6 min read.
Over the past year, e-commerce giants Alibaba and JD, have been aggressively expanding their influence on China’s “lower tier cities”, in a bid to capture this largely untapped lucrative market. In 2017, Morgan Stanley reported that 73 percent of China’s population live in these prefectures and county-level urban enclaves, which comprise 59 percent of the country’s GDP.
Last year, Alibaba announced the Rural Taobao initiative, a concerted effort to alleviate poverty through e-commerce in rural areas that aimed to cover 1,000 counties and 150,000 villages across China by 2021. The plan targets not only consumers but also the development of strategic partnerships between the private and public sectors, as well as a direct supply chain that connects rural products with urban consumers.
Meanwhile, JD has been upgrading its lower tier cities strategies after a bountiful 618 shopping festival last year. The JD Big Data Research Institute reported that sales in Tier 6 cities grew the fastest. Among JD’s strategies is the rebranding of its group buy app Pingou to Jingxi, to reach a larger audience compared to its previously more fashion and female-oriented niche. This will allow the app to compete squarely with the popular Pinduoduo and fend off Alibaba’s Taobao Tejia in these markets. The e-commerce giant is also partnering with Kuaishou, the short video platform where 70 percent of its users hail from lower tier cities.
The Ministry of Commerce (MOFCOM) reported that rural consumers spent RMB 137 billion online in 2018, growing an impressive 30.4 percent over the previous year. The COVID-19 outbreak early this year further accelerated the uptake of e-commerce in small cities across China. According to a study by GfK, the number of first-time users in lower-tier cities who shopped online during the outbreak doubled those in top-tier cities.
The untapped potential in these markets is certainly mind boggling for e-commerce players, which are facing a saturation point in their key top tier markets. As e-commerce giants shift their focus inland, they must realize the new markets’ idiosyncrasies will be throwing out their conventional playbook — lower tier cities are ready for disruptive models that cater to their unique needs, one of which is “social commerce”.
Brief history and evolution of social commerce in China
Social media is pervasive and increasingly playing an important role in consumers’ shopping journey, from how they consume information to evaluating and making purchase decisions.
The phenomenon began around 2010 — first with Weibo, followed by WeChat, where enterprising individuals set up stores, and promote products to their close circle of friends and followers by sharing personal user experience, product reviews and comparisons. Many store owners on Taobao, Alibaba’s consumer-to-consumer (C2C) platform, were born on Weibo. These owners utilize social networks to engage with their customers and direct them to their Taobao stores for transactions. With the launch of WeChat Wallet in 2013 and Weidian (micro stores) in 2014, individuals can now sell to their personal networks, using Moments as their “advertising” space. With this, the earliest version of social commerce was born.
Nevertheless, the term “social commerce” only became prominent with the rapid rise of a relatively unknown Pinduoduo, which managed to challenge industry giants like Alibaba and JD in a saturated e-commerce market with its model of group shopping that targeted the coveted but difficult to crack lower tier markets. Social commerce has since become a buzzword, counting e-commerce platforms, social media networks and short video streaming sites among the contenders looking to monetize their users’ circles of influence.
Today, social commerce is a 3-pronged engine characterized by:
1) Group shopping
The group shopping mechanism popularized by Pinduoduo is slightly different compared to previous group buy formats. On a platform like Pinduoduo, anyone can initiate a “group shopping” and invite their social networks to participate — the higher the number, the lower the price. Bargain hunting has become a fun social activity with these group shopping apps.
Apps: Pinduoduo (拼多多), Taobao Tejia (淘宝特价版), JD Jingxi (京喜)
Influencers, or key opinion leaders (KOLs), share related content and interact with their interest-based communities through text, image, video or livestreaming to inspire purchase. Users come regularly for the content and interaction with their favorite KOLs, even when they initially do not have any purchase intention.
Apps: RED (小红书), Mogujie (蘑菇街), Douyin (抖音), Kuaishou (快手)
These platforms provide products and services, such as supply chain, logistics, IT system, training and after-sales services, to micro store owners for a fee, who will then distribute the products to their social networks. Owners earn commissions when they successfully sell the products or recruit new members for the platform, making it similar to a pyramid scheme, which is illegal in China.
Apps: Yunji (云集), Beidian (贝店)
Key players leverage social commerce to penetrate lower tier cities
1) Pinduoduo: Challenging e-commerce giants by capturing lower tier cities
Pinduoduo is often credited with bringing e-commerce to lower tier cities. Consumer behavior is different in smaller, close-knit communities. There is a strong sense of social support and connectedness among consumers in lower tier cities, which Pinduoduo recognized and capitalized on when it launched as a WeChat mini program for group shopping five years ago.
Pinduoduo is designed as a fun virtual bazaar without the conventional search bar. It engages users with personalized recommendations, encouraging users to browse for fun, not only when they need to buy something. This brings back the fun of discovery, which has been missing in traditional online shopping, that consumers miss from shopping in physical stores.
There are always irresistible deals on Pinduoduo, and this makes the platform extremely sticky, especially in the lower tier markets where consumers have limited disposable income and are less brand savvy.
2) JD Jingxi and Taobao Tejia: Reinventing the playbook for e-commerce in small cities
JD and Taobao introduced Jingxi and Tejia respectively to challenge Pinduoduo for a share of the group shopping market in lower tier cities.
JD Jingxi is essentially an upgrade of an earlier app called JD Pingou, which targets females and small city shoppers with ultra-low prices, particularly in fashion products. Items are priced between RMB 1 and RMB 10 on Jingxi — along with group buy cashback incentives, the app offers an attractive proposition to price-conscious small city consumers.
Jingxi can now be accessed via WeChat’s “Discover” tab, which allows JD to tap into the 1.2 billion-strong monthly active users (MAU) on WeChat. Walkthechat, a consultant for building WeChat presence for brands, reports that 60 percent of orders on Jingxi received during this year’s 618 sale came from lower tier cities (Tier 3 and below). As of August 2020, Jingxi ranked in the top 6 of mini programs on WeChat.
Taobao Tejia is the latest of a series of Alibaba’s initiatives, including Juhuasuan and Alipay Pintuan, to captivate lower tier consumers. Taobao Tejia offers a broad range of deals, which are often priced at RMB 9.90. With first-time e-commerce users emerging during the coronavirus pandemic this year, Tejia has grown its MAU to 40 million.
Taobao Tejia recently piloted RMB 1 (including delivery) promotions during its 10.10 sale, as well as expanding into physical RMB 1 stores, as a lead-up to the biggest shopping event of the year, the 11.11 Singles’ Day sale.
3) Taobao Live and JD Live: Acquiring social wings through livestreaming
Online shopping picked up in lower tier cities in 2015, driven by Pinduoduo’s aggressive moves in social commerce. This was when e-commerce and content platforms were still exploring livestreaming with independent influencers who were broadcasting their own content to a dedicated following, especially “daigou” influencers who were buying from overseas for their customers in China.
A standard, systematic push for livestreaming had not been available until Taobao Live was created in 2018 as a dedicated channel for the platform’s merchants to sell via livestreaming. Taobao Live, with approximately 800 million MAU today, has facilitated more than RMB 300 billion (USD4.4 billion) in transactions over the past 12 months, reports Yicai Global based on data from Alibaba, which adds that 70 percent of new users are from lower-tier cities and towns.
Taobao spun off “Taobao Village Live” last year, in tandem with its Rural Taobao initiative, to cultivate livestream hosts across rural and poverty-stricken areas to sell local produce. According to Alizila, there are now over 50,000 rural livestreamers listed on Taobao Live, which has hosted over 1.2 million sessions featuring agricultural produce to date.
Meanwhile, JD is upping its livestreaming e-commerce game by launching a base in Xi’an, the provincial capital of Shaanxi in northwest China, to help traditional enterprises and local merchants go digital. In a statement released by JD Cloud & AI, the company said “the livestream base will combine JD’s resources and technology advantages to foster diversified development”. This new venture will complement JD’s other consumer-facing collaboration with Kuaishou, the short video streaming platform that is immensely popular in smaller cities.
4) Kuaishou and Douyin: Owning the shopping journey with content
E-commerce platforms have long worked with Tencent-backed Kuaishou and Bytedance-owned Douyin as user engagement tools, leveraging the apps’ native influencers to generate creative content and direct traffic to the shopping sites. While Douyin’s more polished content is mainly influential in top tier cities and favored by large brands, Kuaishou’s sometimes crude but honest-to-goodness user-generated content (UGC) has struck a chord with consumers in lower tier cities.
Kuaishou enjoys three to five times higher e-commerce conversion rates compared to Douyin, perhaps thanks to Kuaishou’s more social nature in content recommendation, compared to Douyin whose content is managed by an algorithm.
With the growing popularity of livestreaming and content for e-commerce, Kuaishou begins to explore monetizing and owning the entire online shopping journey, instead of just being a customer engagement tool for e-commerce players. In June this year, Kuaishou made Chengdu in southwest China its livestreaming e-commerce base with a RMB 3 billion (USD 448 million) investment.
WeChat: The Return of the Original Social Commerce Platform
Despite helping other successful social commerce players launch on its mini programs, WeChat’s own social commerce strategies had been half-baked — at least until early this year — when it upgraded its mini programs with more e-commerce features to unleash the shopping potential of its 1.2 billion MAU. The changes included a customer review mechanism, tools for brand protection and shipping, as well as a consumer protection platform, aimed at building a vast online marketplace.
In July, it introduced Minishop, a shop builder tool that helps merchants create their own retail stores on Wechat. Lately, WeChat Channels has been testing a new livestreaming feature — as of now, the feature is simplistic compared to competitors’, but WeChat’s e-commerce ambitions clearly are not.
Moving on: Game-changing drivers in China’s e-commerce landscape
We will continue to see China’s e-commerce landscape evolve with the digital literacy and the disparate needs of the vast and diverse Chinese population. As new online shoppers, lower tier city consumers have leapfrogged traditional search-based e-commerce format in favor of recommendation-based group shopping, and static text and image-based content for rich and interactive livestreaming and UGC videos.
Shoppers are also beginning to embrace customer opinion leaders (COLs), such as UGC creators who share their product experience on Kuaishou, compared to key opinion leaders (KOLs) who move thousands of products within seconds on Taobao Live. However, content creators are not sellers —should creators learn to sell and how should their performance be measured? Yet, early indications show that consumers might just prefer trusted creators with whom they share the same interest, without the glitzy hard-selling that is common on livestreaming shopping platforms now.
As interest-based content becomes the driver of consumers’ stickiness to social media, social commerce could ironically become less social, as it evolves into content commerce that is given a boost by artificial intelligence and machine learning technologies. This is evident in Douyin’s algorithm-driven content recommendations, which are based on behavioral analytics. Users do not have to engage in typical social media activities like “follow”, “like” or “share” their favorite content. Simply by capturing individual user behavior, as they navigate the platform’s services, Douyin’s algorithm is able to profile the user and recommend the most pertinent content, brand or merchandise for them. The selling can be even more subtle, but also more effective.
Lower tier cities are powering growth in domestic demand, as China faces international political headwinds and competition from the likes of Southeast Asia where a burgeoning manufacturing industry is offering an attractive alternative to global brands caught in the US-China tension.
This steady growth in domestic demand, coupled with the “Made in China 2025” vision, drives exciting innovation in manufacturing, supply chain and logistics. Livestreaming and group buying are creating bulk demand on the consumer side to realize the consumer-to-manufacturer (C2M) model, where products are shipped directly to consumers from factories. This model promises the lowest prices for consumers and the lowest inventory costs for factories, which can run on zero inventory as manufacturers are able to match incoming orders precisely.
Alibaba’s new Rhino Smart Manufacturing platform will further the C2M model by allowing the production of small orders for small and medium-sized businesses and entrepreneurs, helping them to compete with big brands. The coronavirus pandemic has accelerated the application of delivery robots and drones, which are now being tested to reach consumers in remote mountainous regions.
Technology will inevitably create greater efficiency in the supply chain, expanding e-commerce players’ ability to lift China’s massive rural population into the next consumption era.