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Are Taobao and JD being replaced?

An army of Gen Z'ers are driving an era of social commerce powered by networks of local tastemakers – here's why luxury brands need to understand ‘decentralised e-commerce’ – and quickly

by Celine Tang
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China has always been a disruptor in the e-commerce and social commerce sectors. Now, platforms like Douyin and Xiaohongshu are disrupting established market leaders like Taobao and JD, writes Jack Porteous from Samarkand Global

China is the world’s leading e-commerce market, accounting for more than half of the online retail sales in 2021. With a population of 780 million digital consumers, e-commerce sales hit £2.3 trillion.

Chinese consumers are also changing faster than their peers in other markets. Consumers’ purchasing behaviours are continuously in flux and that presents a constant challenge for international brands looking to engage with their customers. The rise of 232.68 million Gen Z’ers as a driving consumer force is setting new trends in communicating with targeted customers.

launchpad CBBC

China’s cross-border e-commerce (CBEC) ecosystem has long been dominated by two major B2C platforms: Alibaba’s Tmall Global and Tencent-backed JD Worldwide. Challengers have come and gone – examples include Kaola, ultimately acquired by Alibaba from Netease in 2019 and now reportedly down to just 20 staff, or smaller players like Secoo, whose rise and fall has been much talked about after a promising start and major IPO. The barriers to launch for international brands remain stubbornly high, and the core challenges include customer acquisition and the often long wait for profitability after launch.

The intensification of these challenges and fiercer competition in a lower-growth environment, alongside cultural and socioeconomic factors, is leading to an enormous shift in CBEC towards a more diverse, multifaceted future. This can be referred to as ‘decentralised e-commerce’ – social commerce powered by networks of local tastemakers, taking place wherever consumers are spending their time.

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What is the outlook for e-commerce in China?

Due to Covid disruption in multiple cities across China, alongside other challenges including high youth unemployment, difficulties in the real estate sector and a potential global recession decreasing demand for Chinese goods, the country has experienced a drop in consumer confidence in 2022. At the time of writing, it remains to be seen what future policy course China will choose, and how quickly it will open up to the rest of the world and loosen Covid controls.

This means that international brands can no longer rely on their previous assumptions when entering China. It was previously common to feel a halo effect from listings in major global retailers in the world’s megacities. However, thanks to Covid travel restrictions, the proportion of luxury purchases made overseas shrank from 55% in 2019 to just 10% in 2021. Correspondingly, e-commerce purchases of luxury goods trebled from 13% to 39% in the same period.

How trust has driven growth in China’s CBEC landscape

Around 90% of sales happen on four leading marketplaces, but even for these, consumer trust remains staggeringly low, with the best rated platform scoring just 39/100 on ‘trust in product authenticity’ in a 2019 survey. Consequently, recommendations from trusted vendors, friends, family or other credible sources such as micro-influencers is an incredibly important part of the purchasing journey. This journey often takes consumers through multiple social platforms, online and offline locations, official brand websites, and review sites.

Social commerce has arisen as an antidote to the epidemic of mistrust. This vast word-of-mouth or recommendation-driven sales network, where the vendor is not the brand-owner, but a friend, family member, influencer, or celebrity, is set to grow to $474 billion by 2023.

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What are the regulatory challenges facing CBEC in China?

Alibaba is the tallest tree in the Chinese e-commerce forest, and it has consequently borne the brunt of the cyclone of regulatory enforcement sweeping the sector. In April 2021, the company was fined more than USD $2.75 billion for monopolistic behaviour, and in its FY22 annual report, described the external environment as the “most severe in decades”. This regulatory focus has allowed others to grow into the gap as Alibaba adapts its business model under increased scrutiny.

Some of the best-known faces who operate on Alibaba platforms like Taobao have also faced their own challenges. Successful live streamers Austin Li and Viya (arguably the most famous live streamers on the planet) have both suffered calamitous falls from grace, with Viya removed indefinitely from the platform in Dec 2021 for tax evasion, and Li – also known as the ‘Lipstick King’ Li Jiaqi  for three months from June 2022 for ‘technical issues’ related to political sensitivity.

The sudden and unexpected fall of these major salespeople left a lot of brands with stock in the wrong place, and often without alternative channels available as a ‘Plan B’.

Chinese consumers are also changing faster than their peers in other markets, presenting a constant challenge for international brands looking to engage with their customers. — Celine Tang, CBBC

How is the CBEC landscape changing?

Growth looks hard to come by for Tmall Global at the moment. Merchants should be wary of seeing it as their sole route to market – even as growth stutters, the platform adds thousands more merchants, intensifying already fierce competition for consumer eyeballs. Alibaba’s first ever quarterly contraction in FY23 Q1 (down 0.1% year-on-year) points to a period of restructuring for the company as it adapts to a new regulatory environment and competitive set – including JD, Douyin (known as TikTok overseas), Kuaishou and WeChat.

In 2021, Bytedance’s short-video social media and eCommerce platform Douyin overtook Alibaba’s to become the dominant platform for live streaming e-commerce. During the early stages of the Covid outbreak in 2020, Douyin’s time spent on platform grew to 88 minutes a day among its active user base. These consumers translated into sales growth, with Caixin reporting that live streaming e-commerce on Douyin topped RMB 800 billion (£95.8 billion) in 2021, more than double its 2020 figure. Alongside Douyin’s growth, rival short-video platform Kuaishou has taken a sizeable share of the market among cheaper products and in lower-tier cities.

In 2022, Alibaba’s long-time rival Jingdong (JD) posted its best-ever figures during its flagship e-commerce festival 618. It is notable that luxury skincare brands are starting to take to the platform in greater numbers – in mid-2022, La Mer opened an e-store, joining other Estée Lauder brands including Jo Malone and Bobbi Brown.

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Tencent’s super-app WeChat, with its Mini-Program functionality, continues to be the natural home for influencers looking to monetise their following and open an eCommerce store. Public figures favour the closed network of WeChat where they can push long-form content to loyal followers and convert product recommendations into revenue. WeChat made tentative steps into live streaming in 2020, and during 2022 has begun to centre this feature more prominently within the app. The platform has goals to make serious inroads into this market to compete with Douyin and Kuaishou.

In response, Alibaba has been making the small-business-to-consumer marketplace Taobao increasingly adaptable. The platform, whose name in Chinese has come to mean ‘to shop online’ in the way that Google is used as a synonym for search in English, has a vast user base and an entrepreneurial network of vendors who can adapt in real time to consumer shifts. Their scale varies from a few hundred to a few hundred thousand followers, and many are influencers in their own right. Taobao provides annual rankings of stores based per category on their sales performance, reputation for authenticity, and customer service scores – further encouraging store operators to provide a reliable, professional, and trustworthy service to their customers. Many also regularly publish content to their store subscribers introducing new brands or products or alerting them to upcoming sales events.

An often-overlooked channel is direct sales through brands’ own global .com sites. Given the reduction in tourism between China and the rest of the world, consumers look to retailers’ and brands’ websites to cross-check claims and get a full brand experience. However, many merchants are still not making simple adjustments such as adopting Chinese payment methods like WeChat Pay and Alipay or ensuring sites load quickly in China to cater to this group. The relatively low-cost investment in these adjustments is often well worth it because they typically have a higher conversion and average basket than home market consumers.

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Time to move beyond ‘hero SKUs’?

A strength of Tmall Global’s marketing functionality and algorithm is the ability to create hero products – which can unlock the ability to scale sales on specific SKUs (products) quickly. Alibaba’s own case studies point to this as the correct tactic to succeed on the platform.

For niche brands without the budget to continually elevate top-selling products or build new heroes, this creates longer-term issues of over-reliance on one SKU and the need for frequent heavy discounting during shopping festivals like Singles’ Day. The nature of decentralised e-commerce provides brands with a golden opportunity to diversify their range – focusing on hero SKUs on volume channels such as Douyin while working with specialist Taobao and WeChat vendors to expand their range.

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Opportunities for brands among increased competition

Leveraging the established audiences of social commerce vendors like Douyin and Xiaohongshu is a vital tactic in any international brand’s playbook in China. It is also essential to look for growth opportunities across all platforms to meet the consumption patterns and preferences of a changing shopper. As emerging platforms look to expand their brand portfolio, there is a burgeoning opportunity for international merchants to diversify their sales channels.

From a risk management perspective, a decentralised approach to e-commerce avoids the difficulties of being overly reliant on one channel or influencer to drive revenue. Different challenges arise around pricing management and ensuring no SKUs become over-distributed and devalued. Both can be managed with adequate planning and resource.

Chinese consumers have already changed their purchasing behaviour. International brands cannot afford to ignore China’s trend of decentralised e-commerce.

Click here to read Samarkand Global’s new whitepaper “Understanding China’s Decentralised eCommerce Landscape”, with foreword by CBBC China Business Advisor (Consumer Retail & eCommerce), Celine Tang.

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