Xiaohongshu is easy to defend but difficult to attack

It is reported that Xiaohongshu has completed a new round of financing with a valuation of up to US$17 billion, which not only highlights its commercial potential, but also reflects the market's recognition of its future profitability. However, Xiaohongshu's development prospects in the e-commerce field are still facing many challenges and uncertainties. This article will explore Xiaohongshu's commercialization path in depth, analyze its advantages and difficulties, and its breakthrough strategy in the new track.

The recent incident of Dong Yuhui's resignation and Yu Minhong's response has caused a lot of controversy. Live streaming e-commerce has not been so lively for a long time.

As for Xiaohongshu's e-commerce business, since Dong Jie's live broadcast became popular last year, the only thing that has been out of the circle this year is the frequent public opinion in the financial sector.

In fact, if we talk about the big events of Xiaohongshu so far this year, financing is one of them. According to the Financial Times, Xiaohongshu recently completed a new round of financing, with a valuation of US$17 billion (about RMB 120 billion).

There are two points worth noting. First, DST is one of the investors this time. It has invested in classic projects such as Facebook, Zynga, Snapchat, and Twitter. In China, DST can be seen in the initial Alibaba, JD.com, Meituan, and ByteDance, as well as the later cross-border e-commerce companies SHEIN, Cider, and PatPat, the Internet education platform Yuanfudao, and the SaaS platform Fenbeitong.

Second, this round of financing is in the form of old stock transfer. The market's interpretation of this is divided into two aspects. On the one hand, early investors chose to exit due to the unclear prospects of the short-term IPO channel. On the other hand, later investors who are optimistic about the company entered. As for why they are optimistic, it is closely related to Xiaohongshu's realization of positive profitability in 2023: According to the Financial Times, Xiaohongshu's revenue last year was US$3.7 billion and its net profit was US$500 million, marking its first profit ten years after its establishment.

It is unknown whether Xiaohongshu can continue to be profitable in 2024, but considering the current business strategy layout and market competition situation, the overall outlook is not optimistic.

01 Obvious innate advantages

As "users' preferred life decision-making search platform", Xiaohongshu has obvious advantages in commercial monetization among many content community peers and competitors.

First of all, it is the differentiated user value that Xiaohongshu uses for commercialization.

A set of data shows that as of September 2023, 50% of Xiaohongshu users are from first- and second-tier cities, and 50% are users born after 1995.

This means that the platform has a concentration of high-net-worth customers with strong spending power, and merchants can sell goods with high unit prices.

This is consistent with the previously reported data on the average customer spending of Dong Jie's live broadcast room. Someone has calculated that Dong Jie's average customer spending is nearly 600 yuan. In comparison, Kuaishou has disclosed a set of data, showing that its e-commerce average customer spending is 50-60 yuan, Douyin is 90 yuan, Taobao is 120-150 yuan, and JD.com is 200 yuan.

Secondly, there is the high stickiness of Xiaohongshu users.

Generally speaking, as the last stop for consumers to "surf" before shopping or traveling, more and more users even directly use Xiaohongshu as a new generation of search engine. In consumption scenarios such as travel, dressing, beauty, and store visits, Xiaohongshu has become the only choice for planting grass and avoiding spoilers.

Data also shows that 60% of Xiaohongshu users actively search, and the platform has an average daily search query volume of nearly 300 million times. In addition, the number of active users of Xiaohongshu continues to grow. In 2023, Xiaohongshu's MAU, or monthly active users, reached 312 million, an increase of 20% over 2022.

In addition, the platform has an increasingly rich, vertical and professional UGC and PUGC content pool. According to official data released by Xiaohongshu, the platform has over 80 million content sharing users, and the originality of the notes is as high as 90%, most of which are recommended content.

The above three points are destined to ensure that Xiaohongshu's business atmosphere will not be too low and that it has strong consumer driving power. Since it is impossible to achieve a closed loop from planting to pulling out, it is also worth telling that it has become an indispensable platform for e-commerce platform users to make decisions and place orders.

This is why Xiaohongshu can continue to attract investment. In recent years, Internet giants and celebrity investors have been very optimistic about Xiaohongshu's unique grass-planting culture, and brand merchants have also taken a fancy to Xiaohongshu's promotion and marketing value.

Therefore, after accelerating the pace of commercialization last year, Xiaohongshu achieved revenue of US$3.7 billion, an increase of 85%, and a net profit of US$500 million, with advertising business as the main source of revenue. According to the data of the "2021 Xiaohongshu Brand Research Report", advertising business accounts for as much as 80% of its revenue.

In fact, in terms of advertising, it is already a very good performance for Xiaohongshu to maintain its current basic base.

Because the advertising industry as a whole is not stable, the 2023 China Internet Advertising Data Report shows that the scale of China's Internet advertising market is expected to be 573.2 billion yuan in 2023, a year-on-year increase of 12.66%, but the growth rate in 2022 is -6.38%. In China's Internet advertising market, the four giants Alibaba, ByteDance, Tencent, and Baidu occupy up to 77% of the market, and many other players can only share the remaining 23%, and the head effect is becoming more and more obvious.

Starting from content planting and monetizing through advertising, other Internet platforms are also trying to conquer this path. For example, Taobao launched "Taobao Shopping", the main platform for content planting, and JD launched the "Planting Show" to increase the conversion rate of goods. Zhihu, which has always emphasized "professional content", also tried to use the idea of ​​content planting to strengthen commercial operations.

However, compared with these latecomers, Xiaohongshu has obvious innate advantages. It is not difficult for it to maintain its base in the grass-planting market. The difficulty lies in Xiaohongshu's desire to conquer e-commerce, whether it is traditional e-commerce, live streaming e-commerce or buyer e-commerce.

02 Insufficient acquired studies

As analyzed in the previous article, Xiaohongshu's grass-growing attribute means that its commercialization path will not be as "twisted" as platforms such as Bilibili and Zhihu. "Making a living" is not shameful, but what Xiaohongshu faces is more the lack of e-commerce genes and infrastructure caused by its past foundation.

To build a good e-commerce platform, there are three key foundations: user scale, merchant scale, and the quality of supply chain service providers.

In the words of Zhuang Shuai from Bailian Consulting, if the user scale is large enough, more demand will be converted into shopping behavior. The scale of merchants is to meet the shopping needs of users. The service quality of suppliers affects the performance of contracts and repeat purchases. Only when the three are matched and harmonious can a virtuous cycle be achieved.

In terms of user scale, Xiaohongshu does not have any obvious shortcomings. That is why, during the 618 shopping festival this year, the number of Xiaohongshu live broadcast orders reached 5.4 times that of the same period last year, and the number of users who purchased in the live broadcast room reached 5.2 times that of the same period last year. Although there is a huge gap between Taobao, JD.com and Pinduoduo in horizontal comparison, in vertical comparison, at least it is moving upward.

In terms of merchant scale, that is, the supply side, Xiaohongshu is trying to work on multiple levels to attract more business traffic.

First, store broadcast and data broadcast are carried out simultaneously. Specifically, in May this year, Xiaohongshu's live broadcast e-commerce business was reported to be adjusted again. The two major businesses of buyer operation and merchant operation were merged to form the e-commerce operation department, which is a secondary department in the e-commerce field.

The second is the upgrade of merchants' traffic and digital marketing tools, including the marketing methodology repeatedly emphasized by Xiaohongshu: "K (KOL, expert) F (Feeds, information flow) S (Search)", that is, to find KOLs to generate high-quality notes, amplify high-quality content through information flow advertising, and use positional searches to accurately cover the decision-making fields of target users.

But it seems that both aspects have achieved little results.

In terms of business flow, Xiaohongshu currently does not have an advantage in terms of product richness and prices, and its categories are concentrated in the fields of beauty and fashion.

In terms of merchant marketing services, according to Phoenix Technology, Xiaohongshu currently does not have a transparent data dashboard. If merchants want to know the data performance of their advertising, front-line employees need to manually run the data and then organize it into an Excel spreadsheet for scheduling and sending it to the merchants. The advertiser tool "Lingxi" launched in 2022 has not yet been fully opened. As for how many orders have been completed through search ads, it is impossible to measure.

In terms of logistics, Xiaohongshu currently relies mostly on service providers such as SF Express, YTO Express, and STO Express, which focus on the mid- and low-end e-commerce parcel market. However, many users have reported that logistics are slow and services are inadequate, such as failure to deliver goods to the door.

The reason is actually very simple. A complete set of e-commerce closed-loop processes requires heavy assets and long-term investment. Back-end fulfillment capabilities such as supply chain, logistics and payment are extremely important, and this is what Xiaohongshu needs to invest time and cost to build. It is difficult to overcome the moat accumulated by e-commerce giants over the past 20 years in a short period of time.

03 The key is to break through in the new track

If this road doesn’t work, try a few more.

Since the beginning of this year, in addition to e-commerce, Xiaohongshu has entered the cultural and tourism industry through the "content + traffic" approach, and has also begun to explore in-store business in local life.

Among them, in terms of local life, according to 36Kr, Xiaohongshu established three major development strategies in 2024: First, it will layout across the country, first develop first-tier Internet celebrity cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Chengdu, and Nanjing, and then gradually sink to second- and third-tier cities; second, products will give priority to high-end categories such as coffee, bread, and homestays, based on the preferences of the core customer groups of the Xiaohongshu platform; third, online support + offline incubation, launch marketing activities for merchants, experts or users, enhance the brand voice of the platform, and lay the foundation.

In the tourism industry, there is Oriental Selection, and in the local life industry, there is Douyin New Generation. These are basically viable business models that have been verified by the market. And just looking at the local life pie, it is worth Xiaohongshu's "gamble".

According to the annual data of Douyin's life service in 2023, the platform's total transaction volume increased by 256%, and the live broadcast transaction volume increased by 5.7 times. At the same time, Douyin's GMV target in 2024 is a 3 trillion market. According to the report of Haitong International, Douyin's local life GTV (total transaction amount after write-off) in 2023 was close to 200 billion yuan.

Therefore, if Xiaohongshu wants to break through the current commercialization dilemma, it needs to develop itself into a super APP, align itself with the "big guys" in various vertical fields, and learn from their strengths.

Among them, judging from the current situation of macroeconomic development, local life seems to be easier to find a breakthrough.

According to Wind and the research conducted by Everbright Futures Research Institute, in terms of social retail consumption, the four major categories that have maintained growth in the past year are grain and oil food, beverages, tobacco and alcohol, and communication equipment.

As for how to implement it specifically, it still depends on refined operations, divided by city, category and user.

Taking group purchase packages as an example, it is right to develop first-tier cities and popular online cities such as Hangzhou, Chengdu, and Changsha first, but how can we find a differentiated outlet unless we compete on low prices? Then perhaps we need to invest more in roles similar to ground promotion, go down to understand the market and consumers, and a premise is that local life itself is hard work and tiring work.

In short, in an era where the entire network is marketing and users are desensitized to grass-roots promotions, the community atmosphere has actually "changed", which is insignificant for platforms like Xiaohongshu, Zhihu, and Bilibili that started out as content.

The "leeks" know themselves and have their own cognitive experience as to whether they can be harvested or not. It is not something that the platform can control unilaterally. Even if Xiaohongshu wants to harvest them quickly, it depends on the strong personal awareness of the users.

And after years of market education, users understand that the platform needs to be commercialized and are willing to try multi-channel consumption, but the core still lies in what can be provided to users, which is the most essential link in economic activities.

Merchants and brands are also weighing the commercial value of the platform. Whether it is advertising investment or direct operation, store broadcasting or buyers, what can retain consumers and repurchase for a long time is quality and comprehensive cost-effectiveness.

Author: Jiang Xia