their high-class idols, impress peers, and enhance social status. Fake goods allow shoppers to “consume” prestigious brands without actually buying the high-quality goods.

Some consumers knowingly buy counterfeit goods even though they could afford a genuine product. They have ample funds but believe that the high prices of authentic products are unwarranted, especially when they can get a similar version at a much cheaper price.

Chinese Fashionistas chasing the trends

Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas want to buy the hottest new products, but know that another trend will replace it next season and are thus unwilling to invest the money to stay on trend season after season. Furthermore, they see counterfeit purchases as low risk, because limited-edition or recently released products are less familiar to the general public, making it more difficult to call out a fake.  

Buyers of counterfeit goods impose a hidden cost on the brand and people who buy the real thing: they make the brand less exclusive. All non-deceptive counterfeit market shoppers share one attribute: they are willing to pay for visual attributes and functions, but not willing to shop the genuine products. 

Government regulation of the fake market in China

Affected parties have previously complained that punishments for selling counterfeit goods in China are too light to deter offenders. In February 2017 Alibaba reported that of the 1,910 cases of suspected counterfeiting they passed on to authorities, only 129 people were found guilty.

In August 2018 the State Administration for Market Regulation stepped-up efforts to crack-down on the illegal production and sale of counterfeit goods in China.

The regulator announced strict punishments for online trading platforms that fail to protect the rights of consumers and trademark owners, or that do not actively cooperate with market regulatory authorities.

They demanded that other regulators such as the Shanghai Administration for Industry and Commerce launch targeted investigations into sales of counterfeit goods in China, and specifically called out offending platforms such as Pinduoduo.

The new China’s e-commerce law, which took effect on January 1^st, aims to discourage counterfeiting in China through heavier fines and places more responsibility on digital platforms to remove sellers of fake goods. The law also addressed false-advertising, consumer protection, data protection, and cybersecurity.

The new law targets three groups: e-commerce platform operators like Taobao, merchants who sell goods on sites like Taobao, and vendors with their own websites or who sell on social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers will need to register their businesses and pay relevant taxes.

In an effort to spur major e-commerce platforms to crack down on counterfeits being sold on their sites, the law makes platform operators jointly liable with the merchants selling fake goods. Previously, only the individual merchants were liable. Platform operators can now be fined up to 2 million RMB (USD 290,000) for the property infringement that comes with selling counterfeit goods in China.

E-commerce platforms crackdown on the sale of the counterfeit good industry in China

Taobao and fake goods

In 2015, Alibaba was the subject of intense state scrutiny as the State Administration of Industry and Commerce unveiled that only 37% of the luxury goods authorities examined on its Taobao platform were genuine. In a strongly worded white paper, state authorities criticized Taobao for lax internal controls, declaring that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. Chinese consumers agreed and called on the government to tighten supervision over Taobao. Alibaba declared a zero-tolerance policy towards counterfeits, and created a new 300-person team to ramp up the fight against fake good in the Chinese market.

Luxury brands were unimpressed, and in May 2015 Gucci, Balenciaga, YSL and other brands filed a lawsuit alleging that Alibaba’s negligence encouraged the sale of fake goods on its sites. A US federal court dismissed the suit, but Alibaba’s reputation as a haven for counterfeiters persisted.

In 2017, Alibaba was again under consumer and government pressure when Taobao was found to have over 240,000 vendors selling fake goods, up from 180,000 vendors the previous year. To assay consumer anger and protect investor relations, Taobao in mid-2017 launched an initiative to crack down on the fake goods being funneled through their site. That initiative has led to 95% of takedown requests and red-flagged listings being processed within 24 hours, a significant improvement in processing times. 97% of listings for counterfeit items are now deleted before transactions even take place.

How does Pinduoduo handle counterfeit items?

Pinduoduo, the third-largest e-commerce platform in China, is another site criticized for selling low-priced knockoffs. In August 2018 the State Administration for Market Regulation investigated Pinduoduo and announced that Pinduoduo should strengthen platform management and better regulate activities of third-party vendors. Pinduoduo soon removed more than 10 million fake items from its site and blocked more than 40 million product links suspected of copyright violations. It is working with over 400 luxury brands to fight counterfeiters and has created a hefty 150 million RMB account to refund consumers who were unwittingly sold fake products.  

How counterfeiters in China get around AI controls online

There are many intricate ways in which sellers of fake goods in China have evaded regulation online. One common trick is for sellers to redirects clients to separate websites, where they can browse options and place an order. Another method is to label items as “haute couture,” which consumers are aware implies ‘high-quality copy.’ Aside from this label, Taobao sellers can change the name of the brand they are copying, or display just part of it. One seller of copycat Zara clothes lists his items as ZA or Z*ra, which allows him to sneak past the filters set by Taobao.

Taobao’s AI tools are constantly upgrading to become more difficult to trick, especially with the introduction of filters against luxury products priced below a certain point. Accordingly, some sellers of fake goods will display a price for their product that is consistent with the price for the real thing, or display a price that is outrageously high. Interested customers will talk to the shop in Taobao’s private chat function, and sellers will reveal the real, much lower price.

In-person sales of counterfeit goods in Shanghai and Beijing

Counterfeit goods sold online in China work hard to avoid detection, but physical brick-and-mortar ‘fake markets’ in cities like Shanghai and Beijing are out in the open, easy to find and even reviewable on sites like Trip Advisor. Officials routinely inspect physical stores, but they may not take the job too seriously because they know local vendors rely on the income. Regulators let the stalls peddling cheap and fake goods slide, instead choosing to target merchants who lead interested buyers to unmarked apartments, back rooms, or closets full of high-quality fake Gucci, Prada, Michael Kors, and Louis Vuitton handbags.

Aside from avoiding government regulation, counterfeiters in China work hard to stay under the real company’s radar. One fake good peddler in Beijing explains: “We careful. Louis Vuitton. They send spies and they sue. So we hide.”

The emerging authentication industry in China

The prevalence of fake goods in China and consumers’ subsequent fears of being scammed into accidentally purchasing knockoffs has created a new sector: product authentication.

There are dozens of apps on the Chinese Apple iOS app store that offer to verify luxury goods. Authentication company Zhiduoshao has hundreds of thousands of users who pay 49 RMB for a product to be checked virtually by an expert. Founder and CEO of Zhiduoshao maintains that 95% of authentication requests can be answered online via photos. Authenticators tell users what kind of photos to upload, and then carefully inspect the monogram, fabric, and technique. Often, the process only takes a few minutes.

Similar app Isheyipai boasts an “expert jury” of 12 authenticators. Users upload photographs of the item in question and choose who they want to check their product. Prices range from 49 RMB for a junior authenticator to 99 RMB for senior staff. Appraisers each have areas of expertise, such as bags, jewelry, or shoes.

Private companies offer training courses that teach appraisers-in-training how to inspect a wide range of luxury brands and products, with advice about texture, logos, stitching and everything else that a counterfeiter might get wrong. A 10-day program can cost up to 40,000 RMB.

Authentication companies in China have an uneasy relationship with the brands whose integrity they claim to protect. Cartier maintains that their products should be bought only from “authorized sellers,” while Audemars Piguet states that it does not endorse any authentication app and De Beers says it is unaware of them.

Brand wariness of authentication services is rational because Chinese counterfeiters are now imitating these authenticators too. Seemingly authentic sites copy the names, website layouts, and imagery of established authentication platforms like Zhiduoshao in order to scam consumers seeking product verification out of their money. In one case, consumers discovered that an authentication app was faking reviews and authentications to sell knockoff goods.

How brands can fight back against Chinese counterfeiting

Anti-counterfeiting strategies must be brand specific to take into account the company’s target market, the types of counterfeits produced, and how the counterfeits are being manufactured, distributed, and sold. An effective strategy combines IP protection, export and customs controls, and retail market controls.

But no matter how sophisticated the anti-counterfeit strategy is, where there is a demand there will be a supply. The only surefire way to shrink the market for counterfeit products in China is to deter consumers from purchasing fake goods in the first place. However, typical deterrence strategies that luxury brands have used in the West will not work in the Chinese market.

Many consumers are aware that their purchases are counterfeit

Most consumers who purchase counterfeit products in China are well aware that the quality is not on par with the real product. When consumers buy fake goods, they do so despite the possibility that the product will fail them. Additionally, the prevalence of sophisticated fakes means that consumers can easily buy counterfeit products with nearly genuine quality. Thus, highlighting the poor performance quality of counterfeit goods is not an effective deterrence strategy for brands to adopt in China.

Where in other countries purchase of knockoff goods is a punishable crime, in China consumers are not liable for their counterfeit purchases. Deterrence of counterfeit purchases in China cannot then be fear-based.

There are two main deterrence strategies that luxury brands can adopt to dampen Chinese consumer demand for fake goods: the ethics emphasis, and the psychosocial emphasis.

Anti-counterfeiting in China: The ethical approach

Counterfeiting is not a victimless crime, and luxury brands should tell consumers who gets hurt when they buy fake products in China.

Most counterfeit goods in China are made in sweatshops by children and slave laborers who are often the victims of human trafficking. These sweatshops are overwhelmingly in low-tier Chinese cities, and these child workers are often Chinese, making the issue hit particularly close to home for Chinese consumers of knock-offs.

The Chinese counterfeit industry’s use of child labor is much more damaging than the use of child labor by companies like Walmart and Target. Corporations can beare held accountable for exploiting cheap labor: when labor abuses are exposed, companies face plummeting share prices, lawsuits, and customer boycotts. Counterfeiters face no such risk, because consumers of knock-off goods do not know who manufacturers their handbags or sneakers.

Brands can educate against counterfeiting practices in China

Additionally, brands can educate Chinese consumers about the criminals who benefit when a shopper buys a counterfeit good. Production and distribution of counterfeit goods are heavily controlled by ultraviolent Chinese triads, who traffic in narcotics and sex slavery alongside fake products.

Consumer awareness of the hidden costs associated with their counterfeit purchase can create shame and guilt that might deter some Chinese consumers from buying knock-off goods.

Anti-counterfeiting in China: The psychosocial approach

In the West, there is a shame that comes when one admits to buying counterfeit products, and luxury brands should work hard to foster that stigma in China. For some people, the regular purchase of fake goods is a normal part of life: many Chinese consumers who own fake goods assume that the luxury brands sported by their peers are fake as well.

In 2018 the Japan Patent Office launched an anti-counterfeiting campaign that revolved around embarrassing consumers who buy knock-off products.

It is too early to see the results of Japan’s shame-based anti-counterfeit strategy, but the premise is solid. Luxury brands effected by Chinese counterfeiting could emulate the approach, and work to create a social stigma against knock-offs.

Across the board, the most effective strategies to deter Chinese consumers from buying counterfeit products are shame-based.

Who is benefiting from the counterfeits industry in China?

China is responsible for more than 70% of counterfeiting according to the World Customs Organization. Where all the money from this industry is going? Alain Rodier, in his book: The Triads: the hidden threat, indicates that the counterfeiting is linked with Chinese triads. They are using the money received from counterfeiting to invest in other illegal activities. However, the money can also be legally re-injected into the country. Alain Rodier argues that criminal money is largely reinvested in the country’s legal economy: “As far as the Chinese triads are concerned, they would have a worldwide turnover of 200 billion dollars. Much of this money is reinvested in the legal economy”. For instance, the Sun Yee On triad would have largely participated in the development of Shenzen. Even though triads and other organizations directly benefit of counterfeiting, it can be noted that this money is sometimes reinvested in the legal economy.

Rethinking the fashion industry

One way of tackle the fake industry is to completely change the opinion of people concerning clothing. Trends should focus more on quality than brands. Fast fashion might also be a big issue in consumption because of its impact on the environment. If the fashion industry evolves to its simplest form, people would not be sensitive to brand image. Without the importance of brand image, there is no demand for counterfeit luxury goods anymore. Naomie Klein with its book “no logo” lead this movement in the end of the 1990s. One way to wipe out counterfeits is to educate people to consume goods differently, without being obsessed with brands.

To conclude, the counterfeit industry is a direct consequence of the industrial growth in the country combined with the value placed on brand image. It is difficult to tackle this gigantic phenomenon generating billions each year. You have both to address the production and the consumption of counterfeit goods. The counterfeit goods industry is injuring companies because it negatively impacts their brand image, consumers who are genuinely interested in the luxury products may lose faith that what they are buying is authentic.

What brands can do to avoid intermixing with counterfeits in China

For luxury brands to avoid being sold alongside counterfeits, brands can try a brand independence, or direct to consumers strategy in China. Counterfeits are sold easily on e-commerce platforms, but selling from a brand’s own website, or brand.com, is a surefire way to avoid competing with counterfeits and keep a pure brand image.

Authors: Alison Bogy & Enzio Cacciotto

Daxue Consulting helps you get the best of the Chinese market. Do not hesitate to reach out to our project managers at dx@daxueconsulting.com to get all answers to your questions.

Luxury brands in China do not have to compete with counterfeits

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Consumer profile of the Stay-at-home Economy in China

The expression of Zhai people (宅人群) refers to men and women who depend on the internet to meet their daily needs without leaving their homes. They are usually keen on online videos, games and social media. Apart from recreation, Internet also enables them to buy food and clothes, learn remotely, and read. During COVID- 19, most Chinese people adopted the Zhai lifestyle. Thus, the Stay-at-home economy in China has expanded.

“Zhai people” aka “宅男 and 宅女” (Zhai men and zhai women) is originally a Japanese word “Otaku” meaning “geeks”, now it is widely used to describe people who don’t like outdoor activities. They normally spend less than 3 hours outside and around 8 hours on the internet every day.

Among the Zhai people, 55.5% are men and the rest 44.5% are women. 76.8% of Zhai people are younger than 35 years old, but COVID-19 pushed the Zhai lifestyle to older generations too. Regarding geographical distribution, Zhai lifestyle are not unique to tier-1 cities. In fact, 60% of Zhai people under 30 years old live in tier-1.5 and tier-2 cities.

Internet accessibility and Mobile payment are the foundation of the Stay-at-home Economy in China

China’s fast-growing internet enables people to enjoy many services without leaving their homes. According to the most recent report from China Internet Network Information Center, 65% of Chinese population are mobile internet users. According to Mckinsey, total time spent online per user per day amounts to 358 minutes, with social apps (44%), content apps (20%) and other apps (36%).

Another important driver of the Stay-at-home Economy in China is the wide use of mobile payment. 92% of people in China’s largest cities use WeChat Pay or Alipay as their main means of payment.

COVID-19 mandated Stay-at-home, which pushed Chinese activities further online

Time spent online has steadily increased for several years in China, COVID-19 enhanced this trend. During the epidemic, Chinese reliance on the internet increased and they were exposed to more diverse platforms.

1. Mobile gaming: Multiplayer online battle arena sector is the most popular with the game Honor of Kings reached more than 100 million daily active users.
2. Social media platforms: On Weibo, some topics about COVID-19 reached over 1 million reads per minute.
3. Online Shopping: In February 2020, Taobao app had 720 million users in China, increased by 33 million users compared with December 2019.
4. Online fitness classes: KEEP fitness app registered a 185% increase in followers on the live-streaming platform Douyin.
5. Remote work and study platforms: The Tencent Meeting app was downloaded 430,000 times a day, up from 370 before the outbreak.

Social media and news apps are more embedded into Stay-at-home Economy in China

On average, every Chinese social media user has 9.3 social media accounts. 98% of Chinese netizens visited social media platforms in January 2020. All of the active social media users have access via mobile. They averagely spend more than 2 hours per day on social media and 45% of them used social media platforms for work.

COVID-19 drive the demand for news apps as well as social media

Both the time spent and the number of active users of daily news apps increased since December 2019. Along with the development of COVID-19, users’ demand for news apps peaked in February when China entered the height of the epidemic. Then, it had another growth in April when China’s market started to recover from the epidemic. Qianfan Analysis reported a 12.4% increase in the monthly average time spent on news apps per use, from 17 to 19 hours.

[Data source: Qianfan Analysys ( 易观千帆), Questmobile, monthly active users of China’s top news apps during COVID-19]

Outside of news apps, WeChat, Weibo, and short video apps became the main channels for Chinese to obtain relevant information about COVID-19. Information channels on social media are more likely to gain traffic in the future. 48% said they will continue to spend more time in information acquisition after the outbreak. A popular science KOL PaperClip went viral explaining the COVID-19, attracting over 2 million views on Weibo alone.

The 4 types of entertainment rising in the Stay-at-home Economy in China

The mobile games market still has growing potential

The revenue of mobile games had already been steadily increasing, and COVID-19 lead to an influx of new gamers. Additionally, many long-time players spent more time gaming during the epidemic. According to Quest Mobile, the Chinese New Year (CNY) holiday had a 41% year-on-year increase in terms of average time spent on gaming. In the same comparison period, the revenue of mobile games in China increased 30% from $530 million to $668 million.

Most of the top games have some social or multiplayer aspect. Mini games are also popular since they are less time consuming and suitable for stress release. The 5 top mobile games people played during the epidemic include:

1. Honor of King: the number of daily active users exceeded 50 million during the 2020 Chinese New Year. On the first day of the new year, the number reached the peak of 54 million.
2. Online chess and card games: People in northern China prefer card games and southerners like chess.
3. Werewolf: Werewolf (狼人杀) is a popular board game in China. Its active users increased by 20% every day during the 2020 CNY.
4. Sandbox games: The number of daily active users of sandbox grew by 6 million since the 2019 CNY, to reach 76 million during the 2020 CNY.
5. Mini games: OPPO mini games became the third most popular game series according to active users during the 2020 CNY.

Short videos enjoyed explosive growth and commit to user stickiness after COVID-19

Short videos have been one of the most important forms of entertainment in China during the past a few years. Now, short video apps provide quick news and info about COVID-19. The number of monthly active users of online video platforms had a large increase during COVID-19. According to iResearch, short videos claimed 68.4% of the spare time of Chinese people, only second to TV series (69.8%). Some movies released on online video platforms rather than in cinema and they had a large number of views. Cinema is no longer the only option for releasing films, online video platforms are challenging its leading position.

[Data source: quest mobile, the monthly active users of China’s online video platforms]

The industry concentration of short videos in China is high. The top short video platforms reached many new users over 40 years old because they could quickly get updates about COVID-19. Douyin (13%), Kuaishou (17%) and Xigua (19%) all witnessed double-digit growth from December 2019 to March 2020.

The number of paid users of online video platforms increased significantly during COVID-19. And those platforms are determined to keep the trend going. COVID-19 halted the shooting of many TV series, movies and shows, which decreased high-quality content. People will have higher demand for higher quality and diverse media. Video platforms are working hard to buy more high-quality video content to increase user stickiness.

Music and concert industry responded to COVID-19 in ways that ensured its growth

During the epidemic, music platforms offered songs and whole albums related to fighting against COVID-19, resulting in increased online traffic. It’s possible those new users will be paid users in the near future. According to Tencent music group, Kuwo 酷我音乐, a big online music platform in China achieved 3.5 billion total exposure during the epidemic. 462 musicians and singers also published epidemic-related songs in Q1 2020.

Offline concerts were all canceled or postponed during COVID-19, while online concerts offered extraordinary audio-visual experience to fans and received large traffic. Online concerts effectively help online music platforms reach more new users, it can be expected that online concerts will be one of the main ways for music platforms to gain traffic. For example, Tencent music group held on 11^th April 2020 an online concert “I am A-Lin”, and attracted 20 million views of its Weibo topic. 4 days later, it held another online concert “To see you whenever I want” became the No.1 Weibo hot topic.

COVID-19 promoted online reading in a somewhat permanent way

More than 50% Chinese readers chose to read novels almost every day. The average daily online reading time increased by 20% during the epidemic compared to last year. Most new readers are those who did not have much free time to read before. Now they have formed the habit of reading online and boosted the growth of the market.

86.2% of people say they will continue to read after the epidemic, hence the online reading market will likely grow in the near future.

E-commerce and delivery further developed the Stay-at-home Economy in China

E-commerce is further enhanced by KOL live-streaming

The matured e-commerce system provides more convenient conditions for Chinese consumers. But its growth rate has declined, as the scale of users has gradually reached the ceiling of netizens and the cost of acquiring traffic is getting higher and higher. However, Chinese people’s purchasing decisions are heavily affected by KOLs and live-stream and some top short video platforms (Kuaishou and Douyin) already entered the e-commerce market by live-stream + KOLs. They achieved very high sales. Hence, “live-stream e-commerce” will become the next outlet in China’s e-commerce industry.

During the epidemic, live-stream and KOLs played even more important roles in online marketing. The top short video platforms made full use of their huge traffic to work with top KOLs in live-stream marketing, they have achieved extraordinary results. Live-stream marketing is becoming the most efficient online marketing tool in China. For example, Kuaishou live-stream achieved over 620 million RMB turnover on 18^th of April alone.

Grocery delivery stands out with the help of contactless delivery service

Although January is a traditional low season for e-commerce platforms, the COVID-19 impact on Chinese consumption is evident in the grocery e-commerce market. In the long run, the main problems for fresh food e-commerce are high transportation and storage costs. Fresh food is not easy to preserve and it’s price is usually high. Therefore, it’s essential for fresh food e-commerce companies to optimize storage to lower costs.

Diverse and safe express delivery methods can increase consumers’ desire to shop online and hedge part of the consumption crisis brought by the epidemic. JD.COM has used an unmanned delivery robot for contactless delivery in Wuhan, which promoted the application of AI tech in daily life. Similarly, China’s largest delivery service provider CaiNiao (菜鸟available everywhere in China) started to use the “contactless pickup” service to reduce personnel contact since 28th January. Thus, consumers’ demand for contactless delivery cabinets is expected to continue even after COVID-19.

Online food delivery is essential in the Stay-at-home Economy in China

In the first two months of 2020, the catering industry’s revenue decreased by 43.1% year-on-year. More than 90% of the Chinese restaurants had to close. Luckily, contactless delivery, which was already quite developed in China over the years reduced infection. Two online food ordering platforms Meituan and Ele.me adapted their delivery services to reduce infection risks. This includes taking the temperature of all the people involved in the delivery process.

Seeing the success of contactless delivery, the catering industry all turned to O2O food delivery. According to the survey of iiMedia, 78% of the restaurants mainly sold online to ensure the continuity of their operations during COVID-19. Among them, 70% said they will remain online.

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According to statistics released in early 2020 by the People’s Bank of China (PBOC) the number of electronic payments processed by country’s banks increased by 6.3% compared to the same period in 2018. 62.1 billion electronic payments have been registered, including 30.7 billion of mobile transactions, representing a year-on-year increase of 73.6%. In March 2020, 776.08 million persons were using mobile payment in China.

COVID-19 boosted online and mobile payments in China

After the COVID-19 epidemic in China, the Payment & Clearing Association of China (PCAC) launched an action on February 28, 2020 to encourage people to use mobile payment, online payment and QR payment to avoid the risk of infection.

Just after the Labor Day holiday in May, payment giants released their payment data. According to Zhuanlan, compared with Qingming Festival in April, the average daily transaction amount of UnionPay increased by 7.7%. Perhaps COVID-19 is the driving force on online transactions in China. The online platform handles 1.354 billion capital online payment businesses on a daily basis, an increase of 54.59% year-on-year. At the same time, the number of offline barcode payment (mobile payment) transactions on a daily basis increased by 48.5% year-on-year. In terms of Alipay, the payment frequency of sightseeing spots has increased by 120%; the amount of payment Wechat paid for restaurants under the line has increased by 447% compared with that in March.

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In 2018, around 83% of all payments were made via mobile payment modes

China has developed differently in terms of payment methods: while all countries have switched from cash to credit cards and are now switching to mobile phones, China has skipped a step. The use of the credit card in China is sporadic, if not non-existent.

And even though mobile payment is overgrowing across the continent, Chinese people are using phone payments more often than their neighbors in Asia.

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Why and how do mobile payments in China work?

This increase in the use of smartphone payments in China is linked to the growth of e-commerce and m-commerce. Indeed, if the share of online sales may still seem relatively low, it is increasing very quickly.

Experts even estimate that mobile commerce in China will reach about $1.5 trillion in sales in 2019, representing a quarter of the country’s overall retail market.

Also, mobile payments have been so successful in China because they are fast and straightforward. And this speed is possible thanks to the QR codes. In China QR Codes are everywhere; even street musicians have a QR Code to collect money.

• There are two ways to pay via QR Codes in China: The customer scans the seller’s QR code, which is very often printed and visible at the checkout, on restaurant tables and even on products in some stores. The customer then chooses the amount and can send the money directly to the seller.
• The customer shows the QR code displayed on his smartphone, and the seller scans it. This method is even simpler and faster because the customer has nothing to do; it is up to the seller to select the amount that will then be deducted from his mobile wallet.

China has therefore quickly adopted mobile payment, and this is mainly because it is very easy for sellers. Unlike Apple Pay, where sellers have to buy technology to receive a payment, in China, a simple piece of paper printed with the QR code is enough.

Mobile payment methods in China in 2019

Tenpay (including WeChat Pay and QQ Wallet)

Tenpay has the biggest market share by penetration rate in China, with 84,3% in 2018. Enveloped by Tencent Company, which owns the most popular social media in China, Wechat (Weixin), Tenpay has developed the most used mobile payment solution in China: WeChat Pay.

WeChat, the Chinese giant, sees 1.08 billion monthly active users in 2018 and more than 900 million users on a monthly basis. We could barely compare this to Apple Pay which has only reached 127 million monthly active users in the world.

Today Wechat pay strategy in China is to extend its services to various financial products – from investment funds to insurance, allowing users to pay for it directly within the app.

Wechat pay transaction fees of 0.1% start at withdrawals over 10,000 RMB as well as overseas transactions such as in case of cross border commerce. The app currently supports 9 currencies, against 18 for AliPay. Cross-border transactions can still be complicated, but WeChat has recently partnered with Adyen, an international payment technology company to facilitate access to China for foreign companies.

Alipay

Alipay is the only online payment system used on Taobao, which is the leading shopping website in China, owned by Alibaba.

Alipay has the second biggest market share in China with over 900 million users worldwide at the end of 2018 and 700 million active users. Many major websites use Alipay as an e-commerce payment method, such as Taobao, Amazon, JD.com and AirAsia, and other 40 million small shops and sellers in China.

Considering low trust in China’s online payment system, they introduced escrow (the payment is made by the buyer before the product is shipped and the payment is released when the product is received) and immediate payment (used to pay for hotel room bookings, flight bookings or other items that do not need to be shipped) to solve the trust issue and to expand the market.

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As a foreign company to set up on this platform, you need to pay USD 1,000. Transaction fees are 2.5 – 3.0% depending on your annual transaction volume.

For Chinese companies there is no setup fee, they need only pay 0.7-1.2% as transaction fees. You can communicate with Nanjing Marketing Group for the information on setting up your account. Alipay has arrangements with over 60 Chinese banks, Visa and Mastercard.

China Union Pay

Union Pay is the world’s largest payment card issuer with approximately 30% of cards worldwide being a China UnionPay card (CUP). China Union Pay is the only domestic bank card organization in China, linking the ATMs of 14 major banks and many smaller banks throughout mainland China. It is also an Electronic Funds Transfer at Point of Sale (EFTPOS).

With China Payment Services, international merchants do not need a physical presence in China, nor do they need a Chinese bank account.

The “push payment” principle is a different process that Westerners may not be accustomed to, whereby users are directed to their personal bank account to authorize the payment.

Many sizeable international eCommerce merchants in China are choosing to offer liberal return policies for card payments, rather than provide a Cash on Delivery option, making UnionPay card payments an excellent China online payment method for any international merchant. In 2019, Union Pay is planning to enter the European market in a move that could cause serious competition for Visa and Mastercard.

Paypal

Paypal entered into China in 2005 with services specifically designed for the Chinese population, including Chinese entrepreneurs.

But the Chinese market of mobile payment methods is very difficult to conquer for Paypal, especially against the competition.  In 2017, an agreement was reached with Baidu Wallet that allows Chinese companies to have better access to the international market and vice versa. PayPal and China UnionPay have also agreed to work together.

How do consumers pay in China?

Cash on Delivery (COD)

Cash on delivery makes up the largest percentage of online payment methods in China. Famous websites such as Dangdang, Amazon, JD.com are conducting methods like this as one option. COD is a payment method in which it is the carrier who ensures the collection of the payment in return for part of the goods and who takes care of the return of the amount to the seller.

There are many reasons for the preference for this payment method in China. Firstly, goods can be quality assured by the receiver before payment. Secondly, if people don’t have an account for online payment (for example a senior or someone from a rural area who is not good at using a computer), they tend to choose this method. COD payment can be made by cash (uncommon) certified check or money order.

Credit Cards in China (China UnionPay cards)

Online credit card usage in China is less than 5%, not as popular as in Western countries. International cards such as Visa and MasterCard are not common online payment methods due to the low-trust associated with them in China.

Debit Cards (China UnionPay cards)

Debit cards are widely used by Chinese consumers for Internet purchases. The funds paid using a debit card are transferred immediately from the bearer’s account through use of a “push payment“ principle. During the online payment process, users are directed to their personal bank account where they physically log in and authorize the transaction.

Although COD makes up the most significant percentage of China online payment methods, the trend towards using debit/credit cards (China UnionPay cards) is continually increasing as more domestic and international online merchants integrate the option of online card payments on their website.

Shipping methods in China

Major shipping companies in China

1. SF Express (Shunfeng Express) 深圳顺丰速运

It has built an extensive business unit covering research and development, logistics, pickup & delivery network, etc. which spans the nation (including Hong Kong, Macau, and Taiwan). At the same time, its international network has been actively expanding to South Korea, Singapore, Malaysia, Japan, the United States, and Europe.

2. STO Express 上海申通快递

Covering Mainland China and Hong Kong, Macau and Taiwan,  this shipping company is in service 365 days all year round.

3. Shanghai YTO Express 上海圆通速递

Yto express is a large famous private shipping company in China. They have set up 4800 branches and have covered more than 1380 cities and 76 airports all over China.

4. TTK Express 上海天天快递

They have weixin service as a method to track the package. Their business is mainly in Mainland China and Taiwan.

5. Yundaex 上海韵达快运

Their business is mainly in Mainland China and Taiwan. For international packages, they work with DHL, UPS, TNT, EMS.

6. EMS (Worldwide express mail service) 邮政特快

EMS is one of the major shipping companies in China which owns China Postal Airlines and China Post Logistics. The company has nearly 100,000 employees and 45,000 sales outlets in more than 200 countries and regions. The company possesses the world-acclaimed brand “EMS” and the leading domestic logistics brand “CNPL.”

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How can foreign businesses use new mobile payment methods to boost their business in China?

Create official accounts to provide special offers

The Alipay and WeChat Pay mobile payment methods offer the possibility to set up individual marketing campaigns. They are not only payment tools, it goes further. For example, you can attract your customers’ attention by directly offering coupons and promotions that can be used via Wechat Pay or Alipay. These coupons can be placed in applications during critical events such as the Golden Week, Singles Day, the Chinese New Year, etc.  For Wechat, it is called the WeChat Voucher solution.

You can also offer your customers a Wechat membership card which is a virtual discount card with the cumulative discount at several levels. Then, you will need to measure these actions, the ROI, to determine the impact on your business but it can attract new consumers and simplify your customer journey.

Allow mobile payments for your Chinese clients, out of China

According to a 2018 survey by Nielsen and Alipay, 91% of Chinese tourists would shop more if overseas merchants had mobile payment options. So if you want to increase your customer base of Chinese tourists, you can develop your payment options.

Allowing mobile payments for Chinese customers is what many countries are doing. According to Alipay’s statistics, in 2018, the number of mobile payment transactions has increased 75 times in Russia, 12 times in Canada and eight times in Malaysia. The same phenomenon has been observed in New Zealand, Australia, and Finland.

Recently, the Galeries Lafayette group in France, whose Chinese customers represent approximately 25% of its €2 billion turnovers, also chose to that implement this strategy.

After opening a store dedicated to Asian customers, the Galeries Lafayette group now accepts payments with Wechat. For the company, this is a logical step in its strategy to conquer the Chinese tourism market.

Want to know more about how you could leverage online payment platforms in China? Daxue Consulting’s Online market research service provides you with in-house service for every step of your research project and can help you to draw a comprehensive digital mapping of your sales funnels in China.

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

This article Payment methods in China: How China became a mobile-first nation | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

Find here Daxue Talks episode 65. In this interview, Miro Li tells us how the world pandemic has affected the e-commerce industry and online shopping in China.

Find transcript below:

What platforms have benefited from the outbreak?

First is the online course apps because students have to take online courses at home, so these apps are very popular during this outbreak.

The working apps as well, because people have to work from home so they are using apps like WeChat work or DingTalk to communicate with their colleagues and clients.

Live streaming platforms — more and more people are watching live streaming at home. Live streaming on Taobao, BiliBili or Red are all very popular.

Entertainment apps have also benefited. For example, short video apps like Douyin or Kuaishou are very popular during this time. People spend more time for entertainment. They want to kill time at home.

And also, online fresh food ordering apps, such as Hema and DingDong. More and more people need to order food online, so these apps are also getting more and more popular.

How has the coronavirus affected China’s online shopping businesses?

First, the fresh food e-commerce actually was booming during this time. The average time users spent on fresh food e-commerce apps is increasing very fast. For example, Hema and DingDong are all very popular during this time, because people can’t go out so they have to order the fresh food from these e-commerce apps. The leading e-commerce platforms such as Taobao, JD, and Pinduoduo are taking the social responsibilities. They start to provide support to help the farmers to sell the agricultural products.

Offline retail shops started to go online and are setting up their own e-commerce store like mini program shops, or they are starting to manage their customers group or do their own live streaming. More and more offline shops are going online as well as logistics companies and delivery service providers as they develop contactless delivery services.

Based on what we can see today, how has the e-commerce industry changed and what is the forecast after COVID-19?

We can see a trend that live streaming is booming. More and more brands are starting to do live streaming, which can bring a lot of sales and revenue to the brands, so this is definitely one of the hottest trends now.

Our customers are already used to online shopping; even for fresh food, they are used to ordering online. So I think this will last for a longer time. People are more used to e-commerce to buy everything online instead of going to the supermarket, going to the shopping mall.

This is also my forecast, that online interaction is becoming more and more important — the online engagements between the brands and customers. Brands actually need to have a very close relationship with their customers online so that they can reach their customers. This is very important for the e-commerce because only if you have a very close relationship with your customers on social media, the customers will bring you more sales. And I think one important forecast is that as more and more brands are realizing this, omni-channel strategy is becoming very important. In the past, some brands have only exclusively focused on offline or online, that’s okay. But now, after [the covid-19 outbreak] actually, it’s not okay. You have to have an omni-channel strategy: an integrated marketing strategy of both online and offline. So, you have to connect your online and offline data customers, CRM etc., and you need to understand the new concept of O2O and new retail. It’s not that simple like before. Omni-channel strategy is becoming more important, and it’s important for the brand to realize that you have to have both online and offline, and they have to be connected. You have to make it an integrated strategy instead of separated. So, I think this is also very important.

How do retailers digitalise during COVID-19? Can you provide an example?

I think one interesting example is from a Chinese brand called Lin Quin Xuan, I think the English name is Forest Cabin. Lin Quin Xuan was an offline retailer, so they have a lot of offline retail stores in shopping malls. During COVID-19, because they have to go online, they started to setup their online shops and to digitalize; they started to ask their sales person from offline to become live streamers. So, their sales person started doing live streaming at home and can sell the products directly from home, which is very convenient for them. They started to set up the online distribution system, using WeChat to manage the private traffic, and each sales person manages a lot of groups of their customer groups. Each sales person does the live streaming every day at home and can sell directly through their phone. So, it’s very convenient, and the sales during COVID-19 actually increased, athough they didn’t have any income from offline. The CEO of Lin Quin Xuan himself also joined the live streaming to sell products. I think they are one of the first to do this, to host a live streaming, to ask their sales person to be the live streamer. I think this is an interesting example of the retailer’s digitalisation during COVID-19.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #65: How is the e-commerce industry in China changing during COVID-19? is the first one to appear on Daxue Consulting - Market Research China.