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Analysis

How Xiaohongshu Got Alibaba and Tencent to Invest

Jun 5, 2018 by Yun Nie
How Xiaohongshu Got Alibaba and Tencent to Invest

For fans of Produce 101, the most frequently used mobile application must include Xiaohongshu, a review and shopping app that provides users a platform to review foreign products, leave travel tips, shop for overseas luxury goods, etc.

On June 1st, the company raised over USD 300 million in a new round of funding that was expected to surpass USD 3 billion. Alibaba remained the leading investor, followed by GSR Ventures, Tencent, GGV Capital, Genesis Capital, Tiantu Capital, as well as other influential individuals and organizations.

Funds raised in this round, according to the company, will be utilized to expand and improve the company, upgrade products, and construct infrastructure, especially algorithm, in preparation of a boom in users.

Content-centric online retailer

Xiaohongshu was initially an e-commerce platform to purchase cosmetics, beauty products, and nutrition supplements from overseas, directly on the app which also had products reviews and shopping tips. However, as the “golden age” of online retailers came to an end, there began a downward trend – the market began to shrink and Xiaohongshu distanced itself from the word, “online retailer”.

Co-founder, Qu Fang, publicly stated that Xiaohongshu was not an online retailer company because it was too easy for online retailers to encounter bottlenecks. Now, the slogan of the company has been changed to “marked my life”, highlighting its online UGC content sharing community.

Xiaohongshu owns Xiaohongshu online community and Xiaohongshu online store, each respectively providing UGC content sharing and overseas shopping services.

In the online community, users are able to share make-up techniques and beauty products in the form of videos and pictures. The most effective catalyst to improve community activity is celebrities, such as, Fan Bingbing who applied a facial mask on camera and Qi Wei, who got made-up while being streamed live.

In addition to popular topics and a large user base, Xiaohongshu invested heavily in advertisements. According to ylzbl.com, the company spent millions of US dollars on entertainment TV shows, the effect of which showed in soaring user growth. Statistics suggested that at the end of May 2018, Xiaohongshu’s users approached 100 million and its monthly active users (MAU) reached 30 million, three times more than the previous year.

The warm embrace of Alibaba

Emphasizing on content is one of the main strategies of Alibaba. Xiaohongshu, which was believed to have joined Tencent’s camp, cosied up to Alibaba after it became the leading investor.

Although critics believed that Alibaba was too radical in investment, Jack Ma said on May 3, “we are rational rather than radical. Alibaba’s investment of USD 30 billion is a beginning”. Xiaohongshu’s 100 million users and 1.4 billion daily notes are appealing enough to Alibaba.

Last November, Xiaohongshu announced that it had reached the break-even point, but the content-centric company has no inclination to gain profits from its content services. How does Xiaohongshu earn from its non-profit content business and peripheral online retailer services?

As its users exceeded 100 million, Xiaohongshu attempted to build its own brand, purchase offline stores, construct an AI system and products supply chain, and launch diverse independent projects – all of which require huge investments. Alibaba’s financial support came at an opportune moment.

With Alibaba leading the investments, followed closely by previous shareholder Tencent, the future of Xiaohongshu looks bright.

Content-centric retailers: past, present, and future

Experts have analyzed that content-centric online retailers might be the new trend. From conventional offline retailers to online retailers and then to content-centric online retailers, customers’ requirements have remained the core in this evolution process.

Chinese content-centric online retailers were partially generated from an unbalanced demand-supply ratio in overseas shopping. Due to high import taxes on foreign luxurious merchandise, it became mandatory for eager Chinese consumers to travel abroad to make their purchases. Xiaohongshu, the first in this field, started by helping overseas customers to draft a shopping list. Thanks to the aggregation of UGC content, the service was gradually transformed into a community for those who are passionate about fashion or shopping and are willing to share their knowledge or eager to know more about these areas of interest.

From 2010 to date, an increasing number of online consumers continue to chase famous brands with low prices – and the rapid development of online retailers has met their requirements. Under the same umbrella, content-centric retailers have won a large user base and see a brighter future than that of other retailers.

As customers become overwhelmed by commodity surplus, traditional retailers have failed to help them to make consumption related decisions. Content-centric online retailers win out here as theirs is a practical way to handle these issues. Whether it is building content community or using live streaming, we media or short clips, content assists customers in several ways and content consumption will become a profitable business.

After the reformation of shopping habits and democratization of consumption in the last few decades, online retailers will now confront a new development in the future – that of content consumption.

Yun Nie

Yun Nie is a New York-based tech reporter. She focuses on India-China financial market, global IT giants and technology-centric market trends. She can be reached at Yunnie@thepassage.cc.

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