Overview of the Chinese cosmetics market

China’s cosmetics performance in the global stage 

According to Euromonitor, China’s cosmetics market occupies 12.7% of the global cosmetics market, becoming the second-largest market after the US.

Data source: Euromonitor, Top 10 cosmetics markets globally

Even after several years of market expansion, the market still seems to have a fine potential for growth in the future. According to Euromonitor, the CAGR of the Chinese cosmetics market is the highest in the world.

Data source: Euromonitor, Top 10 cosmetics market ranked by CAGR

Based on data from the National Bureau of Statistics, the yearly growing pace is remaining at about 10% since 2013 and the total retail sales reached 299.2 billion RMB in total. Hence, investing in such a large and consistent growing market can bring high revenue to the company.

Source: National Bureau of Statistics, Total cosmetics retail sales in China

Chinese domestic cosmetics brands are prospering

Cosmetics comprise a wide range of products like skincare, makeup and perfume. In the Chinese cosmetics market, skincare products are the main consumption force, and makeup products increased its market share year by year. Skincare products consistently accounted for over 50% of the Chinese cosmetics market. On top of this, makeup products have been continuously increasing since 2014.

Data source: Euromonitor, Cosmetics market distribution by category

Seven of the ten top cosmetics brands in China sare Chinese domestic cosmetics brands. The attention rate of Perfect Diary is far higher than other brands, meaning that a lot of cosmetics fans in China follow Perfect Diary.

Data source: QuestMobile New Media, Which Chinese domestic makeup brands are the most popular

Among the top 100 most popular cosmetics brands in China, 37% are Chinese domestic makeup brands.

Data source: QuestMobile New Media, Regional Distribution of top popular 100 brands

There are two cosmetics categories where Chinese domestic cosmetics brands have a strong position. These categories are essential skincare related products and eye make-up. Essential skincare products like hand cream, mask and cleanser have high daily consumption. Chinese domestic cosmetics brands could use price advantage to compete, through controlling the supply chain to lower cost. Besides, unique design helps Chinese domestic makeup brands make eyeshadow and eyebrow pencil hot products.

Data source: QuestMobile New Media Database, Origin of brands dominating China’s cosmetics market by product category

The rise of Chinese domestic makeup brands is correlated with sales promotions. According to Askci, 2 of the top 5 sales brands were Chinese domestic cosmetics brands during 618 shopping festival in 2020. Perfect Diary and Florasis ranked first and fourth respectively.

Data source: Askci, Cosmetics brands sold most during 618 shopping festival

Chinese cosmetics consumers portrait

According to data on Tmall and Taobao, consumers under 30 years old place most of cosmetics orders. Most of them are post-90 or even post-00. Students aged 18–22 made up over 25%, but their market share has decreased.

Data source: Tmall & Taobao, Chinese cosmetics consumers distribution by age

However, the share of consumers over 30 years old has an overall increase. This increase might because people aged over 30 gradually build and wake up the awareness of using skincare and makeup. Therefore, the demand for cosmetics among them goes up.

What Chinese domestic cosmetics brands consumers purchase most

According to the skincare top sales, Pechoin harvested 1,733 million RMB in sales, ranking first, followed by Chando and WIS, with 1,653 and 1,515 million RMB respectively.  

Data source: Tmall & Taobao, Top Chinese skincare brands

In the makeup market, top brands are different from top skincare brands, although some makeup brands provide cosmetics products. Perfect Diary maintained its performance and ranked first, with 2,762 million sales.

Data source: Tmall & Taobao, Top Chinese makeup brands

What makes Chinese domestic cosmetics brands different

Compared to foreign cosmetics brands, Chinese brands seem to put their eggs in more baskets. Their marketing efforts are spread through much more variety of activity and spread across many more platforms.

Creating a KOL marketing feedback cycle with short video apps, live-streams and KOLs

The rise of most Chinese domestic cosmetics brands attributes to social seeding through KOL marketing and cooperations. This feeds a feedback cycle where consumers give feedback on open platforms, where brands can then apply to their product development.

Data source: QuestMobile, Online marketing mode

Leverage traffic of multi-channel, post content in different forms

Traffic in multi-channel is other boost for the development of Chinese domestic cosmetics brands. It is common to market on Douyin, Kuaishou, Weibo, Wechat and Red, but each social platform has its own marketing strategy. On Douyin and Kuaishou, where people post short videos, brands cooperated with KOL to post makeup try-on, makeup tutorial and unbox testing. On Weibo, brands normally implement celebrity endorsement. On Wechat official account, brands post deep introduction of products. On Red, brands and KOLs post products-related tutorial.

Data source: QuestMobile, Online marketing in different forms

Launch cross-over products in big e-commerce promotion

Co-branding is more a strategy to get hold of targeted audiences who have complex behaviors. Through cooperating, brands can find a connection between consumers and brands. For example, Chando’s cooperation with Bilibili is a new try for its marketing strategy. As a place attracts most young generation, Bilibili provides a platform for Chando to increase consumers base.

Source: Chando, Chando X Bilibili

Unique marketing strategies for each Chinese domestic cosmetics brand

Perfect Diary, a textbook case for private traffic

Perfect Diary, established in 2016, is one of the young Chinese domestic brands. It targets 20-35 year old women, which is a high spending power group. In March 2017, it opened an online store on Taobao and Tmall. Half a year later, Perfect Diary opened on Red, WeChat store and hosted three Pop-up stores in Shanghai. In 2018, It established a Douyin and JD store. On January 19^th, 2019, it owned the first offline experience store in Guangzhou and expanded to 40 offline stores now.  

Behind Perfect Diary’s bold IP collaborations

IP cooperation is becoming a popular marketing method for domestic Chinese brands. Perfect Dairy cooperated with lots of IPs to launch new products. The most popular IP cooperation is with the Discovery channel.

Source: Tmall, Perfect Diary X Discovery

The history of Perfect Diary’s IP cooperation consists of three stages. In the first stage, Perfect Diary started to explore the market and launched fashion week related products. It reached celebrities, who have high credibility and cultivate the trust in the market. In the second stage which is the explosive phase, Perfect Diary cooperated with cross-over IP and KOLs to promote a single product. In this stage, it cooperated with makeup KOLs and reached to the followers, which increase the influencing power of brand. In the third stage where the brand continuously grew, it cooperated with mass and trendy IP. This cooperation helps to expand customers group, including people make-up beginners. 

Perfect Diary implements private traffic to build brand-owned traffic pool

Perfect Diary builds private traffic in two ways and uses two virtual BA (Beauty Advisor) to manage different types of consumers. Xiaowanzi (小完子) is in charge of consumers, who purchase online and joined through a lucky money card. Xiaomeizi (小美子) maintains the consumers who attracted from offline pop-stores or give aways. The source of customers is different, which requires two virtual BA to communicate customers in different tactics.  

Data source: Maoshihu, Process to reach Xiaowanzi

Florasis redefines the oriental cosmetics

Florasis’ sales performance is rising

Florasis was founded in March 2017 and opened its Tmall flagship store in August 2018. Although the sales for 2018 were only 43.19 million RMB, Florasis’ sales reached 1.1 billion RMB in 2019, rising nearly 25-fold. 

Florasis also presents an excellent in its first Double Eleven promotion. According to Mktindex, Florasis gained 220 million RMB sales and ranked fifth among the top 10 Chinese cosmetics brands that gained most sales.

Distinctly Asian makeup

As a chinoiserie cosmetics representative, the idea behind Florasis brand is ‘the Oriental makeup, using flowers to nourish the makeup look’. It includes everything from product ingredients to package design. Product ingredients highlight to use nature grasses and flower, and nourish the skin mildly. Package design and product name also filled with chinoiserie. For example, Florasis’s carved lipstick replicates the ancient Chinese carving technique and carved flowers on the lipstick, creating a precedent for the three-dimensional texture lipstick in China.

Source: Taobao, Florasis’s classical relievo

Pregnant woman friendly

Florasis gives people a safe and harm-free impression. It emphasizes that its products contain zero alcohol, zero-hormones and contains no harmful ingredients. An actor (Jiani Zhang) in Story of Yanxi Palace, which is a popular Chinese drama, recommended Florasis’ CC cushion. Zhang posted her using experience as a pregnant woman on Red, which drew most followers’ attention and discussion.

Source: Red, Jiani Zhang promoted Florasis’ product

Picking right KOL and spokesman

According to Baidu Index, the spokesman’s effect can be observed. On 3^rd March 2019, search word ‘花西子’ peaked because Justin Lee promoted Florasis’ loose powder. Another peak on 18^th May 2019 is because Florasis announce Jingyi Ju as spokesman. Jingyi and Florasis is a perfect match, because Jingyi owns high traffic and was known as the oriental beauty.

Data source: Baidu index, What increase the search of ‘Florasis’

Little Dream Garden, a black horse in the body care market

Targets ingredient-oriented consumers

Little Dream Garden is a Chinese cosmetic, focusing on developing body care products. It targets customers who care about the ingredients. Therefore, it emphasizes the ingredient and efficacy, naming product by main ingredient, such as Shea Butter body scrub and Ceramide body lotion.

Source: Taobao, Shea Butter body scrub

Posts testing video to build trust

Little Dream Garden leverages KOLs and KOCs to post product testing videos on Red, guiding users to join in the discussion. The opinion of KOL and KOC can increase trust rate and prompt consumers to buy the products.

Source: Red, Products testing video

How WIS involves celebrities on Weibo

WIS is a Chinese domestic skincare brand, created in 2011. It aims to provide scientific and effective products. It does not have any offline store so far. The brand targets consumers aged 18 -35 who have the strong social ability. For brand positioning, low-price capture lots of post-90 and post-00’s interest.

Source: Wechat, WIS products

Weibo is WIS’ social marketing asset

The popularity of WIS results from social marketing on Weibo. For example, a member of Happy family, Weijia Lee, recommended its product on Weibo, which attracted more than 240 million readers and brought around ten thousand followers for WIS. At the same time, celebrities, such as Jiu He and Na Xie, reposted the Weibo and reinforce the marketing effect.

Source: Weibo, Weijia Lee promoted WIS

What can brands learn from the success of Chinese domestic cosmetics brands

Although foreign cosmetics brands represented more than half of the cosmetic market in China, the rise of Chinese cosmetics cannot be overlooked. In fact, they can provide a learning opportunity on how to effectively appeal to Chinese consumers.

• Listen to the customers

Under short video App + Live Broadcast + KOL marketing mode, brands not only promote their products but also listen to the feedback from customers. Upgrading products according to the feedback is an important strategy to maintain brands’ sales performance.

• Pick the right brands for collaborations

Most Chinese domestic cosmetics brands implement cooperation with brands in different fields, celebrities and etc. to launch limited products. This campaign can bring the brands more consumers, strengthen brand image and increase brand volume.

• Promote in an appropriate form

Chinese cosmetics brands promote their products in different forms according to the character of a product. A testing video will gain more trust for a product that emphasizes its harmless ingredients. 

Learn more about the Chinese cosmetics and personal care market

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This article The rise of Chinese domestic cosmetics brands: Florasis, Little Dream Garden, WIS, and Perfect Diary is the first one to appear on Daxue Consulting - Market Research China.

Matthieu David: Hello everyone, today we are going to look into the beauty sector in China, and the report we published a few days ago, maybe two weeks ago about how Covid-19 impacted the beauty sector in China. How it impacted during the epidemic and after the epidemic. I’m here to talk about the report with Allison Malmsten who has worked on the report and we will like to share today with the audience a few conclusions we had on the report, especially Alison you mentioned, an overview of the beauty sector before Covid-19 and some of the trends which came out of this and which were a change in the sector. What kind of changes and differences did you see before Covid-19 and just after Covid-19 in China.

Allison Malmsten: Right, hi – so I am Allison, one of the marketing managers at Daxue Consulting. So, first, China’s beauty market is by no means small, it’s the second-largest in the world at over 300 billion renminbi in annual revenue. Skincare taken 54% of the beauty sector in China and some trends that we saw before Covid-19 were – 1] the high-end segment was growing proportionately faster, so high-end brand segment was growing at 18% year on year while the mass brands were only growing at 5% year on year. 2] Second is that social commerce is blossoming, this is Xiaohongshu and also WeChat has its own platform called 有赞 (youzan) and what we saw is on these platforms, especially for the beauty sector in China the conversion rate is pretty high, and so this is kind of a new way of shopping and the year on year growth for Xiaohongshu was double in 2019. Lastly, there’s a rising preference for a domestic brand. Looking at the top 20 beauty brands in China, in 2012 only 7.6% of them were Chinese while in 2018 14% of the top 20 beauty brands in China were domestic Chinese brands, so this growth is pretty significant.

Matthieu David: Very interesting, it seems that the Covid-19 accelerated some trends which were already happening before such as social commerce, Xiaohongshu being one example, that’s what existed before, and the epidemic was let’s say a time where people had more time to spend online and to do social commerce. Do you have the same analysis at the trend that is not necessarily new, whether they have been accelerated with Covid-19?

Allison Malmsten: Right so out of the three trends I mentioned, yes, the social commerce is definitely even more significant now because obviously during the pandemic people were less willing to go to offline stores and they were doing more live stream shopping and more shopping on Xiaohongshu and KOL marketing is definitely very important during this time. There is one trend that might take a turn and that is the high-end segment was growing very fast before and we might see the slowdown as people will be preferred – they’ll be looking more at ingredients and less at brand names, so this could give a chance to any brands that focus on natural ingredients and focus on skin health and skin repair.

Matthieu David: Very interesting to see indeed, in the report we mentioned that Chinese consumers online were looking at the ingredients and at the quality of the beauty product they were buying, more than before and I think within the report we found out that not all the categories went up and for instance make up went down if my memory is correct and specifically some beauty products and financing on natural ingredients grew faster.

Allison Malmsten: Yeah so, cosmetics were hit the hardest. A McKinsey survey showed that 44% of respondents purchased less make up, while 31% purchased less skincare but then also 25% of people purchased more skin care so it’s kind of balanced out but yeah and then within makeup, obviously lipstick pretty much because everybody is wearing a mask, so there’s a beauty style now called the ko [inaudible 05:00] its makeup for wearing masks, so the focus is really on the eyes and also the skin and so the skin care sector, it did take a bit of a hit but it’s also doing pretty okay and a lot of the focus when people are at home – our social listening showed that a lot of people are talking about its time to be at home and they’re wearing less makeup so they see that their skin is getting healthier so they’re very excited about those results and it inspires them to purchase more skincare products, while at the same time wearing a mask for a long time can be very damaging to the skin, so a lot of people are searching for products that have skincare repair functions and also skin sensitivity is a big keyword now. A lot of people are finding that they have sensitive skin and they’re looking for skincare products that can help repair their skin damage from wearing a mask including anything like natural ingredients are really popular right now.

Matthieu David: And some of the comments we found online through social listening were saying that people were switching from makeup to skincare instead of putting makeup to take more care about their skin with specific products, I would say more natural products. I’d like to go back on the Chinese brands – you mentioned that Chinese brands took off during the Covid-19 lockdown and after the Covid-19. Do you see here long-term trend or it’s just short term and was during the epidemic, or do you see a substantial change which is going to stay?

Allison Malmsten: I think that this is going to – the preference for domestic brands, I think this is going to be a long-term trend. I think this is a trend that was accelerated from Covid-19 and the reasons are 1] because patriotism is a very high right now in general, 2] because also domestic brands really understand Chinese consumers and they understand how to reach them. They’re usually very proactive about social commerce and also, they are familiar with like some Chinese herbal ingredients that are very in right now and so they include those in their ingredient list and yeah, I think that a lot of Chinese brands are gaining momentum right now.

Matthieu David: And we looked into a very specific brand called Perfect Diary in the past and it’s a very, very Chinese company which is doing very well. In a topic, we’d actually like to talk about which is product traffic and Perfect Diary has been an example of being very good at product traffic. Product traffic being something very specific to china where e-commerce started with marketplaces like Taobao and then Tmall and then JingDong and many other marketplaces where having your own website and selling through your own website was not mainstream and now its becoming more the case – not selling through your own website, but your website, your WeChat groups, your WeChat channels and your live streaming. So, using a marketing platform to convert on your own asset, your own digital asset, and not through a marketplace. What did you see in terms of digital changes during the pandemic and after?

Allison Malmsten: So, I saw some digital changes, one like you mentioned private traffic and then two is also live streaming. Live stream obviously ballooned under lockdown, while everybody was at home they spent more time on their phone and inevitably they spent a lot of time shopping on their phone or looking at products and so some statistic for that was that as of February 18th, the monthly number of live streaming events on Taobao ballooned by a 110% year on year. Also, Douyin, also experienced around 70 to 100% growth during the lockdown period, so a lot of brands are using live streaming now. And then also one case, in particular, is [inaudible 09:10] which is an Australian beauty brand, during the coronavirus they directed its offline stores to all sell on WeChat, so that is over a 1000 stores that would normally have offline sales, offline staff, they all went online during that period and they actually had sales of 6.3 million renminbi during a live stream event that happened during the coronavirus lockdown in china.

Matthieu David: I believe that the next step is to see those trends now continuing or if it was just a short-term trend during and after the pandemic.

Allison Malmsten: Right, yes that will be very interesting to see because once stores open up, I’m sure people are very eager to go out shopping again but at the same time they might be a little bit more cautious to hit the stores.

Matthieu David: Thank you, everyone, for listening and we will continue with new reports, we will go through together online.

Find the full beauty sector in China Report 

This article Market Tidbits transcript #1: Major changes in the beauty sector in China after COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

Moreover, Marseille has a significant soft power among Chinese people, which is especially apparent in football, film, literature, and beauty. Famous brands and products from Marseille such as Marseille soap and wine and brands like L’Occitane, Compagnie de Provence and Le Petit Marseillais have a glowing reputation in China. Meanwhile, businesses like Airbus Helicopter and CMA CGM are flocking to China, strengthening Marseille’s metropolis position.

Data source: Statista, arrivals of tourists from China (including Hong Kong) in tourist accommodation in France from 2012 to 2018

The Chinese perception of Marseille

Why are Chinese so enthusiastic about this Mediterranean city?

As a port-hub originally founded by the Greeks, many Chinese associate Marseille with the Mediterranean, beautiful landscapes and French fashion. But beyond these superficial perceptions, Marseille and China have deeper connections.

Since 1987, Shanghai and Marseille have become sister cities. Moreover, the 2018 Belt and Road Initiative conference was held in Marseille, boosting Marseille and China business investment.

Politically, the establishment of Chinese consulate-general’s branch office in Marseille demonstrated this city’s political significance for both countries. In terms of education, Aix-Marseille University has opened a joint institute with the Wuhan University of Technology in China, and the kedge Business School shares executive partnerships with Shanghai Jiao Tong University. Relying on its innovation dynamics, Marseille is upgrading its image and becoming more familiar to Chinese people.

Qualitative analysis of Chinese perceptions of Marseille

Source: Baidu index of Marseille 马赛 Chinese perceptions of Marseille

Chinese people’s discussion scope about Marseille centers on its popular tourist spots, cultural activities and products. Besides Marseille, Chinese tourists also show great interests in other cities in South France like Nice, Gannes and Provence. As for cultural activities, Marseille’s football matches are absolutely a sensation in China. Chinese netizens also frequently search for Marseille’s brands and products like Marseille soap, L’Occitane and Compagnie de Provence.

Source: Zhihu & Weibo, Chinese people’s various concerns about the security in Marseille.

However, Chinese tourists consider Marseille to be poorly policed. This is due to frequent demonstrations, thefts and robberies. Plus, Chinese tourists’ inclination for showing off wealth makes them more susceptible to pickpocketing. “Is it really safe there?”, “Are there many thieves?”, “Are manifestations of the yellow vest movement over yet?” such queries are often present in Marseille related posts on China’s social media. In fact, the security of France has been negatively reported by media in recent years, not just Marseille.

Footprints of Chinese KOLs in Marseille

Source: Red, Online social gathering with Chinese KOLs in Marseille

Recommendations and sharing of KOLs about Marseille largely direct Chinese people’s perception of this city. By focusing on Chinese social media like Red, Weibo and WeChat, Chinese KOLs have great interests in seeking excitement in Marseille. They like experiencing new situations and unique trips. Thus, exploring niche and wild landscapes like Verdon Gorge Grand Canyon, Calanques national park and seaside villages are their fondness. Because they can give their voice of loving life and chasing uninhibitedness by conquering desolate places. Just like a popular traveling blogger on Red shared, “I love the feeling of freedom and unfettered.”

Chinese KOLs also have a craze of sharing their liked local delicacy and shopping. “Traveling isn’t just about taking in beautiful scenery, it’s also important to enjoy local cuisines”, a Chinese traveling and food blogger commented on Red. Besides, it is indispensable for Chinese KOLs to take photos to record impressive dining experiences. And they will caption it “attendance (打卡) in an internet-famous restaurant”. If they find any adorable products and brands, they will also share them on social media. For example, Marseille soap, Le Petit Marseillais and Compagnie de Provence is harvesting more Chinese consumers through KOLs’ recommendations.

Marseille’s cultural output towards China

China has one million Olympique of Marseille fans

If you ask a Chinese football fan about their impression of Marseille, the answer will definitely be this city’s team, the Olympique of Marseille. Through leveraging China’s social media, this football club has attracted nearly a million followers on Weibo.

Besides, Marseille’s legendary player, Zidane also opened his personal account on Weibo in November 2018 and has more than 212,000 followers. Beyond its digital strategy in China, the Olympique of Marseille is also active in offline promotions. In 2018, it created a fan club in Shanghai. The president of the club Jacques Henri Eyraud attended the ceremony and said: “The establishment of this Shanghai fan club is the first step of entering the Chinese market, and we hope to have more comprehensive and in-depth cooperation with Chinese fans in the future.”

Source: Weibo, Chinese poster of the Olympique of Marseille

Marseille films rank highly in China, which in turn, puts the city in the map in modern Chinese literature

Marseille’s cultural output towards China goes far beyond sports. Marseille’s films, music and literature are also influential to Chinese, partly thanks to French filmmaker Luc Besson favoring Marseille as a location for film shooting. The symptoms of this city’s intense renovations in the 1990s were indicated in the action film series Taxi, which were highly appreciated by Chinese audiences. Douban, China’s authoritative film rating site, gave the Taxi series a 7.8 / 10 rating, same as the contemporaneous French film Jeux d’enfants (2003). In literature, French writer Alexandre Dumas’s magnum opuses, like the Count of Monte Cristo, the Three Musketeers and the Man in the Iron Mask, inspired many Chinese readers and draw them to visit Marseille. Additionally, there are also many depictions in Chinese novels about this city. For example, Chinese popular scientific fiction the Three Body Problem mentioned Marseille as a large-scale science research base.

Source: Douban, Chinese poster of Taxi 5

Chinese tourism in Marseille

Chinese tourists’ top destinations in Marseille

Ctrip lists the top three attractions of Marseille for Chinese tourists by three categories: popular landscapes, must-see museums and historical discovery. Known as the most beautiful canyon in Europe, Verdon Gorge is considered by Chinese visitors the most beautiful local place. Boating on the Sainte-Croix lake is a must-play activity for them. Another popular destination for the Chinese is the Château d’If. In center city, Chinese tourists like to take pictures in the old port and soak up the atmosphere of its fish market. Besides, the Notre-Dame-de-la-Garde basilica, the Panier district and numerous museums are preferred by Chinese tourists as for picturesque facades and historical value.

Source: Ctrip, ranking of landscapes and tourist sites in Marseille

Chinese tourists’ eating, living and shopping in Marseille

Restaurants serving local food, like Panisse, Madeleines and Moules Marinière, are popular with Chinese customers. O’Bidul, a seafood restaurant with authentic recipes and heart-warming service, is appraised by Ctrip as the most popular restaurant.

China’s wealth inflation allowed Chinese tourists to splurge on luxury hotels in Marseille. The hottest hotel in Marseille for Chinese tourists is InterContinental Marseille Hotel-Dieu, of which the cheapest room charges at least 30,000¥ for one night. In addition, Chinese tourists increasingly adopt Airbnb is as a cost-effective accommodation.

In terms of shopping, there are many super malls like Galerie Lafayette, Les Terrasses Du Port and Centre Commercial Bourse, which can satisfy Chinese customers’ various fashion demands. Also, many Chinese tourist make bulk purchases at local pharmacies and boutiques.

Source: Ctrip, ranking of hotels, restaurants and shopping malls in Marseille

Chinese interest in Provence, France was sparked by a soap opera

Lured by clusters of mauve flowers, Chinese tourists are conquering Provence in the form of sightseeing. Every July and August, groups of buses carrying thousands of Chinese visitors crowds the country lanes. Many French medias has reported Chinese people’s obsession with Provence, and are surprised they don’t go to Paris, but yearn for this remote landscape.

In fact, this Chinese craze stemmed from the Chinese drama shot in Provence, Dreams Link (一帘幽梦), which was on screen between 2007 and 2008. The lavender and sunflower fields, the French castles and the pure sky had root in the memory of the Chinese the frame of a France more romantic than ever.

Source: Xiaohongshu & Weibo, Chinese tourists are conquering this purple land

There is no doubt that the Chinese boosted local economic development. They are bigger spenders than other foreign tourists. In Provence, the average daily expenditure, excluding hotels and meals, of the French is about 60 euros, for Americans it is 97 euros, however, for Chinese it is an amazing 170 to 300 euros. Hence, local tourism beneficiaries adopted various strategies to cater for Chinese tourists, like making everything in lavender purple, adding Chinese instructions in billboards, and promoting special souvenirs. Additionally, Provence has become the Garden of Eden for Chinese couples. In recent years, the trend of holding wedding or spending honeymoon in Provence is soaring for Chinese people. Because the Chinese translation of Provence includes the character Wàng (旺) which means ‘prosperity’.

What you should know about Chinese tourism in Marseille

Along with the boom in traveling abroad, China’s tourism is undergoing a consumption renewal towards niche destinations and customized tourism. Under this circumstance, knowing how to effectively reach these increasingly sophisticated travelers is a strategic advantage for Chinese tourism stakeholders. Digital marketing is an effective channel, and there are so many platforms to choose from. In combination with a KOL marketing strategy, niche and lesser-known destinations can put themselves on the radar for Chinese travelers. As demonstrated by the success of the Olympique of Marseille, Weibo is useful to accumulate consumer awareness in China.

Additionally, Xiaohongshu can also be leveraged to promote destinations including stores, restaurants, and hotels. WeChat is also not to be overlooked, not only running a WeChat account for promotion, but also local vendors can set up WeChat pay for Chinese tourists in Marseille.

Source: Zhihu, digital tourism marketing channels in China

The economic links between Marseille and China

Beyond its tourists, China’s businesses are flocking to Marseille.

Marseille’s economy is surging under the cooperation with Chinese companies. Many international groups having long traditions of working in China such as Airbus Helicopters and CMA CGM shipping. Chinese magnates such as Weichai Power, PetroChina, Watchdata Technologies and Tinno Mobile have all invested in Provence. In March 2019, Marseille-Fos gained a 105 million euros investment from Quechen Silicon Chemical to build its European silica factory. This expensive contract is one of the largest Chinese greenfield investments in France.

Now, many Marseille-China direct sea and air routes are planned.

Along with Marseille’s transportation connections being expanded, more investments from China will be boosted. “With its unique geographical location and abundant resources, Marseille can play an active role.” Fei Zhaohui, president of the Paris branch of China’s Export-Import Bank, said at the 2018 Belt and Road conference in Marseille. In the future, Marseille-China trade will advance as Marseille can act as a bridge between China, south Europe and North Africa.

The popular industries, brands and companies of Marseille in China

Competitive advantages of brands and products from Marseille in China’s market

Skin care products

Soap produced in Marseille is a well-known traditional craft for Chinese. It boasts a high reputation in China by means of its beauty benefits and scents of olive oil or lavender. Now, Marseille soap is more than a must-buy cosmetic for Chinese tourists, as it is a symbol of the city.

Le Petit Marseillais and Compagnie de Provence, niche skin care brands in China, are extensively shared by Chinese beauty bloggers on social media. These two brands’ shower gels have attracted many loyal Chinese customers because of their various and innovative fragrances. Many second-time purchasing customers commented that they love their attractive aroma. However, without accessing China’s market, the main purchasing channel of these two brands for Chinese customers is through Daigou or Haitao.

Source: L’Occitane, L’Occitane’s KOLs strategy in China.

If Marseille’s skin care products are the crown, L’Occitane is definitely the pearl on top. Now, China has become L’Occitane’s third biggest market in the world with 197 million euros sales revenue in fiscal year 2020, behind America and Japan. Its success is attributed to its digital and KOL marketing strategies in China. Vigorously participating in China’s various e-commerce promotions, L’Occitane focuses more on online selling. In Chinese ‘6.18’ online shopping carnival, relying on its high customer reputation and imported brand property, L’Occitane’s turnover increased by 170% compared to 2019. Meanwhile, it leverages Chinese celebrity influence to acquire more customers. Among 100 comments of its popular hand cream, 54 purchasers spoke bluntly that Zhu Yilong, the brand ambassador of L’Occitane, was their buying stimulus. This Chinese male star has acted in several popular Chinese TV series and films, and he has 25 million fans on Weibo.

Data source: Digitaling, L’Occitane’s relative comments and activity on China’s social media.

Alcohol        

Chinese wine drinking habits are changing at a quick pace. However, China’s national wine production has plummeted, and the demand of imported wine has soared. Under this circumstance, the unique geographical advantage makes wines from Provence highly appreciated by Chinese consumers. From January to June 2019, France is China’s second largest wine exporter with 351 million dollars total annual in exports.

Hence, as one of France’s prominent wine production zones, Marseille has great potential in China’s wine market. French wines & spirits giant Pernod Ricard is penetrating China’s alcohol market. China accounts for 9% of Pernod Ricard’s net sales, becoming its third largest market in the world. Additionally, its turnover in China increased 21% in fiscal year 2019, while Chinese baijiu and whisky showed robust momentum. Additionally, targeting China’s strongly evolving spirits market, this alcoholic drink tycoon has accelerated its layout in China. Pernod Ricard’s whisky distillery in Sichuan, as China’s first spirits factory with foreign investments, started the construction in 2019, and the production is scheduled to start in 2021.

Source: Pernod Ricard, Pernod Ricard’s business in China

Logistics

CMA CGM China (达飞轮船), a subsidiary of Marseille’s CMA CGM Group, has served 28 years in China. With 51 offices nearly covering all major port cities across China, CMA CGM China has evolved into an industrial leader. It implements “Customer Centricity” strategy to provide high-quality, customized and cost-effective shipping solutions for Chinese customers. Beyond an industrial giant, CMA CGM China is committed to environment protection and marine biodiversity preservation by reducing carbon discharge. Besides, in order to facilitate customer serving process, CMA CGM China has opened its official account on WeChat, which allows customers to discover more about them and submit LOI documents remotely.

Source: CMA CGM, key figures of CMA CGM China

During the COVID-19 outbreak, CMA CGM Group proved its resilience and team’s expertise. Due to Chinese government’s strict measures to restrain the epidemic, CMA CGM China’s business suffered an obvious decline. Shanghai Yangshan Port, China’s busiest port, saw a 17% plunge in cargo volume under the impact of COVID-19. However, CMA CGM effectively controlled its cost and limited the volume shrinkage at optimistic 4.6%. Moreover, its operating margin surprisingly increased to 13.5% and realized positive net result of USD 48 million in the first quarter of 2020. Besides, CMA CGM Group has donated 50,000 FFP2 (EU N95 standard) masks to China to help Chinese government in controlling the pandemic, which reflecting its close bond with China and a great sense of social responsibility.

Source: CMA CGM, CMA CGM Macro Polo’s call in Chiwan (China)

Future prospects for Marseille and China

Marseille is the fastest growing interconnection hub in Europe, and it is striding towards a metropolis leading the world having close contacting with China. Yet Marseille has showed its significance in the diplomacy, and it will be strengthened with Belt and Road policy’s further implementation. As for tourism, Marseille is one of Chinese tourists’ top destinations, aiding local economic advancement. Meanwhile, relying on its geographic advantages and abundant resources, this port city will be more attractive as a goldmine for Chinese companies to invest there. Contrary, although the organization and HR of Marseille’s famous brands and companies in China were impacted by the epidemic, they will certainly be more competitive in China’s market following the country’s economic recovery. If you want to know more information about China’s market, please send e-mail to dx@daxueconsulting.com

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Meanwhile, Estee Lauder Group launched twelve brands into the Chinese cosmetic market, enabling China to be its No.2 international market. In 2019, Estee Lauder Group’s net sales in the Asian-Pacific region reached 3.6 billion USD. In contrast to the American region’s negative change, the Asian-Pacific area earned a 21 percent increase year-over-year.

Data Source: JUMEILI.CN, Regional Net Sales of Estee Lauder Group

History of Estee Lauder

Mrs. Estee Lauder created Estee Lauder in New York. Now, it is the world’s biggest company for skincare products, cosmetics, and perfume. Its products are available in over 13,000 outlets in over 130 countries around the globe. One of Estee Lauder’s strengths is R&D and product development. Also, it keeps a harmonious relationship with its customers, making it possible for the company to acquire more growth in the future. Mrs. Estee Lauder had always insisted that a woman can always be beautiful and fashionable. Thus she injected her lifestyle and sensitivity to fashion into the brand.

The layout of the Estee Lauder Group in China

Estee Lauder Group launched many well-known brands, promoting its whole layout in the Chinese cosmetics market.

Estee Lauder Group in China desires to provide a wide range of cosmetic products to Chinese customers

When Estee Lauder initially entered China, it focused on high-end product sales. In 2005, however, it launched six new brands into the Chinese market. Estee Lauder assigns its brands to different target customers. It hopes every customer can find suitable products from Estee Lauder Group. M.A.C highlights the personal style, looking more fashionable, while Estee Lauder is a typical high-end brand. Now, all-around brands’ matrix almost covers all categories of cosmetic products and price zone, reducing the risk that customers change their preferences. Notably, Estee Lauder Group launched a brand called Osiao in Hong Kong in mid-October, 2012. This brand is specially designed for the skin of Asian people.

Brand matrix of Estee Lauder Group in China

Now, Estee Lauder Group has many famous brands. Its top brand is LA MER. Then Estee Lauder follows as the first tier brand, and Clinique and Origins follow as the second-tier brands. Smaller brands also include Aramis, Prescriptive, Tommy Hilfiger Toiletrie, Kiton, Darphin, Michael Kors Fragrance, and Bobbi Brown. Currently, only parts of its brands are in the Chinese market. However, Estee Lauder Group never stops its expansion in the Chinese market. On June 16th, 2020, two luxurious fragrance brands from Estee Lauder Group, BY Killian and Editions de Parfums Frederic Malle, initiated in Shanghai International Finance Center.

Source: JUMEILI.CN Original Brands of Estee Lauder Group in China

Source: JUMEILI.CN Acquired Brands of Estee Lauder Group in China

Strategies of Estee Lauder in China

Through decades of development, Estee Lauder has a big market share in the Chinese cosmetic market. Fan Jiayu, the general manager of Estee Lauder China, shared that Estee Lauder paid attention to what they do now and looked forward to the future’s business environment. Estee Lauder China always keeps its awareness of possible crisis to evaluate its position and prepare for potential risks. That allows the brand to strengthen its brand awareness in China and customer stickiness.

Estee Lauder established an R&D center in China to better satisfy Chinese customers’ needs

According to the CEO of Estee Lauder in Asian and Pacific Districts, Fabrice Weber, Estee Lauder contended a keen interest in the Chinese market. He hoped that Estee Lauder could merge into China market instead of being a ‘foreign’ company. In 2005, Estee Lauder set up a team to research Asian skincare needs. In 2010, Nutritious Super Pomegranate series appeared that were designed for Asians to improve dehydrated skin. On June 2^nd, 2011, Estee Lauder announced the establishment of its Asian R&D Center in Shanghai.

Estee Lauder China’s e-commerce sales boomed in 2020

Ecommerce in China has developed rapidly and is quickly becoming the main purchasing method among Chinese. Thus, Estee Lauder took a specialized online strategy to adapt to the Chinese market. E-commerce represents approximately 30% of Estée Lauder’s business in its top markets. In 2014, Estee Lauder became one of the first high-end cosmetic brands that entered on Tmall. Estee Lauder built a professional team with 50 people to focus on Estee Lauder’s Tmall store and independent e-commerce shop. In 2017, the sales revenue of Estee Lauder in China got 40 percent growth. Notably, e-commerce accounted for 50 percent of that increase. Also, Estee Lauder Group opened online stores for its sub-brands, bringing more consumption for the group.

After the COVID-19 outbreak spread through China, Estee Lauder’s March e-commerce sales spiked, with a 135% YoY increase. During this same period, Lancôme’s Tmall sales increased by 110%, and those of Perfect Diary’s by 29%, according to data from WalkTheChat.

Data Source: WalkTheChat Analysis, Evolution of Tmall flagship sales between March 2019 and March 2020

Estee Lauder builds close relationships with celebrities and KOLs

Celebrity endorsement marketing is also behind Estee Lauder’s success in China. Fabrizio Freda, Estee Lauder’s CEO, contended that 75 percent of investments were spent on digital marketing, social media, and KOLs, earning a high efficiency. For example, Yang Mi, a famous Chinese actress, is Estee Lauder’s brand ambassador. Her first cooperation with Estee Lauder in February 2017 earned over one million shares on Weibo and brought over a 500 percent increase in sales. Meanwhile, the cosmetics brand also engaged in  KOL marketing in China. In the 2019 double 11 presales, Chinese actress Li Jiaqi sold over 0.4 million Estee Lauder’s Advanced Night Repair in a short time.

Source: Weibo Estee Lauder, Estee Lauder announced Yang Mi to be its Asian-Pacific region brand ambassador, gaining over one million shares.

The cosmetic market is competitive, so Estee Lauder needs to prepare for potential risks

Estee Lauder received great results in the Chinese market due to its excellent strategies. However, Estee Lauder in China also meets tremendous challenges from both thriving domestic brands and well-known international brands. Particularly, L’Oréal Group, has an identical layout in the brand matrix that involves different levels of brands. Especially, one of its cosmetic brands, Lancôme, is the main competitor of Estee Lauder. One of their eye creams uses similar technology and has similar functions, triggering aggressive competition between them. Yet, although Estee Lauder won significant market shares in China, it still faces crucial competition. Therefore, Estee Lauder needs to maintain vigilance in case of potential risks.

Data Source: qianzhan, China’s cosmetic market share 2018 (foreign brands only)

COVID-19 impact on Estee Lauder Group in China

COVID-19 had a great impact on the cosmetic market. Travel retail channels could not function well due to decline in China’s inbound and outbound tourism.

In March 2020 Estée Lauder reported a 11% decrease in net sales from the same period last year. As a result, the company has implemented a host of measures to reduce spending in advertising, administration, and human resources, as well as furloughing part of its vast retail staff and cutting salaries of top management.

The short-term impact on Estee Lauder online business in China is roughly the same as that of physical channels, but e-commerce can play a leading role in business recovery in the future.

Authors: April Peng & Valeriia Mikhailova

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Learn how COVID-19 impacted China’s beauty sector by downloading our full report.

The beauty sector in China before the COVID-19 outbreak

China’s beauty market developed steadily before COVID-19

In the past five years, the beauty sector in China had shown a steady increase. China had become the world’s second-largest beauty market in 2019, and the size of China’s beauty market reached 425.6 billion yuan in the same year. China’s beauty market becomes one of the fastest-growing and most promising fields of business in the near future.

Source: 360 make-up, Total retail sales of the beauty sector in China

Three key trends in China’s beauty market before COVID-19

The high-end segment grew faster

Source: Euromonitor, data.iimedia.cn, Beauty market segment in China

As China’s resident disposable income rises, people are more willing to consume, and there will be higher requirements in terms of the quality of life. According to data, in 2013-2018, the growth rate of the domestic high-end cosmetics market is accelerating, especially in 2017 and 2018, the growth rate reached 25% and 28.1% respectively. In China’s beauty market, although mass brands still play a major part in the market, the high-end segment was estimated to grow fastest in the next few years. It is predicted that the CAGR (Compound Annual Growth Rate) of the high-end brands, mid-high-end brands and mass brands from 2018 to 2023 will be 18%, 14% and 5%, respectively.

The popularity of social e-commerce on the rise

With the use of social media in the context of e-commerce is gaining popularity, increasing numbers of Chinese consumers are making their purchases through social media platforms such as Xiaohongshu and WeChat. It is a trend that social e-commerce is increasingly welcomed by both sellers and buyers in china. The social attributes and sharable characters make social e-commerce more friendly for beauty brands. For the beauty sector in China, the social attributes and shareable character make social e-commerce more friendly, and social e-commerce is set to become one of the mainstream sales channels in the future.

Source: Youzan, Beauty market segments in China

According to Youzan, a 3rd party WeChat e-commerce platform in China, the GMV growth rate and purchase convenience of social e-commerce are much higher than that of traditional e-commerce.

Rising preference for domestic brands

Source: China Association of Fragrance Flavor and Cosmetic, Cumulative share of domestic brands in Top 20 list in the beauty market

Thanks to the development of e-commerce, domestic beauty brands have risen strongly in recent years. Leveraging social media marketing and living marketing, some Chinese beauty brands, like Perfect Diary and Lin Qingxuan, have seen rapid growth. In 2018, the cumulative share of domestic brands in the Top 20 list in China’s beauty sector was 14.1%, increasing from 7.6% in 2012, and the percentage has been estimated to gain more market share in the future.

COVID-19 impact on China’s beauty sector

General impacts of COVID-19 on China’s beauty market

COVID-19 had a strong impact on the beauty market in the short-term

Source: iimedia research, Predicted impact of COVID-19 on China’s beauty market by product category

COVID-19 impact on China’s beauty sector was clearly negative in the short term. During the outbreak, retail sales of beauty products in China dropped from 299 billion RMB in December 2019 to 37 billion RMB in the first two months of 2020. High-end brands were more affected than mass brands. For different beauty sector segments, COVID-19 has varying degrees of impact on different categories in the beauty market. Also, the epidemic had a more negative impact on cosmetics than skincare products, while personal care products were gaining more popularity in this period. According to the Beauty Consumer Behavior Survey on 1,000 Chinese respondents, around 50% of the respondents stopped using cosmetics during the coronavirus.

Sales of beauty products decreased during COVID-19

Online commerce events were also affected during the coronavirus outbreak. The sales performance of beauty products on Tmall and Taobao decreased by around 40% in January 2020 compared with the same time in 2019. Normally, shopping festivals on Tmall and Taobao might help to boost sales. However, in 2020, offline promotion activities on Tmall on Chinese New Year and Valentine’s day were all cancelled. The COVID-19 impact on China’s beauty sector was even more severe due to the cancelling of two commercial highlights.

Source: iimedia research, Sales of beauty products on Taobao & Tmall by category

The beauty consumption after COVID-19 experienced a dramatic drop, and the sales of beauty device products and that of personal care products both had a nearly 50% year on year decrease in Jan 2020. Compared with others, the sale of hair care and the dying sector suffered the least.

COVID-19 impedes beauty consumption in China

Source: Qinyan information, Chinese beauty consumers’ behavior and perception during COVID-19

Also, the negative COVID-19 impact on China’s beauty sector reflected in the purchase intention. According to a Beauty Consumer Behavior Survey conducted by Qinyan information, purchasing demand on beauty products sharply decreased during the COVID-19 outbreak.  40% of respondents suggested that they didn’t have purchase intention, while 43% said they were unable to buy beauty products. Only 6% of consumers said that there was no impact on their purchasing experience in beauty products during the epidemic.

Major changes in the beauty sector in China

Skincare products are gaining popularity

One major change in beauty consumption after COVID-19 is that skincare products will be more welcomed compared to make-up. Cosmetics’ sales in China declined by 14.1% in the first two months of the year compared with the same period last year. During the outbreak, people consumed more and talked more about skincare products than cosmetics. Chinese netizens showed more passion for discussing and sharing their skincare experience at home. Also, due to the damage from wearing face masks for a long time, products with “skin repair”, “basic skincare” and “first-aid care” functions are increasingly needed during the coronavirus.

Health and safety have become keywords for beauty consumption after COVID-19

Source: Jumeili, What Chinese beauty consumers will care about after COVID-19

As society recovers from COVID-19, Chinese consumers are expected to pay more attention to the environment. This will be likely to inspire the beauty industry to focus more on products with natural and healthy concepts. For most beauty consumers, after COVID-19, they would only purchase necessities. Apart from the great concern of the cost-performance ratio, Chinese consumers also prefer beauty products with eco-friendly and natural ingredients.

Beauty brands are stepping into the disinfection sector

Source: Paidai, Sales growth of disinfection products on Tmall

Since Chinese consumers have an increased awareness of personal hygiene, disinfection products are expected to keep growing after the epidemic. The sales of disinfection products increased significantly during the 2020 Chinese New Year. Seeing business opportunities on disinfection products, many beauty brands stretched their category and started to produce hand sanitizers. For example, brands like CHANDO (自然堂), One Leaf (一叶子) and Geo skincare (纽西之谜) had started to produce and sell hand sanitizers.

DIY hairdressing is trending

Since most hair salons suspended service during the coronavirus outbreak, more people started to do hairdressing by themselves at home. In this case, hair dying products and related topics were gaining popularity. Specifically, Hairdressing products are mentioned more on social media platforms than before. Internet users in China showed great interest in learning how they can cut, dye and style their own hair. Some beauty brands adapted to this new trend fast, and promoted their hairdressing products. For example, L’ORÉAL collaborated with Tmall to promote their hair care products in early March 2020. In addition to meeting the rising demand for hairdressing at home, it also served as a women’s day promotion on Tmall.

Rising demand for doing SPA treatment and massages at home

Source: Robodata, Sales of massage chairs on Tmall and Taobao

As SPA and massage parlors suspended service during the pandemic, people showed great interest in trying to do massages by themselves at home. Topics about doing SPA treatments, like foot soaks and massages at home, are trending on social media platforms. Meanwhile, the sales of related products surged compared to that in last year. Taking the massage chairs as an example, the sales of massage chairs on Taobao and Tmall increased a lot during the coronavirus, especially in March.

Live streaming for beauty products is increasingly welcomed

Live streaming has become increasingly popular in China in the last few years as more consumers attach more importance to immersive experiences and personalized recommendations. The epidemic stimulated the dramatic growth of live streaming and made Chinese KOLs more important than ever. This trend can also be seen in the beauty sector.

Source: Taobao, ‘lipstick queen’ Li Jiaqi’s live streaming on Taobao

According to the data of one of the most famous influencers in China — Li Jiaqi, who first made his name selling lipstick on Taobao, his live streaming on Taobao attracted around 3.92 million views a day in March 2020, and the average daily sales volume approached 854 thousand RMB.

Beauty brands tend to attach more emphasis on private traffic

Due to the coronavirus outbreak, online marketing is blooming, which spots the light on private traffic. Realizing the trend of private traffic, beauty brands present a great passion for learning how to leverage private traffic. Some beauty brands in China transformed their business model quickly into the epidemic and started to put effort into private traffic marketing.

Jumeili initiated a social marketing online summit on April 28. The summit discussed how beauty brands in China could leverage private traffic and social marketing to gain traffic and increase conversion rates. The online summit had attracted more than 7,000 registers within 6 days.

Some brands take advantage of private traffic to boost sales during the epidemic. For instance, Cloris Land, an Australian brand that entered China in 2011, directed its offline stores to sell in the WeChat community and mini-program live streaming. From March 6 to 8^th, 1,057 stores joined in the live streaming sales event; the sales reached 6.3 million RMB.

Case Study: The impact of COVID-19 on Lin Qingxuan

Lin Qingxuan, a Chinese homegrown beauty brand, was severely affected by the coronavirus epidemic. In 2020 Chinese New Year, it had a year-over-year decline of 90% in sales, and lost over 10 million RMB as of January 31, 2020.

Source: Baidu Index; Pang Jing; Weibo, The impact of COVID-19 on Lin Qingxuan

Lin Qingxuan had made a quick response to the coronavirus crisis in early February, based on the changes in beauty consumption after COVID-19. Baidu index shows Lin Qingxuan has successfully improved its brand awareness by taking quick adaptation.

Responses of Lin Qingxuan during the crisis

Several timely measures successfully saved the brand from the crisis. First, It met consumers’ demand for skin repair products as people paid more attention to skin care and skin repair during the coronavirus outbreak. Specifically, Lin Qingxuan made more an effort to promote its skincare, especially skin repair products like the camellia oil.

Second, since offline stores suspended service during the coronavirus, Lin Qingxuan transferred its offline business to online channels at the very beginning of the epidemic.

Last but not least, Lin Qingxuan expanded its private traffic marketing. The brand has begun to build its private traffic pool on WeChat in 2018. Due to the coronavirus, Lin Qingxuan started to expand its private traffic pool from WeChat to Taobao with the collaboration with DingTalk. This helped Lin Qingxuan transfer rich public traffic from Taobao into private traffic, where it can manage its own consumer traffic.

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Full transcript below:

Hello everyone. This is China Paradigm where we, Daxue Consulting, interview season entrepreneurs in China.

Matthieu David: Hello everyone. I’m Matthieu David; the founder of Daxue Consulting and its podcast China Paradigm. Today I am with Augustin Missoffe to discuss brand development in China’s market. It took us some time to have you on the show, but finally, you are here. Thanks for being with us today. It’s 8 am so, thanks for doing this early. You have been in China for much more time than I thought because I met with you maybe 5 years ago. Actually, it is going to be your 10 years anniversary in China. In June 2020 you will have been in China for 10 years. You have been in the digital industry for 6 years and now work for Hopscotch in the Chinese PR industry. So, thanks for being here Augustin. I’m sure you want to add something about how much time you have been in China before starting our discussion on brand development in China’s market.

Augustin Missoffe: No, no you’re right. I arrived 10 years ago. Thank you for meeting with me today. It is really a pleasure to be here to discuss global PR in China.

Matthieu David: So, let’s talk about Hopscotch and the Chinese PR industry. I am not sure how many people are familiar with the company, I mean the people who are listening to us. It’s pretty big. I was impressed. 250 million euros in worldwide revenue and 25 000 000 USD in Asia. In China only it’s about 8.2 million Euros. In China, you have offices in Shanghai, Guangzhou, Beijing, Hong Kong, Taiwan that are covering 40 cities which is impressive for global PR in China. You describe yourself as an event-native global agency OPR network or community. I’d like to define the word more with you later on. That’s what I’d like to talk about. The PR industry has changed a lot over the last 20 years. In the 1990s when I was a kid, we were talking about PUR in case there was a crisis or there was a scandal. When you had to communicate with the media, with newspapers, with TV, with radio, etc. Now, we talk about global PR in China when we deal with your own advertisement which we see on Weibo and so on. PR, I feel, has grown to a much bigger extent to offer an online and direct link to consumers. So, I feel that’s an industry that is changing, and it has been re-shaped over the last decade. Would you mind introducing Hopscotch a bit more? Correct me if anything that I said was incorrect!

Augustin Missoffe: The Hopscotch Groupe is the first native global PR group that was born in France many years ago and now also works on brand development in China’s market. We are providing some global PR in China. So, what is global PR in China? We have discovered many years ago that people need to be in the middle of an event marketing in China. They don’t want to have another view. They want to be in the middle of an experience and also today we have the digital, the PR, the events and shopper marketing, etc. So, we decided to do a combination of everything using tech. For example, using digital, using all the event marketing in China to mix everything and that is what we call global PR in China. The idea is to create brand development in China’s market and after to get a real impact, a real experience with the consumer. People are fed up with seeing and reading only two lines about a product. They want to live the experience. So, that is the mission of Hopscotch. It is really to push the best of the company, a product, a category of products in order to improve visibility and also to touch the heart of the consumer. That is what we are aiming for when it comes to global PR in China.

So, in fact, Hopscotch is focused on all industries – automotive, food and drinks, etc. We are providing the best of event marketing in China. Our team which, as you said, is a bit everywhere in China, is also in the rest of Asia and worldwide. Today, we have 36 offices all over the world. We have more than 800 experts/talents in our agency that are trying to innovate. We have three main directions in Asia which are innovation, creativity and being ambitious. The main focus will be then to immerge as you said. Hopscotch is quite new. However, Hopscotch is just getting shared more in the shopping center which is more than 20 years in China and 40 years in Japan or 30 years in Hong Kong. So, the idea is we need to capitalize on all of these with all of our networks and knowledge on brand development in China’s market. In other words, we need to develop more and more activities and be able to sell them to our customers worldwide.

Matthieu David: I’d like to understand more about what you do and to give a very clear understanding of the audience of what you do. So, maybe a couple of case studies and how you deal with them. I was especially surprised by your presentation. You sent me a picture of the group focusing on Asia and more specifically China and I was surprised that very early – I think it’s slide 4 – you are saying: “We worked with 3300 suppliers worldwide and we have an active freelancing team worldwide of 1500 people.” That’s not something that many companies advertise on. They would advertise on their inhouse team and not only their network. So, I feel that in a sense, you work with a lot of flexibility and agility to be able to touch both offline and online and different parameters in a connection with the community. Would you mind elaborating more? Maybe with a few case studies from the Chinese PR industry and how you operate? My question is coming from the fact that some people do everything and I’d like to know more about how you articulate those different aspects and to which extent you do the PR.

Augustin Missoffe: Sure. So, it is to analyze most of the things. So, we have the digital, we have all our event marketing in China departments, we have all our shopper departments, all our own PR departments. So, most of our activities are directly inhouse even when it comes to the Chinese PR industry. However, when you have an event marketing in China when you have a digital project where you need to work with skilled parameters and also you need to have particular expertise you are not going to invent this or invent yourself when it comes to brand development in China’s market. We always try to find the best partners and freelancers we can, everywhere to work in the Chinese PR industry.  The key as to why we are looking for parts in Beijing with suppliers where we are also going to search for the best CSR supplier in order to help us to build a very eco-friendly event marketing in China. Also, to have the opportunity to work with celebrities, to work with chefs. We do that in order to elaborate recipes, to build a totally new direction for a campaign.  

For instance, in Mexico, we are working with T-Mall in order to promote all of that. We are building some offline event marketing in China but collaborating with T-Mall in order to do that all together. So, the aim is to work in perfect intelligence together and that is why we are very proud of the network we have with suppliers and freelancers. Also, we are quite happy that these people are integrating our team year after year and we are working with them for many years. For instance, here, in our Shanghai office, we are very proud to have inter-talents who are working for us for more than 10 years in the agency, which is rare in China, especially in the Chinese PR industry.

Matthieu David: How do you communicate with different suppliers? It was discussed with an event agency that was saying: “We are very transparent and actually we take a mark-up of 20%.” It is standard in the industry and we said until the client comes, we take a mark-up of 30% on the suppliers outside of our main working office. How do you work with different suppliers? Is it something that you add up on the client? Is it something that actually you internalize so it is part of your team at the end of the day? How do you work with such an extensive network?

Augustin Missoffe: Everything is dependent on the kind of event marketing in China we are doing. We are totally transparent with our customers because, as you said, there is no need to explain to people that we are able to do something when we don’t have the internal resources. So, we are totally transparent about what we are doing in terms of brand development in China’s market. We are also providing sometimes some freelance work. So of the freelancers are internalized because we are working more than 10 months per year together. We don’t have the credentials anymore because we believe that they are our own colleagues and they are working with us on plenty of projects. One particularity of our agency is that we often sign like 2-year or 3-year contracts. So, we tend to have very strong project managers and we also try to have a strong product director. So, the idea is really to be transparent and customers always know that. It’s also the fact that working with a long-term customer is always based on trust and transparency on the fact that we can rely on each other and that is also where we like to go for brand development in China’s market.  

Matthieu David: You sent a presentation with 4 different case studies discussing the Chinese PR industry. Two of them are with major brands. One for CRV with Huawei in France – correct me if I am wrong. They are two very interesting cases. Another one is for Tunisia. So, in the tourism industry where you reached about 15 million digital impressions, 1,25 Euros in PR value and it is 57-something thousand which is very hard to get on WeChat actually. People who listen to us from outside might think that it is not a lot for China, but on WeChat, it is a lot to get 57 000 people WeChat. You worked for the Mexican one as well in partnership with Ching Do and I think there are 6. The Ching Do one is milk from France. Would you mind elaborating a bit more on those cases and give more substance to what you said to be event-native and to be 360 with different suppliers in the Chinese PR industry? 

Augustin Missoffe: Yeah sure so let’s say, for example, you have tourism in Tunisia that needs global PR in China. So, the main objective was to promote Tunisia as a destination for Chinese tourists. So, how do you do it? We worked a lot on social media. So, we built an entire marketing campaign and promoted some videos that we had directly recorded in Tunisia by making a movie with Chinese celebrities. The idea was really to invite people to come to the country and we have done promotions with dedicated tourism platforms in China thanks to brand development in China’s market. The most important thing during this campaign was really to tell people: “Forget about issues there was before you entered Tunisia and let’s focus on the beauty of the country, the diversity of the country and all the activities you can do.” Maybe you know Tunisia is a free visa place for Chinese people and so, the objective was really to boost the market. We sent it to different collaborations, leaders, KOC and also some different partnerships were delegated in order to have a successful campaign.

Matthieu David: I’d like to go more in-depth in one or two cases that discuss the Chinese PR industry. When you say that you shot videos and you displayed the video, would you mind elaborating a bit more on what media you use? Was it more on WeChat? Was it more on Weibo? How do you interact with your audience and how do you convert videos into followers and videos into a call to action and interaction?

Augustin Missoffe: Sure. So, the video has been launched in different series. It was 5 different episodes and it was accumulated into a full movie of a Chinese guy who decided to quit his work and to go and travel. He gets a phone call from his boss, throws away his bicycle and meets a young Chinese lady. She is a beautiful one, he falls in love and they try to be near each other. So, that all about the movie; being together on the beach. This movie has been diffused on the platform as part of our strategy for global PR in China, but also directly on WeChat from Tunisia to the tourism board, on Weibo and pushed with different opinion leaders. We had to have the possibility to join the service account of the Indonesian board directly on which you have plenty of information about which agency you can use to book your flight, trip, etc. All the facilities you have in order to travel to Indonesia. So, that was on different platforms and pushed by the opinion leader.

Matthieu David: For people who are outside of China – maybe people in China don’t know much about it either – but it is a travel-oriented platform. I am not sure about how different they are in the value position. You can post videos on this platform, but it seems much more like a selling website than a social website.

Augustin Missoffe: Yes, it’s a combination of both because it is also where people are expressing their feelings about trends. They are giving some sort of advice.  They are also advised before the trip, but also give feedback on their own trip. It’s also where you are able to promote, for example as we have done, a particular destination which we have done with the tourism board. All those videos were showing you the best places in Tunisia. So, this is how we allow people to see the country and ask them to push them directly to go and visit Tunisia.

Matthieu David: Okay, I see. So, you wanted to talk about other cases?

Augustin Missoffe: Yeah sure; about Magimix and global PR in China. So, Magimix is a French cooking kitchen appliance that helps you to cook with mostly whatever you want. They are very nice products and there is a cooking expert. The cooking expert arrived 2 years ago in China. It’s a beautiful machine that helps you to cook, which helps you to do everything you want. You want to have a good meal at home, you use the Magimix. This machine was not known at all at the beginning. We worked on all the strategies, all the clarification, all the social media, but also all the development of all the different tools. As an example, in France, you can control your machine. It is sent from the app on Android or Apple. When our customer arrived, he directly took the position and said: “We are not going to develop another app which we have to release in ten different marketplaces, but let’s develop a mini-program.”

So, we worked with dedicated tech agencies in order to develop all three programs and to be able to manage the machine and make use of global PR in China. So, before working with freelancers, we elaborated on some recipes with different Chinese chefs to adapt all the international recipes for the local market. We worked directly with Chinese chefs. Then we worked on the PR launch. So, we have done a huge PR launch event directly here in Shanghai where we managed to do all the visits to the store to the media and some KOLs, etc. It helped us to promote the machine directly. That has been a one and a half-year project which is still unfinished because we have to continue to promote this beautiful machine thanks to our expertise in the Chinese PR industry. It was quite 360 which is what hate because that means we can do as I said a bit of everything, but the main thing is to be able to do event marketing in China where we will have some content to also organize all the different aspects of the project to be sure we are able to do brand development in China’s market one product or one category of products.

Matthieu David: You talked for some time about KOL, but some people are using KOC now. How do you work with them? I feel there are a lot of questions from brands and from the west, especially on how you really leverage them? You have two cases where you talk about them. So, you say it was proposed by KOL and for Magimix you say you worked in the food industry with chefs and so on. How do you interact with them? So, more specifically how do you have to pay them? Do you have to give them the current software? How do you select them? Do you select them because they are able to sell, they are able to deliver a message or because they like the product as well and so, would you mind sharing a bit more about how to do this? What is your vision?

Augustin Missoffe: Sure. As you said, the process is quite different from KOL and KOC. Let’s start first with KOL. We are collaborating with them and one of the successes of KOL to be met is also thanks to WeChat. WeChat has been a close platform so that means you have your own service account. If you don’t have a KOL I will not be able to know your account and thus, brand development in China’s market would not be possible. So, the KOL is kind of a bridge that will help you to win visibility. KOL in China has an average of 1 million followers and up to 100 million followers. How do we work with them in the Chinese PR industry? It depends entirely on the project. But what we try to tell them is to first analyze which Key Opinion Leader will be suitable for the product. That means, for example, that we took one proposed KOL and we chose a famous celebrity. His name is Shan Shan. She lives in France and she has already expressed that she loves wine. She also loves nature. So, we took plenty of parameters and then we analyzed them to be sure it is suited for brand development in China’s market. It helps us to find the right person. After that, of course, when you are working with a KOL which has 70 million followers, you are going to see Magimix in France you are going to pay them and that is part of global PR in China.

However, you are going to work tirelessly with them in order to find everything to fit your budget.  Then, also, it’s the way that they are going to promote the product and do brand development in China’s market. You don’t have only one post and then end the campaign. The goal is to have continuity in the campaign to be sure that she is not going to do the promotion for only two weeks. We want to make sure that she promotes the product because she believes in the product. I have heard a funny story about milk powder. In China, you have two competitors and you have a famous Chinese person and the guy is a Chinese celebrity. His wife is European and also a famous person and thus a perfect person to do global PR in China. They are promoting one milk powder saying: “this is the milk powder for my kid” The mother is promoting the other milk powder and says: “This is the milk powder for my kid.” The idea is really to be sure that the KOL really loves the products. So, we also educate them and ensure that the person has a real affinity with the product. So that is the first thing to do when you want to do brand development in China’s market.

For the KOC; the Key Opinion Customer, the idea is also to give them sometimes some products in order to be sure that they are going to use it. Sometimes, they already have the product. So, we are going to give them some inputs to give like some other tools in order to promote the product.  As an example, when you give one category of products you are going to give it or move it around. Who can be with this category of products? Sometimes, of course, you also have to pay for them. So, it is different with each product. Paying the KOL in China is not an issue when it comes to brand development in China’s market. It is a popular business and the idea at the end of the day is really to promote your product, but check that they are going to share a product and also avoid going to the competition. We had success also through this KOL by ensuring that they are the right person for the right campaign.

Matthieu David: What are the expectations you have from the KOL perspective and also the KOC? I understand that it is creating views, it is creating impressions, but how do you really measure the results at the end of the day? Of course, it is difficult to track the conversion in sales, but would you have some metrics which are beyond the impressions? I tell you that because we worked on an evolution of some campaigns and we found out that some people liked actually more the KOL himself rather than the message. So, they went liking eventually the message proposal as a KOL, but actually the comments were all about the KOL and not about the product they were pushing. So, would you mind sharing a bit? Maybe what would be your concern when you deal with a KOL and a KOC?

Augustin Missoffe: It is always the fact that they will prefer the KOL rather than the product. However, they are always very intrigued by the KOL and this helps us to do brand development in China’s market. We have seen that if you have looked at live streaming campaigns. People are buying all kinds of products like L’Oreal and stuff. We did an amazing campaign with lipstick recently. So,  they are obviously going to follow the KOL and they are going to listen to the message. They learn about the product that is being pushed because they believe in this. So, it can be indirectly the real ambassador of the brand. So, that is also one of the main things. We must ensure that the relation between the product, our customer and the KOL is not only a business relationship. A person must like the product and believe in the product and that is how we will succeed to push the consumer to like the KOL, but also to love the product he is selling.

Matthieu David: When dealing with KOL’sy do you work with agencies? As you said, you have networks and suppliers/partners you work with or do you contact them directly? Does it go through some platform? I remember one interview we ran in the past saying that the care of the business has to change because actually you should have agents for KOL’s. KOL’s will be managed to see which products match instead of a product or a brand reaching out to a KOL directly. So, it should be the work of the KOL to reach out to them and say, “Oh, this brand is really something I like.” Or, “I like your way of talking. I’d like to work with you.” So, how do you deal with them? Is it direct or indirect? Do you reach out with Weibo or WeChat or the website?

Augustin Missoffe: Yes, so we try. We are working directly with them for one reason and that is to avoid any intermediaries in the campaign and also to deal directly with the KOL in order to do a better brand development in China’s market. There is something very interesting about KOL. It is like to choose a different product. It is mostly in the food and drink industry where KOL’s contact us directly to say, “Hey, I have seen your different campaigns. I know this one is new this summer and I would be very happy to promote these different products.” So, this is something that is becoming more and more recurrent. This is mostly because there is a huge. Most are focused on cosmetics, food or gaming. This is something that is happening more and more for brand development in China’s market. The fact that emergency will manage a pool of KOL’s and for me, I will call it the KOL factory, so, I don’t believe too much in it.

Matthieu David: Why?

Augustin Missoffe: It is becoming a KOL factory, but we still keep the virtue of the KOL who promotes products for one reason which that they believe in it. The fact that you have for a KOL agency will be more mechanical. The agency will impose the product directly on the KOL. Sometimes the KOL tells us, “I’m sorry, but I already have a competitor of your product” or, “I am sorry, but I don’t know anything about wine, so I’m not going to promote it.” They are able to say no and my main concern in the agency is that they will be obliged to promote some products because one KOL doesn’t have anything to do for 2 weeks, etc. It is one of the reasons why we are working with them directly without any intermediary.

Matthieu David: You work in a big organization which is Hopscotch again 250 million Euros in many, many countries. What differences in the cases you have mentioned and the cases you worked on and the cases that Hopscotch is working on in the rest of the world? What main differences do you have to communicate on when you work with China or when they work with China? What are the surprises they have? What are the differences in the treatment of the cases you handled in China and the rest of the world?

Augustin Missoffe: There are plenty. We’ll start by the flexibility and the fact that our customers are asking for things to be delivered yesterday. Everything is in a rush and also about all the digital activities for brand development in China’s market. In some projects, for example, I will see sometimes when we reply to the tender we arrive more with a conceptual approach. That is something that is phase one and after that, we develop all the different aspects. In China, I have had different customers that want everything, all the details at the first minute. So, they want to know everything. We don’t have a very different proposal because it’s more on the concrete part. Sometimes it’s the conceptual part that could be secondary. However, they want to have everything in detail quite quickly. Also, the digital side of the business is totally different.

I am always saying this for 9 years now. When WeChat arrived, the world has developed in two separate parts. You have China and the rest of the world extending also to everyone how WeChat works, how the towers are working and how everything is working around the digital. Now we must use it, how we should integrate it, the online to offline, offline to online, the new retail. This is part of our DNA for event marketing in China, etc. That is something that sometimes they ask me or from my colleagues, but it’s so that we do a lot of different training in order to be sure that they will be able first to get a heads up about all of that.

It’s also one of the reasons we are getting plenty of projects. We are welcoming them worldwide with all my colleagues pitching from worldwide and China and then also some information or some insight. We display some innovation that they will be able to work on and also able to re-use it during other events in the US or using PR communication in France, Ireland, etc. So, it is a bit of a mix of everything. The key components for me are different compared to the rest of the world.

Matthieu David: How do you explain that in China you feel that clients are wanting to get things faster and with more details compared to the west? What would be your explanation?

Augustin Missoffe: They are quite fast. The economy is booming, competition is fierce in different sectors and there is an evolution. I think I have been here for years and what we say on  Monday could be totally different the Friday because there are so many evolutions in the week in terms of social media platforms instead of trends and when there are mistakes as we have seen for example, for a luxury brand it is going too fast. Social media are going faster than everywhere else in the world. That is also the main thing why China is going quite fast. You can observe this over the last 10 years.

The first WeChat payment was in 2014 and today nobody uses cash, credit cards. We are all on our mobile phones. So, everything is going quite fast and you will see it is also in the Chinese mentality to say, “Make a point. Next push.” It is quite nice. I had yesterday a very interesting niche question about the fact that in France we prefer to be ready before we like something. In China, we are ready by launching the thing. So, everything is in parallel and after we will adapt. So, that is also the mentality. They are very entrepreneurial. They are very focused on innovation, so they take more risks here.

Matthieu David: Sometimes, I wonder if it’s easy to build a long-term brand by putting some tactics for long-term strategies. Companies have been building long-term strategies and I did not imagine the various luxury brands to be so fast in the change of reactions. It really considers all changes before going into it. You talked about new retail and this is a buzz word. For every buzz word we have to know what’s really going on. For me, new retail includes payments. It can be anything. It can be WeChat as well for all players and delivery. Delivery is very cheap in China and very easy. You get your food within 30 minutes. These for me, as far as I understand, are the two main components of new retail and I am always wondering, “Do I need something? Is there something I am missing here?” Because you have so much to do in food and beverage. I believe you have spent a lot of time, but what extent of new retail? What can we extend? What can we build with that? What really is new retail?

Augustin Missoffe: Sure, we use new retail for only two services because that will be payment and delivery or purely the services, but it is also philosophy. When you go to a supermarket from Alibaba, it is a place where you can do a bit of what you want. You can eat in this place. You can take your lobster, ask the guy to cook it and eat it at the place. It is also a place where you can enter freely without having to do anything. So, you don’t have cash. It is digital. You can enjoy the fact that you will have a seat, that you will discover some stuff, so it is no longer a shop. It is a pathway. For me, it is even more than a philosophy. After, if we need to speak about more practical things in terms of buying, you can do click and collect. You can go over there, try on-site and make it on delivery. You can have all the ways of living in the same place and now it is really adapting to the supermarkets. It is more and more adapted also to all the different retail stores and it will be adapted after all kinds of different aspects. Everything will be done more freely and also the fact that we are giving more information on our mobile phones and the fact that we are getting these tools which are ruling our lives. They are part of our daily lives. We do everything with them. Also, one thing which is quite nice in new retail is that everything is easy. When you don’t want a product anymore you send it back. It’s easy. You don’t need to go to the post office, stand in the queue, etc. It is the same as if you were to call a delivery guy. He will be here in 20 minutes and will deliver everything. I think there are also these kinds of philosophies where the new retail took all the place.

Matthieu David: I feel the path that was missing in my explanation of payment and delivery is the one of experience. So, new retail is also about a new experience where you would connect with a digital world. One thing you said is that it is easy to buy, return a product, etc. When it is easy for one person, it is difficult for the other one and what I am questioning is whether the client is key for event marketing in China. So, the brands and then your client. How does it deal with that? Isn’t it much more difficult to evolve now in this environment where people can comment on Twitter about the product? Before it was a bit more complicated so people were thinking twice before returning a product and so on. How do you deal with that? Is it a concern of the clients of your brands?

Augustin Missoffe: No, not so much because right now the service is something that has become more and more important for our customers and all the brands. Service is something that we use to highlight the brands. Of course, I would say all the people commending and giving some bad comments because the boxes they received have been destroyed in the delivery process. So, you have also what I call the small social grudge which for me is not so important because we have seen some brands which have been destroyed by that, but the main idea is also to control it.

We are in an industry where you have people commenting all the time. So, we need to play the game. If you don’t want to play the game, you need to leave China. It is mandatory to play this game. After, it is not for me to slave and master. It is more collaboration where consumers don’t have to impose something from brands. People who want to buy some products from luxury brands will have a very tailored service. If they want to buy cheaper brands or regular brands, they will have another service. However, they will be able to get what they want at the price they want, at the moment they want it and the brand will adapt itself. Brands have already adapted to the supply chain in terms of social, in terms of Key Opinion Leaders, etc. Everybody has something in the market so, for me, it’s more a balance between the customer and the brand.

Matthieu David: I’d like to go back to the identity and origins of the company Hopscotch. You say in the presentation that it is event-native and I got two or three feedbacks. One from a group was things that people want to connect again now, to go to events, to interact with each other and we got some other feedback from people in business to say, “We want to have interaction with temporary shops” or even their own shops with the digital aspect and then having their own shops. How do you then react to the fact that China is so digitalized, and your origin is in event marketing in China where people can touch each other, they can meet in real life? Is it something that you are combining? Is it something that you are doing differently for China?

Augustin Missoffe: Not only for China but yes, we are combining everything. We, at Hopscotch, like to say that we are experts in event marketing in China, in digital and in PR and shopper experience. So, all these pillars make us global PR in the China group. This means the digital; we are going to mix it directly with the events and the same for the global PR in China. When people are participating in an event, the experience is good. They don’t want to watch an event. They want to be part of the event. They want to live a real experience that could be for example, with plenty of digital integration because I think we also have to stop to say, “I want to do something digital.” Digital must be the hardest of the global strategy. So that is not for me one particular department or one particular thing. It is integrated now. We are in a new era where all that must be developed and digital is also the way that we get content. People through digital like to see what is happening somewhere else. When you have a VR demonstration, they want to be part of it. So, the thing with digital is that they will be able to see what is happening. So, the idea is really to have all of it to make and build a real experience to have something from nothing and to put these people; the consumer in the middle of it and it is how we succeed to create amazing campaigns.

Matthieu David: For companies and brands, it is much more expensive to sell because they have to create events, they have to manage the digital prism, they have to do all that. Let me say your margin is my opportunity. So, when you make a margin, I will find a way to actually lower the margin and be your company. This is my opportunity to charge you on the marketplace. Where do you feel actually people can save money to be able; for companies to be able to reallocate the purchases that were spent 10 years ago, 20 years ago to what you are describing now. Which companies are dropping is what my question is? What companies are not doing anymore? What are the things they didn’t consider? Would it not be an ultra-market, for instance, because I can think of a place where you have to be anymore? Is it not to work with newspapers anymore and TV anymore because actually the connection is not strong enough? What is your point, is the media; the tool that is given away; given up by the present companies?

Augustin Missoffe: I am going to speak purely for China. That is purely depending on the customer. However, we have had the change to social media, social networks to be able to collect some data, to be able to understand which companies are working and which ones are not working. Let’s take a simple example. You want to do a campaign for a product in the Chino Valley and the Shanghai Valley. You will be able to put some record on it and to have it tracking and you will be able to know precisely how many people scanned their credit card from the China Valley and from the Shanghai Valley and like that you will discover that finally, on the China Valley you have a few people who scanned their credit card instead of the Shanghai Valley where you have thousands of people. So, you have in this case, you are going to take the decision to do the communication. So, that is also the way that we succeed to collect some data and to use some data because the key to everything in fact; and I really believe in this; data will manage everything at the end. Today we have plenty of data coming from all the social platforms, all the different advertising, etc. however, nobody is working clearly on this data. In order to have a really good result and also to anticipate the consumer willingness and the consumer wish; that is also today one of our jobs to succeed to collect this data and understand the ways that the consumer is interacting with the campaign and with the product and after; anticipate the campaigns. That is something that we are tending to do and in term of what they used to, what they are doing now and what they are going to do that the data will help us to do it and our story depends on the customers or rather the Chinese market who don’t know all about the hypermarket because the hypermarket right now is dying in China up to the e-commerce so everybody wants to use the e-commerce, but how do you build e-commerce? Which activity are you going to select? Which are the more specialized and the more expert in your category of product? Should we trust the fact that we must be in China or could we do some global selling to Alibaba Global or T-Mall Global or should we do it directly? Everything is depending on the clear strategy which will be defined thanks to all the data we collect. 

Matthieu David: My understanding is the breakdown of the costs for brands and companies has changed where they were going to hypermarkets and supermarkets mainly or even exclusively. They would rely on the hypermarket or supermarket to clear the traffic. Now it is the brands and companies which have also to take into account this bit risky invested which is to create the traffic between the conversion to sell or not. That may be justified by the fact that marketplaces have a lower commission because I understand that hypermarkets and supermarkets are taking much more commission on the product. Do you agree with this?

Augustin Missoffe: Yes, it depends on the kinds of the campaign. It is the same when we have done some campaigns for products in supermarkets. We are also working entirely with a different supermarket brand which is also very… we have to create traffic etc. It is quite funny. I tried to go there on the weekend and it was full of hostesses pushing you to try some product etc, but it is the same that you can see in the e-commerce platform when you go for example, in the beginning, we have the level which is a global shopping mall. Right now, if you look at the agenda of Alibaba you will see things there that you don’t see every day on all the different products. You have one festival and you have all kinds of festivals all the time. So, also, they try to find their own way to promote traffic. However, it is the same; you can buy online or offline. People will still go in-store and also one thing that is quite important with offline retail. It is absolutely dying and just evolving.

Matthieu David: We are almost at the end of the exchange or the talk. I will ask you a couple of questions, as you know, and the first question is what books inspired you most in your journey?

Augustin Missoffe: That is a good question. For now, I am reading a very interesting book about Diplomacy which is diplomatic about… it is a book from the former ambassador; French ambassador in the US explaining his relations with everyone in his life. It is interesting the way that we could create some relation with people on trust, but also trying to get the best of the different cultures and that is something that we try to do here in Hopscotch and so besides, we are a multi-cultural team where we need to understand each other, speak to each other to get the best of each other’s cultures and this mix also helps us to build and create successful campaigns and this book has listed plenty of things like that.

Matthieu David: The last ambassador of France in the US?

Augustin Missoffe: Exactly.

Matthieu David: What do you read to stay up to date about China? As you said, China is moving fast. There are so many articles and so much content created about China and my understanding is that there is a lot of growth sometimes and it is difficult to know what is really happening because there is lots with imaging, lots of actually purely PR for Alibaba or whatever to say, “Now we have people that use AI and VR to buy” which is actually a goal think really happening in a massive way. So, to stay up to date what do you read to make sure you have the right information?

Augustin Missoffe: So, as you are; we are in plenty of WeChat groups and articles etc. so what we try to do because the day is running so fast every time I see some report I put it in a particular group which all my teams in China and after the end of the week everybody reads a bit of everything. We are after that doing kind of notes; internal notes with all the different articles and that helps us also to have all the main things and also all the different articles. However, what I read more and more is also all the reports from DCG which are normally very trustworthy and which are very positive. After that, I read also some different articles from China channel, from also Tech Crunch and I try also to avoid a little bit the too commercial articles who are promoting at the end, only the product of the providers.

Matthieu David: Yeah so you would say TechCrunch, you would say reports basically that are published and you gather all the reports and indeed there are so many reports sometimes that I feel that on some of those WeChat groups it is a full-time job to check it.

Augustin Missoffe: Definitely and I would just like to know how they monitor that?

Matthieu David: Yeah, yeah, I’m disappointed. I don’t know. What books in China? What books about specifically more about China would you recommend if any? Not necessarily history. It can be anything.

Augustin Missoffe: Sure, there is a good one in which I am reading a bit about AI and how AI is going to change evolution. It has been written by… I will send it to you. It is super interesting. He has a huge capital venture fund right now investing in plenty of AI start-ups and it’s a group that helps you to understand a bit of how China is going now and how it is going to evolve and mostly he gives a trend about all the evolution. If you have come to Shanghai recently you have seen the different new cameras. That is evolving a lot. The question is what will be the next step? How are we going to live with it and we will see what is the value-added because what I love in China is people are okay to give all their data, all their information. However, they are okay only if they have a good service in return. So, if you give them some service, they will be happy to give whatever you want. So, the question is what will be the next service that we will have?

Matthieu David: And for the cameras; people not living in China; actually, we can see the new cameras and things like to be 360 which can do it better than the old cameras which feel like we are back in the ’90s. We can see very soon in the streets, facial recognition and cameras and the ones which are not. There are two questions now that are inspired by a thinker called Peter which started to use strategy in business and in order to understand what is going to happen in the coming years or month is trying to look at successes. He was not expecting, and he was looking at figures and was not expecting it. To give you an example, I was not expecting a KAFU to pull out of China so for me it shows that there is something going on in retail which is e-commerce, which is new players and the past is not working anymore. All those prominent companies, what would be your surprises or what successes didn’t you expect, and you are seeing and witnessing? On the opposite; what failure were you not expecting that you have witnessed in China?

Augustin Missoffe: So, generally speaking, I have a little bit in the… yeah, I will say maybe in the automotive industry. We have seen some European brands who came here very proud to enter the market, however, in Europe, they were the key car manufacturers. However here we are discovering that they didn’t succeed by themselves and mostly the failure is not that they didn’t succeed, but that they didn’t succeed to adapt themselves when they had the green light to go. We have seen electricity arriving and they didn’t believe in it. We showed the SUV; they didn’t believe in it and it took too much time to train for it and that for me is one of the biggest failures we have seen because mobility after is also one of the key things which needs to happen. For me, the two main concerns worldwide would be mobility and food. Those are the two things which will take more and more places and to see some experts who didn’t see the biggest things about evolution. That is probably one of the biggest failures. 

Matthieu David: Yeah what about success? You didn’t see some things that actually would show something bigger behind it? Something which is a game-changer; a new paradigm – to use as a word of the podcast? What successes embodying it?

Augustin Missoffe: I would say something which is quite common; WeChat. WeChat is a media with all the possibilities. In the beginning, if you remember in 2011 it was WhatsApp. They tried to launch it in Europe in 2012 and 2013, but well it was not working for them. It was an exact copy of WhatsApp and after it was Chinese, and China became scared in Europe. However right now, all the possibilities of WeChat. I even try to explain to people what WeChat is and they say: “Yes, it is kind of WeChat and a Facebook.” I say, “No, WeChat is life in China. If you don’t have WeChat, you are not able to do anything. So, all the possibility I did not expect so much from WeChat and WeChat is in our daily life; a personal one, but also a business one. To be honest it is impossible to live without WeChat today in China.

Matthieu David: What do you think it is showing about China why WeChat took off o well in China being the super app and we don’t have that in the west? What is the bigger… what is the iceberg behind it because we see WeChat, but what is behind it? What will you take from this success?

Augustin Missoffe: Well, I think of the successes as also the way to adapt themselves to be very innovative, to have the payment and after Shanghai was one of quite the advantage is to have some rapport with WeChat which is very big and also it is part of the government which is quite something because they are also protecting all the data. So, one of the reasons we are okay to give it to them, but it is also the fact that they are evolving also. They don’t have any issue to come to sell stuff. Let’s say, for example at the beginning of the mini-program it has been a big failure from January to July. Nobody was using it. Nobody understood it and it is the point of a mini-program and at that point we even say it and I like to say it; it will be an app native here and in July we decided to change it to get some other things for the mini-program to have more easy ways to develop the mini-program and right now we have more than a million mini-programs in WeChat so they have the capacity to evolve and say, “Okay, this is not working.” We stop it and we try other things. So, it is also the fact that they are launching stuff; even if it is not totally finished., if not then the business plan is done, but they are going forward and that is also one of the big added value of the Chinese market.

Matthieu David: Thank you very much for your time and for the insight. It was a very interesting talk. I hope you enjoyed it. I hope everyone enjoyed listening to it as well.

Augustin Missoffe: Great, thank you very much. Have a good day.

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 #93: How can companies manage their brand development in China’s market? is the first one to appear on Daxue Consulting - Market Research China.

Just like the content on these platforms, the figures of the short video market in China are making heads dizzy. The Coronavirus crisis has shed more light on an already booming industry. A large number of mobile users and the addiction for short video content among Chinese Millennials were already the drivers of the consumption of short video content. This viral trend is reshaping the content market, with short video marketing strategies in China becoming increasingly crucial for marketers.

The short video market in China soars on traffic growth and AI development

According to a QuestMobile report released in June 2019, the total users of these short video products has reached 820 million, meaning that 7 out of 10 mobile internet users in China are using these platforms to record, share or enjoy videos. The leading players in Mainland China are Bytedance’s Douyin and Kuaishou. Baidu and Tencent are trying to catch up with their own platforms, respectively Haokan and Weishi.

[Data Source: Questmobile –  short video apps in China, MAU June 2019]

Each short video platform has its distinction

TikTok / Douyin’s ByteDance, the global player

Douyin was created in 2016 by the Chinese tech giant ByteDance. It is by far the most widely known short video app thanks to TikTok, its global franchise. The app is available in 75 languages across the world. User base is mainly young women, displaying music-inspired content videos. No matter the size of an influencer, Douyin’s recommendation algorithm is based on users’ virality engagement with a piece of content. As long as people engage with a video, it will continue to spread further. Influencers can also use the live-streaming function to interact with their fans.

[Source: Douyin, the #1 short video platform in China]

Kwai / Kuaishou targets rural audiences in China

In 2012, Kuaishou went from a GIF-making app “GIF kuaishou,” to a short video platform. In 2019 Q2, the app became the second-highest-grossing video app globally, behind YouTube and ahead of Douyin.

Tencent and Alibaba-backed Kuaishou, known as Kwai on the international market, is the biggest competitor of Douyin, with a higher percentage of male users. Targeting China’s grassroots society, 64% of the platform’s users live in lower-tier cities. These users are heavily engaging with content and are willing to comment and to share. However, compared to Douyin, Kuaishou’s content might be of lower quality, and its ability to monetize content is far weaker. With less revenue coming from large brands advertisers, Kuaishou draws revenues from its live broadcasting function in which viewers have to pay to interact with the broadcaster.

[Source: Kuaishou, the #2 short video platform in China]

Xigua, known for its high-quality content

Xigua was created in 2016 by Bytedance to target a different audience from Douyin’s, with males accounting for a greater proportion of users. The platform attaches great importance to high-quality content, with both algorithms and user sharing helping drive traffic to high-quality videos longer than one minute. Besides, people can quickly find videos which interest them thanks to a more precise classification menu. However, the platform lacks active Chinese Key Opinion Leaders (KOLs) who can set the standard.

[Source: Xigua, a lesser known short video platform in China]

Bilibili, from mangas to makeup

Bilibili was born in 2010 from the willingness of its creator to share videos about anime fandoms, manga, and video games. Since then, the platform has diversified, attracting a lot of traffic thanks to content around lifestyle, entertainment, beauty, or technology. The app also offers a live streaming service that allows fans to interact with their streamers.

Bilibili’s audience is far younger than other short video platforms, with 80% of the viewers falling into the 16-25 age bracket. Moreover, the average time spent daily on Bilibili exceeds 85 minutes, and the engagement is relatively high. As of now, brands in the tech and entertainment industry have attracted high retention and engagement on this online video platform. We can also expect fashion to be a big draw in the future.

[Source: Bilibili, originally a manga platform, now is popular a video platform in China]

AI enables the development of short video platforms in China

The monetization of traffic on these applications is crucial, and Artificial Intelligence could help. AI is already the main engine for improving users’ journey on the short video apps, with the ability to enhance the visual quality, select content recommendations, and generate ideas of new content. A better user experience brings more traffic, which in return enables mass advertisement, user subscription, and many monetization opportunities. 

Chinese traditional tech companies such as Tencent, Baidu, Alibaba all invested, developed, or acquired short video apps, feeding them with technology to enable commercialization of content. AI algorithms have transformed the content industry from ‘people looking for content’ to ‘content reaching out to people.’ Thus, a study conducted by Netflix shows that 80% of hours streamed on Netflix are based on personalized recommendations. Wholly enabled by AI, instead of relying on word-targeted searches or interest-channel browsing, these short video apps in China directly feed under-60-second, user-targeted short videos to users.

By collecting likes, comments, and other data metrics such as response time, machine learning tracks user behavior and tailors content, deciding what video to show next. Thus, in China, the average daily use time on short video apps is 45 minutes. The growing user’s attention generates a large amount of advertising revenue, with the value transferred from the brands to the online video market in China. Therefore, following the traffic growth, the short video market in China is skyrocketing on the back of a better monetization of its content. In 2018, China’s short video market revenues grew by 744% year-on-year, an impressive leap forward which is expected to last.

Driving forces of the short video market in China embody modern Chinese lifestyle

In addition to their ability to optimize the viewer’s experience and monetize content, short video apps represent a new type of format that perfectly suits Chinese consumers of the 21st century. The digital transformation of China changed lifestyles, pushing daily-life activities from offline to online. In 2017, improved connectivity and video maturity enabled live-streaming and short video apps to penetrate the Chinese mobile internet ecosystem.

Post 70s lifestyle

Chinese people are getting more time-poor, meaning that the short video format adapts perfectly to this new fast lifestyle. Short content can be viewed on public transport when leaving work, or at home before going to bed. The peak of usage of these apps lies, therefore, between 6 pm and 11 pm.

Outside of the short format, the success of such platforms could also be explained by the lifestyle of the new generation of mobile users. Gen Z (defined as the “post-95” generation, aged 15 to 24) are more inclined to express their views openly. Even if they want to be perceived as independent and brave, they are by no means immune to the influence and group behavior. Consequently, they love to interact with people they identify with, feeling that they participate to the conversation. For example, this group of consumer fuels choreography challenges on Douyin, supports their favorite artist via the live-streaming function of Kuaishou, or follows the latest fashion style of biggest KOLs on Bilibili.

Users under 50 represent close to 90% of the total users on the short video platforms in China. Nearly 50% of whom are under 35. Another characteristic of Chinese consumers under 50 years old is their proclivity to spend money freely. Even if a big part of Chinese gen Z is still unemployed, 70% of them receive more than 3,000 yuan in pocket money per month, with 20% of them receiving more than 10,000 yuan. Beyond this generation, Chinese people enjoy a modern and quick lifestyle with less time to spend than money.

Covid-19 drives traffic on short video apps in China

During the Coronavirus, the shift towards online services quickly accelerated. No matter the age group of the consumer, it needed to rely on online services to keep its habits. With people streaming from all over China, Chinese people have flocked to these platforms to collect real-time information on the epidemic situation. During this period, short video apps represented more than 30% of the time of news acquisition among Chinese netizens, and 17.3% of the total use of the mobile internet. Compared with the 2019 Spring Festival, short video consumption time exceeds that of mobile games.

[Data Source: QuestMobile, How Chinese netizens spent their time online during Spring Festival of 2020]

Moreover, the economic impact of the Coronavirus in China pushed offline industries to go online. Examples of such industries making smart use of the live-streaming functions are the night clubs and the gyms. Thus, a five-hour live-streaming set at OneThird, a nightclub of Beijing, brought back $285,000 in tips donated by the viewers on Douyin. Banking on the trend, Douyin’s rival Kuaishou made deals with clubs across China to stream their shows.

[Source: Douyin – Keep’s Short video marketing strategy in China during the Coronavirus]

Could short videos be the future of marketing in China?

With an incredible engagement from its users, short videos are a boon to promote, market, and sell products. Marketers can use it as a tool for communication, sharing reviews from Chinese key opinion leaders, and for targeting narrow audiences. Another option is to invite followers to share and like a post to win a prize in return. In addition, live-streaming allows for audience interactions and feedbacks, which could provide useful data for marketers.

Proof that marketers would invest the stage, the advertising revenue from the short video market in China is expected to reach close to 100 billion RMB (14.1 billion USD) by 2021.

[Data Source: Statista, 2018, China’s short video advertising market revenue]

Short video KOL marketing

However, as the possibility are numerous, short video marketing strategy in China can quickly become complex. One of the most effective uses of Chinese short video apps is to promote a brand is through influence marketing in China or KOL marketing. Chinese KOLs exhibit the ability to widen a brand’s audience, drawing customers from online channels to physical stores to make purchases. Resulting from their ability to attract traffic, Chinese KOLs can attract brands and advertising, helping short video platforms in China to achieve a better monetization. Consequently, the short video market in China is competing to close exclusivity deals with the biggest Chinese KOLs.

[Source: Douyin – influencer marketing in China to promote the short video app]

The 15 to 60-second format is challenging for creators and brands, which are not able to enter in-depth in the storytelling that makes video content valuable. As of February 2020, short video platforms like Douyin are adopting longer video formats to attract higher quality content. If brevity is making it hard for marketers to inform and persuade, the conversational content of these platforms could represent the future of marketing in China. Live-streaming functions and chasing engagement from the audience to enriches the experience are seen indeed as the next marketing trends in China.

Short video marketing strategy in China: How Daxue can help you

As a competitive market research agency in China, Daxue Consulting can help you creating your short video marketing strategy in China. Our team is dedicated to giving you the best understanding of Chinese consumers and to assist you in each step of your social media strategy process.

Understand the target audience

First, Daxue Consulting can perform customized social media listening plans to analyze comments on Chinese short video platform Douyin, as well as shopping platforms in China – which are directly accessible via the short video app, like Taobao, Tmall, JD.com. This social listening phase will help you identify the best channels according to your targeted audience.

Choose the right KOL for your audience

This first set of raw data is useful to identify Chinese live-streaming KOLs that would fit for your brand, product, or service. Some KOLs could be exclusive to only one or two platforms in the Chinese market. This makes it essential to know the right social-media channel and define a short video marketing strategy in China to reach the desired target audience (e.g., Douyin vs. Kuaishou vs. Bilibili).

According to our case study, Austin, a former makeup artist for L’Oréal, would be the perfect candidate to market a cosmetic brand among young consumers in low-tier cities market in China.

If you want to know more about influence marketing in China to kickstart your short video marketing strategy in China, make sure to check out Daxue Consulting’s KOL market report!

Chinese leading players to go global

While the short video craze is reaching new heights in mainland China, Chinese actors are gaining traction from foreign markets. Embodying the fast pace of the modern Chinese lifestyle, but also the western one, ByteDance’s Tiktok (known in China as Douyin) is booming. In 2019, TikTok managed to achieve more downloads than Netflix, Facebook, or Gmail on the Appstore.  Kwai, which is owned by Kuaishou, repeatedly tops the Brazilian app store’s most downloaded chart.

Chinese players are looking for fresh opportunities abroad, while the short video market in China became increasingly saturated. By appealing to certain demographics and cultures, plenty of short videos platforms thrive in China’s domestic market. Replicating these same strategies on a global scale for Chinese companies could be riskier. Indeed, if there is still room outside of China for TikTok or Kuaishou, it is not guaranteed for the others.

In China, the huge engagement of the users attracts influencers and advertisers who helps achieving the monetization of the content. For Chinese short video startups going global, achieving monetization is a real challenge, knowing that the engagement rate of foreign users is far weaker.

Author: Maxime Bennehard

Check out our report on the KOL market in China

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This article The short video market in China: Embodying the fast pace of modern lifestyle is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

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

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

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

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

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

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

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

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

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

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

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

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

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

Vincent Ghossoub: Yeah, Tetris is casual. 

Matthieu David: It’s casual. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Matthieu David: Okay. 

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

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

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

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

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

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

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

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

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

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

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

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

Vincent Ghossoub: Yeah.

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

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

Matthieu David: What skills do you need?

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

Matthieu David: Designers. 

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

Matthieu David: Wow. 

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

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

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

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

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

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

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

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

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

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

Matthieu David: I see. 

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

Matthieu David: I see. 

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

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

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

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

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

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

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

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

Vincent Ghossoub: Both.

Matthieu David: Okay.

Vincent Ghossoub: It went hand in hand. 

Matthieu David: Are you profitable now? 

Vincent Ghossoub: We are if we want to. 

Matthieu David: Okay. I see.

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

Matthieu David: I see. 

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

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

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

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

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

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

Matthieu David: Sorry to interrupt.

Vincent Ghossoub: Yes.

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

Vincent Ghossoub: Did you say Facebook? 

Matthieu David: Yeah.

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

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

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

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

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

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

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

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

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

Matthieu David: Yeah. Okay. 

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

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

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

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

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

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

Matthieu David: Thanks again. 

Vincent Ghossoub: Thank you. 

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

Green products market in China driven by NGOs and the Government

The awareness of green consumption partly arises from the blooming of 3,500 environmental NGOs in China. For example, the NGO Friends of Nature is playing a major role and is precisely orientating consumers in choosing a green product, creating “blacklists” and developing concrete awareness actions. The other main force pushing the fast development of green products is the government. A first large action was undertaken in 2007, when the Communist Party Congress called for a change of all actors of Chinese companies to behave in a more environment-friendly way.

A year later, an environment protection ministry was created and has been producing measures to regulate unacceptable behaviors. Recently China defined clear targets enabling to overcome the challenge of maintaining at the same time such a remarkable rapid economy expansion and more eco-friendly industries. Matching policies promoting green products in China are being undertaken. It included subsidies for energy saving products and advantageous tax rates for low pollution vehicles.

Green products financing as national development strategy

According to China Chain Store & Franchise Association, government is a key stakeholder in promoting consumption of green products in China. Chinese government has strongly committed to promoting the transition to a green economy. In the past 15 years, China has included environmental protection within the national development strategy, promoting an ‘ecological civilization”.

Financing of green products market in China is one of the instruments for environmental changes. During the “13th Five-Year Plan” period (2016-2020) government improved the system of ecological projects financing, including support of green products. Green credits and green bonds are used to help the enterprises which produce eco-friendly products in China. Data show that in 2016, China’s green bond issuance accounted for 40% of the world’s total.  In 2018, China’s green bond issuance exceeded 30 billion U.S.  increased by 62% from the previous year. At the same time, from 2015 to 2018, China’s 21 major financial institutions issued more than $114 billion of green loans. In 2019 the People’s Bank of China announced the program of support of green enterprises by providing green debt financing instruments. Such government subsidies help to enhance market competitiveness of green products.

[Data source: Xinhua Finance ‘Green bonds issued in China 2016-2019’]

The role of environmental NGOs in China is growing

With the country’s increasing emphasis on environmental protection, various environmental NGOs have rapidly developed in China. The Chinese leadership is aware that the government cannot solve the serious environmental problems alone. The most important function of environmental NGOs is to increase environmental awareness among the population. Strengthening consumers awareness enhances their willingness to consume green products in China.

Recently political space in China has opened up for NGO to help government with environmental policies. Over the past decade, about 100 environmental non-governmental organizations have cropped up, not including the thousands of government-organized NGOs. Additionally, about 200 student environmental associations are active on college campuses.

[Data source: China Sustainable Consumption Research Program, ‘Most influential stakeholders in promoting green products consumption in China’, 2016]

Large preference for green products among consumers

Surveys over the market show the Chinese have learned to protect the environment by daily attention. The habit of saving water, food, and electricity is increasingly practiced in households. Easy and effective actions are undertaken with routine. However, this comes from the fact that the Chinese are purchasing green products in order to protect their own health and safety since scandals concerning the food and medical industry frequently occur. In 2017 survey showed that the environmental sustainability characteristic of a product was only ranked after personal health and safety. A perfect example to this statement is the French premium water, Evian that has been extremely successful those last years by branding themselves with health and purity regardless of the expenses and pollution of transportation.

However, from 2015 to 2017 the awareness of green labels increased from 78% to 89%. Additionally, the awareness of green products in China rose from 58% to 83%. In 2017 71% of respondents said they had been spending more on green products in the past year. According to the data released by the China Chain Store and Franchise Association, in recent years, the concept of green consumption has become increasingly trendy in the daily life of Chinese residents.

[Data source: China Sustainable Consumption Research Program, ‘Consumers agree that consumption has impact on the environment’, 2016]

Green products consumption is increasing, but still far behind the world average

Growing environmental concerns pushed consumers’ willingness to buy eco-friendly products in China. The appearance of online shopping platforms in recent years has seemingly helped to boost the consumption of sustainable products. Compared with the offline market, the number of merchants participating in the online market is bigger, which leads to a great variety of products. The online green products market in China is highly differentiated and consumers can easily switch among various products. For example, the biggest shopping platform in China, Alibaba, claimed that the number of consumers who do eco-friendly shopping has exceeded 380 million in the past years.

Besides, green products have been frequently searched on the Alibaba website. Searches for keywords such as formaldehyde-free, phosphorus-free, fluorine-free, and pollution-free all rose by more than 30%. According to JD online shopping platform, the overall sales of green products in 2019 increased by 18% from 2018. Such categories as food, beverage and homecare products grew faster, with growth rates of 195% and 90% respectively.

Green products in China’s FMCG markets

The food, beverages and apparel industries attract big amount of consumers in green products market in China. For example, consumers have gradually abandoned low-cost chemical fiber clothing from the perspective of environmental protection. They are more likely to choose cotton, linen, and silk materials, which are eco-friendly. At the same time, organic retail sales have increased from $4.712 million US in 2015 to $8.087 million US in 2018. Eco-friendly food has gradually become popular in the past two years, and consumers begun to prefer organic rice noodles and oils.

However, despite the fact that consumption of green products in China has increased much in recent years, the per capita consumption is still far behind the world average level. The reason is that green consumption concept started to take shape in China rather late and it requires intensified publicity and institutional promotion.

Growing demand for green products in China

The demand of consumers for various categories of green products in China has risen significantly, especially for food, beverages and homecare goods. 71% of consumers have increased spending on green products in 2016. In households with an income above 20,000RMB, that proportion increases to 76%. According to “China Sustainable Consumption Research Report” in 2017 about half of consumers were willing to pay 5-10% more for eco-friendly products in China, while in 2019, the number of such customers increased to 80%.

[Data source: China Sustainable Consumption Research Program, ‘Chinese consumers’ willingness to pay more for green products’, 2019]

Chinese millennials choose green products

Compared to their parents, millennials in China are more aware of social and environmental issues and care more about the impact of their actions on society. A survey showed that in 2017, 86% of millennials were interested in sustainable investment.  Chinese millennials, especially in urban areas, are highly conscious of brands, quality, and value. They expect, like all young people around the world, to buy something that embodies their lifestyle choice. They expect the brands that they buy from to have an ethical stance both socially and environmentally. Eco-friendly shopping reflects their positive values: caring for the community, the planets, the animals, etc.  JD.com’s research over 266 million customers in China showed that those aged 26-35 accounted more than half (51.8%) of the total volume of green purchases made on JD’s platform in 2017, and accounted for 48.8% of all users buying green products in China.

Consumers in first-tier cities are more likely to shop eco-friendly

In general, consumers in first-tier cities and second-tier cities have different perceptions of eco-friendly products in China. For Chinese people living in urban areas, safety and health were key priorities in choosing a product. Only interviewees in some first-tier cities actively mentioned that the production process of products should also pay attention to environmental protection. In addition to the understanding of the product’s safety and health, consumers in first-tier cities can be more connected with water conservation, recyclability, and environmental benefits. Studies show that as middle-income people predominate in first-tier cities, they are more likely to pay attention to the environment and choose eco-friendly shopping.

Companies go green to attract customers

The amount of people in China who choose the product because the manufacturer is well-known for fulfilling Corporate Social Responsibility commitments grew significantly. In 2017, consumers purchased only 21.53% of products for that reason, while in 2018, it accounted for 43.2%. In 2019, the proportion has reached 52.35%. As more and more people choose green products in China, enterprises start adopting eco-friendly strategies to increase brand loyalty. At present, China’s green manufacturing system mainly involves green factories, products, industrial parks and supply chains. In November 2018, the third batch of green manufacturing lists was released, featuring 391 green factories, 480 design products, 34 parks and 21 prominent supply-chain management enterprises. With the massive rise in fintech in China, companies such as Pintec or Ant Financial started providing microloans for small companies to “go green”.

[Data source: China Sustainable Consumption Research Program, ‘Customers choose companies committed to sustainable production’, 2019]

Emerging green strategies in Chinese companies

Some industries actively contribute to the development of green products market in China. For example, the fashion industry, which is currently the most polluting industry in the world, contributes to the development of green products. For companies in this industry, “sustainable development” is a powerful branding tool. That was the reason for record number of green manufacturers at the textile trade show in Shanghai in 2017. Green manufacturing is no longer the domain of specialist brands. For example, textiles giant Esquel, the world’s largest shirt maker, has put been putting sustainability at the center of its business. With sales of US$1.3 billion (8.5 billion yuan) in 2018, Esquel manufactures over 100 million garments annually for retailers including Marks & Spencer, Ralph Lauren, and Tommy Hilfiger, and has been focusing on building a more sustainable business for both staff and the environment.

Green products in China have high potential in the food industry. More than 11,000 enterprises have obtained more than 17,000 organic product certification certificates. Also, the number of registered organic marks has exceeded 1.7 billion. In the online food delivery industry, the unique example of eco-friendly strategy is Yikou company (full name, Yi Kou Liang Shi). This company uses only ceramic tableware for food delivery. After consumers finish their meals, Yikou collects cutlery and tableware to wash for reuse. The company’s innovative business model closes the loop on plastic in food delivery.

E-commerce giant Alibaba: example of successful eco-friendly strategy

Alibaba platform actively provides eco-friendly products in China, advocates green concepts, and encourages green actions. Gigantic scale of 11.11 shopping festival in China has huge impact on the environment. This caused by the packing materials used in the shipping of items. Cainiao, Alibaba’s logistics network, delivered more than 1 billion packages during 11.11 in 2018. Alibaba’s efficient logistics and accessible recycling programs are critical to reducing waste. Cainiao has introduced smart technology that improves packaging efficiency by 15%. In 2018, over 150 million eco-friendly packages were shipped without using any plastic tape.

In 2019 Alibaba established 40,000 stations along with additional 35,000 stations by its express delivery partners for recycling of packing materials. These stations act as collection and recycling centers for cardboard boxes and other packing materials returned by shoppers.

[Source: Alizila, ‘Shoppers bring their boxes and bags to a Cainiao recycling station’]

Additionally, the company plans to incentivize shoppers to return their packing materials to recycling stations by adding additional points in their Ant Forest app. This app is a green initiative by Alipay which allocates points to its users when they perform low-carbon activities in their daily lives. It includes cutting down the use of paper and plastic, paying their utility bills online, and using public transportation or bicycles instead of driving cars. Over 500 million consumers have activated this mini-app to track their low-carbon footprint through daily actions and have used their collective credits to plant more than 120 million trees in China.

[Source: Alizila, ‘Users click on an icon on the Alipay app to access “Ant Forest,” a game that rewards users who engage in activities with a low carbon footprint’].

Besides, in 2018, Alibaba provided hundreds of millions of environmentally friendly packaging for food delivery. Ele.me, the subsidiary of Alibaba, launched a no-cutlery option in their app for online food delivery. In 2019 they already accumulated 45 million orders from users who voluntarily chose not to use plastic cutlery.

Trend of “Buying Green” still looking for appropriate supply

Green products market in China is not yet overly competitive, and is limited to niche consumers. The market potential for organics and certified products can be expanded through increasing knowledge and trust. Sustainable standards and labelling are one of the effective measures, but they currently suffer from a lack of consumer awareness and recognition.

At the same time, there is currently a lack of supply of green products in China. In 2015 a gap of 44% was estimated since the demand for those goods is increasing very fast. In 2019 the development of green food cultivation and production technology in China was still relatively lagging behind, resulting in a slow growth of supply of organic food. At the same time demand continues to be much higher, what makes the gap between supply and demand in the market expand year by year. One of the reasons for that is lack of funds for green industry. In 2018, China’s total demand for green financial funds was 2.1 trillion yuan, but the total supply was 1.3 trillion yuan, and the gap between supply and demand was 0.8 trillion yuan.

China’s green products industry needs more investment

According to Xu Shufan, deputy head of the science, technology and standards department of the Environmental Protection Ministry China’s environmental protection industry can be reached fast, “but the industry still needs more investment from the market, rather than simply waiting for governmental investment”.

The research from 2018 showed that food and drinks were the most popular category among green products in China, followed by household cleaning products. Clothing and accessories were joint third in the list, along with personal care products. However, for the moment, many sectors are still waiting to awaken and set off with the population awareness concerning pollution and the global challenge of global warming.

Daxue Consulting can provide you support in entering the growing market of green products in China. We conduct all the market research and consulting services you may need, such as potential analysis, cost analysis, implementation feasibility etc. To know more about the Chinese green products market, do not hesitate to contact our dedicated project managers by email at dx@daxueconsulting.com.

Author: Valeriia Mikhailova

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Distribution channels fully controlled by brands

[Source: daxue consulting, “Different distribution channels for branding in China”]

There are three main kinds of distribution channels for branding in China. Being present on third party e-commerce platforms is the most expensive and least controllable.

With social e-commerce’s popularity, brands can control better, but it is still hard to collect first-hand users’ data. Brand-owned channels have the most highly independent level, which means it can connect directly to Chinese consumers with full control on all processes. It would be the most cost-effective way, as well as the new rising trend for branding in China.

Branding to sell directly to consumers in China

The market environment is friendly for selling directly to Chinese consumers in 2020

In July 2019, the import tariff in China was announced to decrease, covering 1,449 product items. The average tariff rate for clothing, shoes, hats and sports-related products was reduced from 15.9% to 7.1%. The decrease in import tariffs makes brand-owned channels more attractive by enclosing the price gap with the market.

E-commerce platforms becoming crowded

[Source: daxue consulting, “Logic of DTC strategy”]

Many global brands are now trying to connect directly to Chinese consumers instead of only relying on Chinese B2C e-commerce platforms. It is mainly because there isn’t much room on a large marketplace’s website to differentiate itself with a unique proposition for the Chinese consumers. Besides, brands can no longer make huge profits on marketplaces where the competition is  increasingly intensive. However, brands can have a bigger control of branding, customer data, as well as gain higher margins through direct-to-consumer (DTC) channels.

Leveraging the popularity of Chinese social media

[Source: McKinsey, “Social direct-to-consumer (DTC) channel adoption”]

In addition to giving brands a platform to leverage social elements to build consumer awareness and engagement in third-party channels, social media now also offer new Direct-to-Consumer (DTC) channels to influence and engage with consumers. It is the case of WeChat mini-programs, which have grown from nothing to driving one-fourth of the awareness in the digital consumer’s decision journey.

Establishing independent brand image in China should be taken into consideration

Direct-to-Consumer (DTC) channels are the most effective and efficient ways to promote products to Chinese consumers and build company recognition. Brands can definitely get benefits from connecting directly to Chinese consumers as below:

More cost-effective marketing

[Source: daxue consulting, “Increasing cost on marketplace for branding in China”]

With higher platform fees and increasing user acquisition costs on public marketplaces, only 10-20% of brands are making profits on Tmall. Thus, being independent and building brand-owned ecommerce channels may be more worthy of investment.

Build truth before purchase

Cross-border marketplaces in China are often criticized for offering fake goods. Chinese consumers tend to purchase products through brand-owned channels where they can ensure that the brands have full control on the whole retail process.

Strengthen personal relationship after purchase

As brands connect directly to Chinese consumers, they achieve stronger growth and become more innovative. Successful brands enjoy benefits impacting their entire value chain: higher value chain margins, satisfied consumers, first-hand consumer insights, and higher entry barriers for competitors.

[Source: daxue consulting, “Benefits of direct-to-consumer (DTC) channel”]

Empower data integration to optimize products and services

[Source: daxue consulting, “Logic of empowering data integration”]

Third-party platforms currently allow users to login with WeChat ID, which means the sharing data could be collected by WeChat ecosystem as well. Integrating WeChat CRM with Enterprise CRM, a single  key identifier can bind a WeChat platform (whether OA, MP or third-party site) with an existing CRM. Then, brands are able to build their own CRM system and connect directly to Chinese consumers. So, it will be easier for brands to collect first-hand customers’ insights and then efficiently optimize their services or products.

Brands that manage to have an independent branding strategy in China

As brands unfold their branding strategies in China, they need to play with a mix of levers in two fundamental axes: Improve brand power and establish a direct distribution model.

Brands need to smartly choose the most relevant initiatives, which have the highest impacts according to their branding strategies and choose suitable strategic objectives.

[Source: Benjamin Maupetit, LinkedIn Pulse, “Initiatives related to different strategic objectives for branding in China”]

To improve brand awareness and foster brand loyalty in China, companies can learn from these successful examples and focus on connecting directly to consumers and offering distinctive value proposition.

Perfect Diary: A strong connection with end consumers

[Source: daxue consulting, “Character image of Xiaowanzi”]

Perfect Diary created a virtual KOC character Xiaowanzi小完子, who has similar characteristic with Perfect Diary’s targeted consumers and plays the role of a customer’s beauty consultant, friend, provider of benefits-related information and real-time customer service. This KOC character can help the brand build closer relationship with consumers. That way, Perfect Diary makes communication more effective. In order to reach more customers, Perfect Diary leveraged group control technologies to create a personal account matrix to provide customized service and connect directly to Chinese consumers.

Beast: Offers a distinctive value proposition

Beast offers a distinctive value proposition through storytelling, which also brings romance and special meanings to their products. Every bunch of flowers is customized for each customer who will then become the story owner. By telling stories, Beast differentiates itself with a unique proposition for the Chinese consumers and drives emotional engagement.

Louis Vuitton: Sell directly to consumers

[Source: daxue consulting, “Louis Vuitton sells directly to Chinese consumers”]

With little presence on China B2C E-commerce platforms, LV’s official website and app have been put in the central position of Louis Vuitton China strategy. Louis Vuitton China ‘s official website has the main function of selling directly to Chinese consumers with more brand values, convictions and brand vision.

Intimate branding through brand owned channels

As a result, Perfect Diary, Beast and Louis Vuitton have connected deeply with their consumers, and developed their direct sales, reducing their exposure on China’s large e-retailers at the same time. Chinese B2C e-commerce giants like Tmall and JD have become the intuitive destinations for most brands. But establishing brand-owned channels can help brands effectively deal with these evermore-serious challenges of soaring consumer acquisition costs, increasingly sophisticated demands and needs, loss of loyalty, and loss of ownership to e-commerce giants.

If you want to learn more about how moving closer to your consumers, email our project team at dx@daxueconsulting.com to start working on your brand strategy for the Chinese market.

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This article Branding in China: Connecting directly to Chinese consumers is the first one to appear on Daxue Consulting - Market Research China.