Consumed with Consumerism
The past 2-3 years in China have been fertile ground for the rise of Chinese D2C companies.
Behind the Rise of New Consumer Brands
Firstly, China’s GDP growth has been accompanied by growing urbanization and higher consumption power. This has resulted in the maturation of consumer preferences and buying habits across the country. Of course, Xi’s Dual Circulation strategy to boost both domestic consumption and international exports is an added lift to the insurgence of Chinese consumer brands.
At the same time, geopolitical tensions have driven a rise of nationalistic sentiments among domestic consumers, who have turned away from foreign incumbents in favor of local upstarts. Some call it guochao (国潮), others dub it “cultural self-confidence” (文化自信). This has given rise to brands that ride on explicitly Chinese motifs, cultures and traditions which play on social identity and national pride to win over Chinese consumers (eg. Florasis adapts from beauty styles unique to different Chinese dynasties, Chando markets itself as a 民族品牌). International brands that run afoul of China’s sensitive issues (eg. Nike and H&M’s poorly thought-out comments on the Xinjiang cotton issue resulted in a boycott in China[1]) have only served to help domestic competitors. Case in point, Anta, China’s largest sports company, is on the cusp of overtaking Adidas as the second most valuable sports company in the world, courtesy of burgeoning Chinese consumer demand.[2]
Fig 1. Florasis, with carved Chinese motifs on their eyeshadow palettes. Source: Jing Daily
Naturally, China’s ecosystem is a conducive one for the growth of new consumer brands. Not just access to a comprehensive supply chain and rich manufacturing base, China’s mature e-commerce and digital payments ecosystem has lent itself well to the rise of social commerce and spurred the emergence of a new generation of D2C brands.
Once written off as cheaper rip-offs and poorer imitations of global brands, these D2C brands are able to hold their own on the global stage, with their own distinctive brand identities and following, while taking advantage of the resource base within China to scale extremely quickly. VCs have also pumped money into the sector, following the slowdown in the TMT space due to market saturation and regulations. That said, as the consumer market in China approaches saturation itself, it has provided the impetus for these companies to look overseas for new pastures.
Characterizing these Companies
For this new generation of Chinese D2C companies, social commerce is key. Many depend heavily on platforms like Douyin, Xiaohongshu and WeChat. Coupled with this is the rise of private traffic (私域流量), traffic that is completely managed by the brand without relying on 3rd parties and at little to no cost. In contrast with public traffic (usually acquired at high cost through platforms, search optimization and advertising), private traffic leverages channels like WeChat to engage consumers directly.[3] Brands manage their own WeChat groups to push out promotions, events and products, while encouraging consumers to interact with the brand. This allows brands to keep engagement levels up and build stronger brand loyalty, while gaining access to first-hand data like purchase and repurchase rates, as well as customer feedback and preferences. That said, many of them use similar customer acquisition tactics (or 打法 as they call it in China) as the consumer internet companies and spend heavily on marketing and discounts to win over customers.
At the same time, D2C companies have recognized that it is no longer sufficient to have a wholly online presence in the long term, and are moving into the offline space in an effort to build a stronger brand presence. Their ability to amass swathes of consumer data allows them to personalize the customer experience, both online and offline, putting them at the forefront of retail innovation today.
These companies are also known for their short product development cycles and frequent product launches. Perfect Diary launched nearly 1,000 SKUs on its TMall store in just one year;[4] Judydoll launches new product suites every 1-2 months. Florasis adopts an approach of “user co-creation”, selecting Key Opinion Customers to become ‘Product Experience Officers’ to test, provide feedback, and iterate as part of the product development process.[5]
Notably, a number of this generation of D2C brands in China have been founded by people who have had experience either in MNCs like Estée Lauder and L’Oreal, or have spent time overseas before returning to China. This gives them a more global perspective, along with useful experience operating in ex-China markets. From a branding perspective, we see them putting out sophisticated and often globally resonant and savvy messaging (eg. Neiwai’s No Body is Nobody body positivity campaign). For Joy Group, a management team with strong professional experience in consumer MNCs doing brand management and operations has enabled them to reach profitability early on (ie. Joy Group’s Judydoll has been profitable from Day One since it launched in 2017).[6] This in turn gives them the expertise, resources and confidence to expand internationally in a sustainable way.
Fig 2. Neiwai’s No Body is Nobody campaign. Source: WWD
Primed for Internationalization
The increasing saturation in China’s consumer market coupled with sluggish consumer spending domestically in recent months has meant that Chinese consumer brands have started to look more actively for new growth opportunities overseas. As a rough barometer, Chinese brands that reach about RMB 1 billion in sales are typically ready to look at global expansion.[7] These companies bring with them the unique ability to 1) leverage the comprehensive supply chain and resources in China and ramp manufacturing capacity up or down flexibly (柔性制造), and 2) acquire consumers quickly and drive user stickiness (many of them use tactics similar to Chinese B2C internet companies). These two factors alone stand them apart from global incumbents and make Chinese consumer brands a force to be reckoned with.
Southeast Asia is a natural prime market for them, with the digitally native population and rising consumption power. Southeast Asian consumers also largely have no prevailing brand loyalty and are fairly susceptible to new social trends. The prevalence and high adoption of social apps also lends the market well to these consumer brands to leverage similar social commerce tactics.
Why should we pay attention?
This wave of Chinese D2C brands marks an emergence of a new generation of globally savvy brands with quality products that have the potential to threaten the incumbents.
Yatsen (owner of Perfect Diary) has recently acknowledged that Chinese D2C brands can no longer compete solely on price as it would make them simply an ‘internet brand’ (互联网品牌) without brand longevity. They have publicly announced a renewed focus on R&D and product innovation in an effort to strengthen their core product capabilities (dubbed their ‘去脂增肌’ strategy).[8] Armed with an awareness of the pitfalls in the consumer internet sector where it has become a race to the bottom (卷 – one of the favorite industry words to describe this phenomenon) of companies burning cash on marketing and subsidies, we have seen several of this new generation of Chinese D2C companies marry the ability to attract and retain consumers while driving product innovation, savvy marketing and financial prudence. Joy Group’s ability to reach profitability quickly and Neiwai’s savvy brand positioning are great examples.
They are at the forefront of retail innovation.
Nowhere else in the world is the online retail segment as developed and innovative as China. These companies are born native to omnichannel commerce and are forced to constantly innovate on retail experiences to compete in the Chinese domestic market.
As they go overseas, they could bring with them such expertise and experiences to global consumers. Perhaps they may even lead the pack in terms of innovation in the metaverse space for retail, riding on the existing base overseas of Chinese internet and games companies who serve as natural and familiar partners.
A parting note that I thought to highlight though, is that we should be clear that these companies I’ve described above are mostly Chinese D2C brands who start off targeting the domestic market first. Companies like SHEIN and Anker are of a slightly different archetype. They are primarily cross-border e-commerce companies, global from day one and/or are overweighted on international rather than domestic revenues. There will be more SHEINs and Ankers emerging from China, catalyzed by the 2021 mass takedown of Chinese merchants from Amazon,[9] (dubbed 封号潮 in China) as these merchants seek to build their own standalone brands instead of relying on large platforms. Touted 有“品牌”思维的公司 (companies that think like a brand, as opposed to wholesalers who focus on volume and margins), these companies prioritize product development and R&D, leverage a variety of both online and offline sales channels, and develop a strong brand identity. While SHEIN and Anker are held up as golden case studies for aspiring Chinese cross-border merchants, it is still early days for the rest of the industry.
And that is an article for another day.
[1] https://www.bbc.com/news/world-asia-china-56519411
[2] https://qz.com/2032201/chinas-anta-is-about-to-be-more-valuable-than-adidas/
[3] https://www.protocol.com/china/china-private-traffic-obsession
[4] https://www.techbuzzchina.com/podcast/episode-79-perfect-diary-yatsen-group-cosmetics-ecommerce-superstar-and-chinas-loreal-for-the-digital-age
[5] https://www.warc.com/newsandopinion/opinion/brand-in-action-how-florasis-reinvented-makeup-with-chinese-style-and-culture/en-gb/4265
[6] http://www.linkshop.com/news/2021474389.shtml
[7] https://www.techbuzzchina.com/livecasts/livecast-9-albus-yu-of-china-growth-capital-on-china-dtcs
[8] https://mp.weixin.qq.com/s/Zrel7A3s_rO0N-3nd4Ef9Q
[9] https://www.protocol.com/bulletins/amazon-bans-more-chinese-sellers