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WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
WECHAT E-COMMERCE:

WHAT YOU NEED TO KNOW BEFORE 2019
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
HANG ON,

JUST BEFORE YOU GET INTO IT…

 This report gives you leading insight into       However, this report isn’t necessarily for
 WeChat’s e-commerce landscape.                   everyone.

 If you read it cover to cover, you’ll be up to   The content goes deep, quick.
 speed on this year’s key trends, opportunities
 and challenges.                                  As such, the report assumes you have a working
                                                  knowledge about e-commerce in China, such as
 That’s my promise to you.                        the major platforms and shopping festivals.
                                                                                                   2
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
WECHAT E-COMMERCE:

ESSENTIAL CONTEXT

                     3
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
THIS SECTION’S TL:DR

 1                                 China’s e-commerce landscape is cut-throat.
     10% “WINNERS”, 90% “LOSERS”

                                   On large e-commerce platforms, only 10% of
                                   stores make serious money.
 2   INTENSE COMPETITION
                                   Slower smart phone user growth and a growing
                                   number of e-commerce platforms continuously
 3   RISING COSTS                  push up customer acquisition costs.

                                   Against this backdrop, big and small players
 4   LOOKING TO WECHAT             alike are looking to WeChat’s ecosystem for
                                   growth.

                                                                                  4
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
10% “WINNERS”, 90% “LOSERS”

                              The 80/20 rule doesn't apply to e-commerce.

                              Instead, it's the "10% W, 90% L" rule.
    IN E-COMMERCE,
  ONLY 10% OF PLAYERS         This holds only 10% of online stores generate
                              enough traffic to make serious money
    AND SKUs MAKE             (“winners”). The remaining 90% struggle to eke
    SERIOUS MONEY             out an existence (“losers”).

                              The "10% W, 90% L" rule can also apply to an e-
                              commerce store’s SKUs and marketing.

                                                                                5
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
10% “WINNERS”, 90% “LOSERS”

  SALES REVENUE DISTRIBUTION ON TMALL
                                              ANNUAL SALES: RMB >10 MILLION
                                         5%

                                         5%   ANNUAL SALES: RMB 5-10 MILLION

                                        90%   ANNUAL SALES: RMB
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
10% “WINNERS”, 90% “LOSERS”

SALES REVENUE DISTRIBUTION ON TAOBAO
                                             ANNUAL SALES: RMB >240,000
                                        6%

                                       94%   ANNUAL SALES: RMB
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
INTENSE COMPETITION

China’s internet population is still growing, but it’ll soon reach the end of strong single-digit growth.

CHINA’S INTERNET POPULATION (2013-18), MILLIONS

                                                                                                                   802
                                                                                                       751
                                                                                                710
                                           632                            668                                 7%
            590
                                                                                           6%
                           7%

            2013                           2014                           2015                  2016   2017        2018

Note: All figures rounded to nearest million; figures taken from June of each calendar year.
Source: China Internet Network Information Center, 2018,
                                                                                                                          8
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
INTENSE COMPETITION

Around 75% of China’s internet users are serviced by 35 apps or less.

NUMBER OF APPS PER CHINESE SMART PHONE USER (2016-2017)

                                                                                     DEC 2016   DEC 2017

        27% 26%                                                         26% 27%
                                            25% 24%

                                                                                  12% 13%
                                                                                                  10% 10%

               45

Note: All percentages rounded to nearest whole number.
Source: Quest Mobile, 2017, Quest Mobile ‘TRUTH’ Data Set (Dec 2017).
                                                                                                            9
WECHAT E-COMMERCE: WHAT YOU NEED TO KNOW BEFORE 2019 - netdna-ssl.com
INTENSE COMPETITION

Consumers are using a greater variety of e-commerce platforms.

NUMBER OF E-COMMERCE APPS PER CHINESE SMART PHONE USER (2016-2017)

        48%                                                                                                    DEC 2016   DEC 2017

                     29%
                                           23% 21%                                        22%
                                                                              16%                                  15%            14%
                                                                                                          9%
                                                                                                                            5%
                 1                                  2                                 3                        4                 >5

Note: All percentages rounded to nearest whole number; some totals may not add to 100% due to rounding.
Source: Quest Mobile, 2017, Quest Mobile ‘TRUTH’ Data Set (Dec 2017).
                                                                                                                                        10
RISING COSTS

  Major e-commerce platforms have struggled to keep pace with rising customer acquisition costs.

  TMALL PLATFORM COST OF CUSTOMER ACQUISITION VS                                            JD PLATFORM COST OF CUSTOMER ACQUISITION VS
  AVERAGE REVENUE PER USER (2015-17), RMB PER USER
450

                                                                                            AVERAGE REVENUE PER USER (2015-17), RMB PER USER
                                                                                            450

                                                                                            400
400

                                                                                                     CAC
                                                                                            350

          CAC
350

300
                                    361                                                     300

250
          ARPU                                                   310                        250
                                                                                                     ARPU

                                                                          225                                                                            225 237
                                                                                            200
200

150
                                                                                            150
                                                                                                                               188 170
                                             148                                                   134
        122 134
                                                                                            100
100

 50
                                                                                             50
                                                                                                             98
                                                                                              0

  0

             2015                        2016                        2017                              2015                        2016                   2017

  Note: All figures rounded to nearest RMB; CAC = Cost of Customer Acquisition; ARPU = Average Revenue Per User; ARPU data is taken from Q1 each year.
  Source: Company Financial Data;
                                                                                                                                                                   11
RISING COSTS

Even e-commerce upstarts can’t escape rising customer acquisition costs.

PINDUODUO MAU (Q1 2017 - Q1 2018), MILLIONS

                                                                     166
                                                                               THAT’S GREAT, BUT…
                                                           141
                                                                                   16x
                                                                              INCREASE IN NON-GAAP
                                                  71                          SALES AND MARKETING
                                                                                EXPENSES BETWEEN
                                                                               Q4 2017 AND Q1 2018
                                  33
          15
      Q1 2017                 Q2 2017           Q3 2017   Q4 2017   Q1 2018

Note: All figures rounded to nearest million.
Source: Pinduoduo’s SEC Filing (Form F-1).
                                                                                                     12
LOOKING TO WECHAT

Strong             sales growth shows potential for continued e-commerce growth inside WeChat.

ESTIMATED SALES IN WECHAT THROUGH                                           (MAR 2018), BILLION RMB

                                                                                                                                 522

                                                                                                                          360

                                                                                        182
               24                                   95

             2013                                  2014                                 2015                              2016   2017

Note:     includes individuals and platforms transacting in WeChat’s ecosystem; all figures rounded to nearest billion.
Source:
                                                                                                                                        13
LOOKING TO WECHAT

WeChat Mini-Programs have boosted and diversified large e-commerce players’ traffic.

DISTRIBUTION OF E-COMMERCE PLATFORM TRAFFIC (MAR 2018), MILLIONS

                   529
                                                                          APP MAU   TOTAL MINI-PROGRAM ENTRIES

                                                              144
                                                                             229
                                                              233

                                                                                                    70
                                                                              86                    53
                TAOBAO                                         PDD            JD                    VIP

Note: All figures rounded to nearest million.
Source: Quest Mobile, 2018, Quest Mobile ‘TRUTH’ Data Set (March 2018).
                                                                                                                 14
WECHAT E-COMMERCE:

IMPORTANT DEVELOPMENTS IN 2018

                                 15
THIS SECTION’S TL:DR

 1   PDD INSPIRES                  PDD’s ascendancy is a highly-covered growth
                                   story. However, its most long-lasting impact is
                                   the extent to which it ‘infiltrated’ WeChat Chat
                                   Groups and Moments. Brands and other e-
                                   commerce platforms have been quick to take
 2   MINI-PROGRAMS GETTING THERE   note.

                                   618 proved that Mini-Programs will be an e-
                                   commerce fixture. This further added hype
                                   around WeChat e-commerce, which already
 3   EVERYONE’S DIVING IN          attracted large and small e-commerce players,
                                   and a flurry of investment dollars.

                                                                                      16
PDD INSPIRES

PDD brought many previous e-commerce innovations to bear inside the WeChat ecosystem.

                                                     HERO SKU
      LIMITED-TIME OFFERS                                                       LUCKY DRAW
                                                     DISCOUNT

                                        SHARE TO                    DAILY CHECK-IN
                                       GET DISOUNT                    FOR CASH

                                                                                             17
PDD INSPIRES

PDD systematically ‘infiltrated’ individual chat, group chat and Moments.

      INDIVIDUAL CHAT           GROUP CHAT              MOMENTS
                                                                            PDD USES WHAT IS KNOWN
                                                                               AS        (‘SOCIAL
                                                                                   FISSION’).

                                                                              THIS TACTIC TAKES SOME
                                                                                PROFIT MARGIN AND
                                                                            INVESTS IN INCENTIVES (RED
                                                                               PACKETS, DISCOUNTS,
                                                                             FREEBIES, SPECIAL OFFERS)
                                                                             FOR PRODUCT LINKS TO BE
            ‘INVITE TO            SHARE FOR              MOMENTS                SHARED IN CHAT OR
           WIN’ OFFERS            DISCOUNT                 ADS                       MOMENTS.

                                                                                                         18
PDD INSPIRES

Brands are now rethinking how they can get more ’air time’ in individual chat, group chat and Moments.

                             LUCKIN COFFEE                            FM

                           TRY YOUR FIRST CUP              PAID CONTENT CAN
                           OF COFFEE FOR FREE              BE LISTENED TO FOR
                               WHEN YOU                    FREE, WHEN SHARED
                           DOWNLOAD THE APP                    TO A FRIEND

                               SHARE APP
                                                           IF FRIEND GOES ON
                             DOWNLOAD LINK
                                                           TO PURCHASE FULL
                            WITH FRIENDS SO
                                                           SUBSCRIPTION, CAN
                           THEY CAN ENJOY THE
                                                           RECEIVE DISCOUNT
                             SAME OFFER TOO

                                                                                                         19
MINI-PROGRAMS GETTING THERE

Mini-Programs service the same fields that apps do, but traffic is still app-centric.

DISTRIBUTION OF USER TRAFFIC ACROSS APPS AND MINI-PROGRAMS (JULY 2018), MILLIONS

               639
                                                                                                                               APP   MINI-PROGRAM
                                                  528
                                                                                      525
                                                                                                                          360              550

               252                                264                                                                     234
                                                                                      175                                                  42

        E-COMMERCE                      LIFESTYLE SERVICES                      VIDEO GAMES                             TRAVEL            VIDEO

Note: This chart includes data from the Top 100 apps with an accompanying Mini-Program; all numbers rounded to nearest million..
Source: Quest Mobile, 2018, Quest Mobile ‘TRUTH’ Data Set (August 2018).
                                                                                                                                                    20
MINI-PROGRAMS GETTING THERE

This year’s 618 signalled Mini-Programs will be a permanent fixture in WeChat’s e-commerce landscape.

            TOTAL MINI-PROGRAM USERS OVER 618                     NEW MINI-PROGRAM USERS OVER 618

                          164 MILLION                                    53 MILLION
         INCREASE IN ORDERS VIA MINI-PROGRAMS                      AVERAGE MINI-PROGRAM USE TIME

                                   66x                                2 MINS 48 SECS
Note: This year’s 618 ran between 1 June 2018 and 18 June 2018.
Source: Aladdin Index and Goldman Sachs analysis.
                                                                                                        21
MINI-PROGRAMS GETTING THERE

Key e-commerce players are still experimenting with different Mini-Program functions and arrangements,
with different results.

                                                            RED                                  JD

                                                 ONE MINI-PROGRAM                         SIX MINI-PROGRAMS

                     4                            STRIPPED BACK
                                                  FUNCTIONALITY,
                                                                             92           DIFFERENT SERVICES
                                                                                           HAVE OWN MINI-
             MILLION                            COMPARED WITH APP          MILLION             PROGRAM

             MP USERS                                                      MP USERS
                                                35% INCREASE IN RED                       26% OF JD’S USERS
                (JUNE 2018)                       MINI-PROGRAM              (JUNE 2018)    USED ONE OF ITS
                                                USERS BETWEEN MAY                         MINI-PROGRAMS IN
                                                  AND JUNE 2018                               JUNE 2018

Source: Quest Mobile, 2018, Quest Mobile ‘TRUTH’ Data Set (August 2018).                                       22
EVERYONE’S DIVING IN

All major e-commerce players have deployed either a Mini-Program, support for   , or both.

  E-COMMERCE
     PLAYER

     WECHAT          WS             MP               MP               MP               MP
  E-COMMERCE
      PLAY

 MP   Mini-Program                  WS                                MP        WS      WS

 WS   Support for

                                                                                             23
EVERYONE’S DIVING IN

In H1 2018, investors followed large e-commerce players into WeChat e-commerce.

                                              H1 2018 WECHAT E-COMMERCE INVESTMENT
             COMPANY                                  DESCRIPTION       FUNDING ROUND    AMOUNT RAISED
                                                               SaaS         ANGEL          RMB 100M
                                              LUXURY FASHION PROVIDER      SERIES A         USD 22M
                                                        S2B2C MALL         SERIES A        RMB 100M
                                              PLATFORM + SUPPLY CHAIN      SERIES A         RMB 30M
                                             SECOND-HAND GOOD SWAP        SERIES A & B    UNDISCLOSED
                                                               SaaS        SERIES B         USD 120M
                                                           GIFTING         SERIES C        RMB 100M
                                                               SaaS        SERIES C         RMB 30M
                                                       SUPPLY CHAIN           N/A          RMB 100M

Source: Company Data, Aladdin Index, Goldman Sachs analysis.

                                                                                                         24
WECHAT E-COMMERCE:

WHAT’S AROUND THE CORNER IN 2019

                                   25
THIS SECTION’S TL:DR

     KOLs PLACE PRESSURE ON    In 2019, I think there’ll be three potentially
 1
     LUXURY E-COMM PLATFORMS   disruptive changes to WeChat e-commerce:

                               Firstly, KOL Mini-Program stores will become
                               one of the top online channels for luxury
                               products.
 2   EVERYONE’S A
                               Secondly, a highly-social, highly-gamified form
                               of      will encourage more transactions
                               between friends.

                               Thirdly, sharing may become a mainstream way
 3   THE ¥0 STORE
                               to buy things in WeChat.

                                                                                 26
KOLs PLACE PRESSURE ON LUXURY E-COMM PLATFORMS

LOOK has quietly snapped up leading fashion and beauty KOLs.

                                LOOK                               LOOK KOLs’ TOTAL ACTIVE FAN BASE

                                                                          20 MILLION
                             PROVIDES TECH,
                               MERCH AND
                           LOGISTICS SUPPORT
                            TO WECHAT STORE

                                                           TOP 10 LOOK KOLs’ TOTAL MONTHLY SALES
                           SERVICES OVER 100
                                 KOLS

                              COMPLETED
                            USD 22 MILLION
                                                               ~ RMB 50 MILLION
                            SERIES A IN 2018

Source:   22 March 2018,                        1 November 2017,                                      27
KOLs PLACE PRESSURE ON LUXURY E-COMM PLATFORMS

LOOK’s near monopoly on top talent will make it one of the top online luxury channels.

                      LOOK’S KOL TALENT LINEUP                                                     TOP THREE ONLINE LUXURY CHANNELS (2019)*

                  LOOK SERVICES 30 ‘TIER ONE’ KOLs,
                 WITH 90% CONTRACTED EXCLUSIVELY

                                                                                                        66%*                          62%*
                                                                ANNYSTYLEONTOP
                                                                                                                                                                     57%*
   GOGOBOI

  FRESHBOY                            BOYNAM                                                    BRAND WEBSITE                  BRAND WECHAT                KOL WECHAT MINI-
                                                                                                                               MINI-PROGRAM                    PROGRAM
Note: Figures with an asterisk (*) represent the author’s prediction of results in Bain Luxury Report 2019; total exceeds 100% as consumers can choose multiple channels.
Source:        25 April 2018                                                                                                                                                  28
EVERYONE’S A

   dramatically lowers the barriers for       to start their own Mini-Program Store.

                                                      TAILOR HOW PRODUCTS ARE PRESENTED AND SOLD

                          OPEN YOUR OWN
                           MINI-PROGRAM
                          STORE IN < 1 MIN,
                            USING       ’s
                          STORE TEMPLATE

                            SELECT WHAT
                         PRODUCTS TO SELL,
                           AT WHAT PRICE

                         ~10% COMMISSION
                         ON ANYTHING SOLD

                                                                                                   29
EVERYONE’S A

Coffee Box showed how brand, product and gamification can combine for a simpler, more social   .

                               COFFEE BOX                     VIRTUAL COFFEE SHOPS OPENED

                              CUSTOMISE OWN

                                                                > 500,000
                              VIRTUAL ‘COFFEE
                                   SHOP’

                               FRIENDS RECEIVE
                             DISCOUNTED COFFEE
                               WHEN THEY BUY               % OF COFFEE SHOPS THAT MADE SALES
                                  FROM YOU

                               YOU GET FREE
                             COFFEE WHEN YOU
                             HIT ‘SALES TARGET’
                                                                       10%
Source:   , 7 August 2018,                                                                         30
EVERYONE’S A

In 2019, we’ll see the more social, less commercial   extend to all kinds of products and services.

                                          FOOD FOR THOUGHT

                                                                                       HOW CAN
      WILL THIS CHANGE          HOW TO PUT THIS        DO YOU INCENTIVISE
                                                                                   CUSTOMIZED STORE
    HOW WE UNDERSTAND           MODEL IN BRAND            SELLERS WITH
                                                                                    OWNER AVATARS
                ?              ADVOCATES’ HANDS?       GAMIFICATION ONLY?
                                                                                       BE USED?

                                                       ARE THERE ANY LEGAL
     WHAT ARE THE MOST          IS THIS HOW BRANDS                                 DO SELLERS SEE THIS
                                                           BARRIERS TO
     INTUTIVE PRODUCTS            CONNECT BETTER                                    AS A GAME OR A
                                                        COMMISSION THAT
      FOR THIS MODEL?                WITH    ?                                         BUSINESS?
                                                        CAN BE OFFERED?

                                                                                                         31
THE ¥0 STORE

We’ve seen different ways ‘share to pay’ has been applied to products and services.

                                                                                           PDD
                             GRADED READER
                                                                                      EVERY SHARE AND
                              SUBSCRIPTION
                                                                                      ENTRY RESULTS IN
                                (RMB 149)
                                                                                       FIXED AMOUNT
                                                                                       TAKEN OFF THE
                                                                                        RETAIL PRICE
                             GET YOUR MONEY
                            BACK IF YOU SHARE
                              AN ARTICLE YOU                                          CAN SHAVE PRICE
                              READ TO WECHAT                                            DOWN TO $0
                            MOMENTS EACH DAY
                              OVER THE LIFE OF
                             THE SUBSCRIPTION                                         APPLIES TO SELECT
                                                                                         SKUs ONLY

                                                                                                          32
THE ¥0 STORE

In 2019, we’ll see new market entrants rely heavily on ‘share to pay’ to create buzz and hero SKUs.

                                          FOOD FOR THOUGHT

     WHAT PRODUCTS ARE         WHAT SERVICES ARE           HOW CAN THIS BE              WHAT OTHER
     BEST SUITED TO THIS       BEST SUITED TO THIS         USED TO CREATE             ACTIONS COULD
           MODEL?                    MODEL?                 A HERO SKU?             TRIGGER DISCOUNT?

                                DO YOU GIVE ‘SHARE           WILL WE SEE A             WILL WE SEE A
     DOES THE CONTENT
                                 TO PAY’ TO NEW             FLAGSHIP THAT             PLATFORM THAT
     SHARED EVERYDAY
                               CUSTOMERS OR LOYAL            ALLOWS THIS                ALLOWS THIS
       DIFFER? HOW?
                                   CUSTOMERS?               FOR ALL SKUs?              FOR ALL SKUs?

                                                                                                        33
HOLD UP,

JUST ONE FINAL THING

This report distils observations about a large,
complex and rapidly-evolving ecosystem.

If you’re looking for more detail on something
in this report, scan the QR code on the right and
submit a question.

                                                    34
YOU’RE ALL UP TO DATE NOW!

THANKS FOR READING

ABOUT THE AUTHOR:

Michael Norris is presently Research Manager at Resonance      Michael has quickly developed a reputation as one of the
China’s consumer insights, strategy and digital innovation     most dynamic and thoughtful commentators on China’s
team, SMART.                                                   digital landscape.

He delivers breakthrough insights and analysis to local and    You can find more of Michael’s commentary on LinkedIn:
international brands, including Harbin Beer, Unilever, Shell
and Tiffany.                                                   https://www.linkedin.com/in/michaeljohnnorris/

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