It’s Time to Rethink Your China E-Commerce Strategy

It’s been over two years since Chinese authorities suddenly pulled the plug on the public listing for Alibaba-owned Ant Financial in an apparent retaliation to comments made by founder Jack Ma about government regulators. Criticism from Ma alerted them to the potential threat that tech giants pose to the state, triggering antitrust action against the company that has chipped away at its hold on China’s e-commerce market.

The crackdown led to Alibaba being fined $2.8 billion in 2021 for coercing merchants into exclusive listings on its platform. Then late last month, the firm announced a dramatic restructuring, which will carve up a tech empire that spans e-commerce, cloud computing, logistics, media and entertainment built over the last 24 years. Each unit spinoff, save for its core domestic e-commerce business, aims to raise additional external funding to enable an eventual IPO.

The company cited operational efficiencies as its reason for the move. “When the kids are grown, they need to leave home to face the market by themselves,” Alibaba chief executive Daniel Zhang said in a video memo to staff. “I hope there will be multiple listed companies emerging from the Alibaba system, and that they will continue to nurture their own sons and daughters and cultivate more listed companies.”

While Zhang’s motivations may be perfectly rational, they don’t necessarily capture the full picture.

The breakup is also intended to address government concerns surrounding any one private sector company growing too powerful. It’s still too early to tell how the situation will shake out. For now, most international fashion and beauty brands and TP companies (third-party ‘Tmall partners’ that brands use to outsource their relationship with Alibaba’s main platform) appear to be treating it as business as usual.

“I don’t think that there’ll be any real, substantive impact on the various merchants and brands,” said Franklin Chu, the US managing director of Azoya Group, a TP company that has helped MyTheresa, FeelUnique, and Lagardere Travel Retail with their e-commerce strategies in China. “I think it’s notable that… Tmall and Taobao are going to remain within Alibaba’s [core business unit].”

International brands with a store on Alibaba’s Tmall Luxury Pavilion have mostly remained silent but a few, such as Italian footwear label Golden Goose, seem to agree. “We haven’t yet received any guidance at the moment. However, we trust such spinoffs will eventually turn out to be beneficial to brands and ultimately to consumers,” said Mauro Maggioni, the brand’s APAC chief executive.

China’s e-commerce market registered explosive growth during the pandemic, reaching 14.5 trillion yuan ($2.3 trillion) in sales last year, according to Global Data. Brands that were hitherto reluctant to partner with one of the local giants had to quickly join competitors that had signed up to Alibaba’s Tmall or rival JD.com years earlier.

The two companies have long been international brands’ first ports of call in China. Gucci, Cartier and Nike now have a presence on Tmall, while JD.com has struck exclusive partnerships with Louis Vuitton and opened official flagship stores for Tory Burch and Canali on its platform. But brands and operators started noticing a gradual erosion of Tmall’s dominant position even prior to recent government intervention.

“In many of our clients, we saw that growth in the Tmall platform was starting to slow and that was in part because of increasing competition, which I think is a good thing for the consumer,” Chu said.

William Lau, partner and VP of brands at Ushopal, a beauty brand management firm that represents Chantecaille and Aveeno, agreed. “This past year was one of the first years where we saw negative growth [on Tmall for] many of the luxury brands and it’s simply because it has started to plateau.”

Although JD.com was able to entice Louis Vuitton by offering the brand a special user interface that would set it apart from the rest of its marketplace, for the most part JD.com has played second fiddle to Tmall in the fashion and beauty space. Last month, shortly after the news broke that Alibaba Group would be split into several units, reports surfaced of JD.com’s plans to spin off its property and industrial units through listings of its own.

“It’s hit or miss,” said Lac Tran, managing partner of Web2Asia, a TP company with clients including Marks and Spencer, Hourglass and Dyson. “When you look at JD, it’s great sales but it’s definitely much lower than what Tmall is able to bring for the same amount of effort. Because the platform’s consumers are still more male, JD requires a lot of effort to perform in fashion or cosmetics, although other categories like electronics do well.”

Meanwhile, Pinduoduo, despite being the third largest player in the overall market and a very effective platform for certain types of mass market goods, is not yet relevant to most foreign fashion brands. It has started moving its positioning upwards from its origins as a discounts platform but even when beauty brands onboard there, “it’s most likely products that are with a very poor expiry date. It’s still sellable, but it might be close to the end of its expiration,” said Ushopal’s Lau.

Beyond the Duopoly

One of the key differences between the e-commerce landscape in China and in the west is that the former is dominated by a few general merchandise platforms with fashion- and luxury-specific sub-platforms whereas the latter has many more e-tailers that are sector specialists. Another is that direct-to-consumer dotcom sites aren’t as powerful in China as they are elsewhere.

“In the west, it’s generally an official website with some Instagram shopping but China doesn’t really have brand.com, it’s all via platform,” said Lisa Ou, founder of the popular Chinese athleisure brand Maia Active. “Western marketing is on Instagram… but your sales are on the brand site. But in China, it’s able to be centralised.”

The problem with centralisation is that it has helped create a duopoly — or arguably a monopoly, depending on how JD.com measures up against Alibaba in terms of a brand’s particular value segment and product category.

A few years ago, some fashion e-tailers tried to wrest away traffic from the major platforms. There was Secoo, which touted its branded environment as a safer place for premium brands, but the Chinese player has been unable to keep up with fierce competition. It mulled a delisting from the Nasdaq in 2021 before recording a loss of $114 million in the first six months of 2022. What’s more, Prada Group has launched a lawsuit against it over lack of payments.

Meanwhile, international e-commerce giants have mostly given up on trying to attract traffic to standalone websites in China. Amazon simply shut down its local marketplace in 2019. In the same year, Net-a-Porter opened a flagship store on Tmall’s Luxury Pavilion after initially going it alone. Not long after, Farfetch also opened on the platform, as part of the wider deal with Richemont.

Many brands operate a WeChat store but because of its closed-loop environment, which means people have to actively search out the brand or subscribe to the account to see updates, the platform better serves brands prioritising revenue growth from an existing customer base over converting new ones. However, its growing suite of clienteling tools make it the top choice for brands looking to improve their omni-channel efforts.

The dominant microblogging site in the country Weibo also tried to get into e-commerce, opening up the functionality in 2020, but despite having abundant traffic has not managed to catch on as a place people transact.

“I think they’ve realised they’ve lost that boat,” Tran said about Weibo. “Brands are very scared. Would a brand launch on Twitter to do e-commerce? I would run away from it. It’s very difficult to control your brand [there].”

Social Commerce Contenders

For now, live streaming platform and Gen-Z favourite Bilibili is seen as more of a marketing tool, while rival Kuaishou is popular in cities that are tier-two and below so don’t yet feature in most international brand business strategies. However, Douyin, the domestic version of TikTok, in the last year has drawn attention as one of the most promising channels for brands to invest in. Though dwarfed in size by Alibaba and JD.com, it offers an immense amount of short video content in a fun and sticky environment.

Another driver of Douyin experimentation was the months-long disappearance of major livestream influencers like Li Jiaqi (Austin Li), over an alleged political faux pas, and Viya, who was investigated for tax evasion. Although the two have started making content again for Alibaba, their absence was acute enough to send brands looking elsewhere.

“There was a period of time during the past two years, when the major mega influencers on Tmall were sidelined. “Without them we saw a perceptible drop in sales, especially during Singles Day in the other major promotion periods,” said Azoya’s Chu.

On Douyin, the influencer ecosystem is more fragmented, Chu said, and influencers tend to command a couple million fans, rather than tens of millions like the top few operating on Tmall. But this means brands can spread their risk.

Xiaohongshu is another platform that brands have experimented with. Sometimes described as a mix between Instagram and Pinterest, it boasts a sophisticated and female-heavy audience which likes to discover brands, especially overseas ones and in beauty. But the app was built around an advertising model and only later added shopping functionality so while the customer journey often starts there, it still loses sales to other platforms because a significant number of users click outside the ecosystem to transact.

That could be changing though. Web2Asia’s Tran said that some of their clients have opened stores on Xiahongshu which has recently performed “much better than expected. Still small but the growth has been two to three times the target that we wanted.”

“[Xiahongshu] has actually been ramping up their livestreaming so it’s picking up steam,” Ushopal’s Lau said. “I actually would not be surprised if in the next half year to maybe a year you started seeing a bit more sales being driven through [Xiahongshu].”

Getting the Channel Mix Right

Prioritisation and timing are also key to choosing platform partners, Chu suggests. “[We often launch] Tmall and Douyin at the same time, then in many of our strategic business plans for our clients we will add JD in year two,” he said.

Such strategies are not just about maximising a brand’s revenue potential by having as many suitable online sales channels as possible to complement the physical store network. They are also about risk management.

In a market of China’s scale, importance and complexity, what is increasingly clear is that brands can no longer afford to put all their eggs in one e-commerce basket — or even two.

The Chinese government’s interest in ‘targeting tall poppies’ also extends to short video platforms. Since the start of the year, China’s internet regulator said it wants to see “healthy growth” on popular live streaming apps, curbing unwanted behaviours like teenage addiction, so Douyin and its social commerce peers could also become targets in a future crackdown.

As brands compare risks, costs and commission rates across platforms, they must also keep in mind factors like incumbent advantage and economies of scale to allocate the appropriate levels of investment across their overall channel mix. Experts are quick to point out that Tmall continues to provide a level of traffic no other platform can match.

“A brand like Lancome in 2022, they did almost half of their sales on Tmall just in the last quarter and primarily within [the Singles Day shopping festival],” said Lau.

The implication that experts seem to be making is that while Alibaba’s leading position in the Chinese e-commerce market is slowly eroding due to a multitude of forces — and that this trend might be impacted in one way or another by its imminent breakup — it will almost certainly remain critical for many fashion and beauty players in the years ahead.

“Tmall is still going to be a key factor in any brand’s China ecommerce strategy for the foreseeable future,” Chu concluded. “It’s just that now there are more immediately viable alternatives to them.”

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