Little Red Book was in a dilemma, leaving not much time for Mao Wenchao

Introduction: Mao Wenchao, the founder of Xiaohongshu, who has always been low-key and Buddhist, has proved his ability in terms of users and traffic scale in recent years, and now it is time for it to show some commercialization.

Zhou Dongshi| Written by Gravel Business Review | produce

1

E-commerce "hunting" Xiaohongshu

The world of Internet e-commerce has staged a dramatic business narrative.

Xiaohongshu, which has never made a substantial breakthrough in the e-commerce business, has unexpectedly become a benchmark in this industry and attracted imitation from major e-commerce platforms.

Dai Shan, the head of Alibaba Group's Taobao business, greatly enhanced the strategic position of "shopping" and regarded it as a content connector "from transaction to consumption". Almost the same as Taobao, JD.com's "shopping" community is also placed at the bottom of the homepage at the second entrance. Pinduoduo placed "Pinduoduo" in the most prominent position at the top of the homepage, and added the element of consumption sharing by acquaintances.

Building a content community is becoming a standard in the e-commerce industry, and most of these motivations stem from Xiaohongshu's content planting logic. Among the many imitators, TikTok is undoubtedly the most devout and radical one.

At the end of 2021, Douyin launched the graphic function. With the blessing of a large number of users, the number of content creations in the fields of travel, food, fashion, technology, and national style has increased significantly. In 2022, Douyin even launched a special grass planting APP "Kesong" to comprehensively benchmark Xiaohongshu. Douyin on Dagankuai failed to fully learn the essence of Xiaohongshu, but this momentum still brought a lot of shock to the industry.

Since its establishment in 2013, Xiaohongshu has gone through 10 spring and autumn years. At the end of 2022, Xiaohongshu MAU reached 260 million, and it is reported that the revenue is 30 billion yuan. For Ali, Pinduoduo, and Douyin, which have a volume of 1 billion users and hundreds of billions of revenues, Xiaohongshu is at most a "small and medium-sized factory", but in the past three or four years, it has been the most deeply researched and widely copied non-e-commerce platform in the industry.

In February 2023, Xiaohongshu announced several sets of data at the "WILL Business Conference 2023": the average daily number of notes published on the platform exceeded 3 million; 60% of users conduct high-frequency searches on Xiaohongshu, with an average daily search query volume of nearly 300 million.

Content planting notes, life search entrance, experience sharing and word-of-mouth communication, Xiaohongshu has influenced users' life consumption decisions before they "trade". This greatly subverts the business strategy of traditional e-commerce platforms to open up the way with hard broad, soft text and brand.

However, the threshold for content cultivation is not high, and under the feedback of 1 billion users, super e-commerce platforms such as Douyin and Taobao have quickly made up for their shortcomings and formed a countermeasure against Xiaohongshu in terms of scale.

This is as if Xiaohongshu first occupied a land with abundant water and grass and abundant products, but did not build a high siege, and finally could only watch outsiders gallop and plunder arbitrarily.

More seriously, as a number of e-commerce platforms borrow grass to condense users' minds and create a more complete consumption closed loop, Xiaohongshu has been unable to open up the back-end commercialization path. In the end, the invasion turned into a hunt, and Xiaohongshu not only worked hard in the content community, but also failed in the process of commercial monetization.

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The dilemma of commercialization in the grass planting model

Xiaohongshu, which started as an overseas content community, started commercialization very early, but it was difficult to break through.

At the end of 2014, Xiaohongshu launched the cross-border e-commerce brand "Welfare Society", and its main competitors at that time were NetEase Kaola, Tmall Global and JD Global. Due to the lack of advantages in commodity procurement, supply chain and quality control in the early days, the progress of this business was slow.

According to iMedia data, Xiaohongshu's cross-border e-commerce market share was 6.5% in 2016, and this market share fell to 4.3% in the first quarter of 2018.

For this unsuccessful attempt, Xiaohongshu co-founder Qu Fang did not care too much, she once said in public: "Cross-border e-commerce is only a phased concept. Later, it turned out that this was indeed just a small episode of Xiaohongshu's test of e-commerce.

In 2016, it opened third-party merchants to settle in, launched its own brand "Youguang" in March 2018, and opened its first offline experience store in Shanghai in June 2018.

However, this kind of business practice with simple taste and weak strategic characterization has not brought enough business value to Xiaohongshu. Public reports show that Xiaohongshu's e-commerce GMV targets for 2018-2019 have not met expectations.

The hindrance of commercialization and the decline in the status of e-commerce are confirming each other. After 2018, Xiaohongshu's strategic focus gradually shifted from e-commerce business to community content ecology, and the platform monetization model changed from e-commerce business to advertising.

Xiaohongshu began to invite popular female artists to settle in, and gained a large number of user minds by sponsoring popular variety shows such as "Idol Trainee" and "Creation 101". At the end of 2018, Xiaohongshu had less than 50 million monthly active users, and more than 100 million monthly active users a year later.

The massive number of users has greatly increased the activity of the community, but also covered up the problem of insufficient commercialization, and Xiaohongshu has forgotten the unpleasantness of the e-commerce business. Since then, the strategic position of Xiaohongshu content community has been continuously strengthened, and the commercial exploration based on e-commerce has been in a subordinate position.

Qu Fang has emphasized on many occasions that Xiaohongshu's positioning is a "lifestyle community". At the end of 2021, Mao Wenchao, the core founder of Xiaohongshu, emphasized internally that Xiaohongshu's growth comes from the community, and trading is an important part of community life, so e-commerce should be placed in the community, the user's consumption mind should be cultivated in the community, and the transaction ecology of merchants should also be produced in the community.

In January 2022, the e-commerce department was adjusted to a secondary department under the Ministry of Communities. Conan, the head of Xiaohongshu's community department, is not only the head of the e-commerce business, but also the head of commercialization technology. As an important part of commercialization, the advertising sales business is responsible for Xiaohongshu CMO and sales leader Zhiheng.

Commercialization blends into the community, reflecting the embarrassment of Zhiheng. Recently, the news about "Zhiheng's recent departure" has spread all over the place, and Xiaohongshu subsequently denied it, but it is not news that the person in charge of Xiaohongshu's e-commerce and advertising business has been transferred frequently.

Xiaohongshu, led by its content strategy, doubled its user size in 2022, but its commercial revenue only increased by 20%. During the same period, the GMV of Douyin and Pinduoduo is estimated to be as high as 1.5 trillion yuan and 3.4 trillion yuan, with a growth rate of about 80% and 40%.

An important reason why Xiaohongshu's commercialization has been hindered is that the content community strategy has greatly extended the path of commercial monetization. It is very easy for users to grow grass in Xiaohongshu, but it is extremely difficult to complete consumption here. In Xiaohongshu's current shopping entrance, the product category is single, most of them are non-standard brand stores, and it is difficult for users to condense their consumption minds here.

The business model dominated by brand advertising makes it more difficult to monetize e-commerce business.

According to statistics, 80% of Xiaohongshu's revenue comes from advertising, and only 20% comes from e-commerce. Today, these two businesses are being squeezed by Douyin and Kuaishou. From the underlying technical logic, Xiaohongshu is a weak recommendation mechanism of "community + UGC", while Douyin is an algorithm-led recommendation logic. Advertisers can't get accurate marketing data feedback in Xiaohongshu, and they prefer to put their budgets on Douyin and Pinduoduo.

Little Red Book, of course, is aware of the seriousness of the problem. But the content community strategy is not only where Xiaohongshu's mind lies, but also has to do it.

Among Xiaohongshu users, 40% are from first- and second-tier cities, 50% are post-90s, and nearly 70% are women. They use it for a long time, open it frequently, like deep interaction, and are willing to share useful and interesting content. The decentralized traffic distribution logic gives small and medium-sized bloggers more possibilities to be seen, and also allows diversified brands to gather in Xiaohongshu.

Users, bloggers, and brands have formed an exceptionally stable ecological closed loop in the community, and Xiaohongshu has established core values that can have a significant impact on users' consumption decisions. Xiaohongshu does not dare to break this ecology easily.

It has also been proven that once the community is given enough commercialization, Xiaohongshu will become less credible and even risk losing its core capabilities. This is the last thing Xiaohongshu wants.

In 2019, a large number of Internet celebrities settled in Xiaohongshu, showing off wealth stickers, micro-business hydrology, brain-dead science popularization, ghostwriting into the wind, brushing single advertising stickers, etc. The Xiaohongshu app was removed from major app stores for 77 days.

Rectifying the content community consumes Xiaohongshu's great mental energy. In 2018, Xiaohongshu launched "Potato Butler" to strengthen content and commercial marketing management. After that, Xiaohongshu also carried out special actions of "Woodpecker Project" and "Panda Plan" to increase "weeding". Throughout 2021, Xiaohongshu managed to divert and sell more than 530,000 fake notes, handled more than 100,000 fake accounts for drainage and sale, and covered 502 brands.

In May 2022, Xiaohongshu launched the Community Business Convention, which opposes false grass cultivation and trafficking anxiety, and strengthens relevant agreements for merchants and brands. However, platforms and users have begun to be trapped in negative labels such as "filter book", "showing off wealth", "white and rich per capita", and "false grass planting".

The complexity of content community governance is increasing, but the pace of commercialization of Xiaohongshu is getting smaller and smaller, and Xiaohongshu has to seek external breakthroughs.

During Singles' Day in 2022, Xiaohongshu and Tmall launched a deep linkage to create a commercialization path of "Xiaohongshu grass drainage + Tmall venue transformation". At the risk of sacrificing the user experience of the community, Xiaohongshu is extremely unwilling to make a wedding dress for others, which further confirms its urgent mentality of business monetization.

On the one hand, the rectification of the content community is imperative, on the other hand, the pressure of commercialization is imminent, and the contradiction between content and commercialization is difficult to reconcile, and Xiaohongshu is in a dilemma.

3

Capital markets are in a dilemma

Xiaohongshu's problem is not only commercialization, listing is another.

In September 2022, Xiaohongshu CFO Yang Ruo left for "personal reasons", and he joined Fosun Group on the back foot just after he left on the front foot. People began to attribute Yang Ruo's departure to Xiaohongshu's listing.

Yang Ruo's resume adds to this credibility. Prior to joining Xiaohongshu, Ruo Yang was the Managing Director of TMT Investment Banking Asia Pacific at Citigroup and worked at Ernst & Young and PricewaterhouseCoopers. When he first joined, industry insiders bluntly said, "Yang Ruo came for the IPO."

What happened afterwards also validates the above inference. Before and after Yang Ruo's employment, Reuters' IFR broke the news: Xiaohongshu plans to go public in the United States in the second half of 2021, and hired Goldman Sachs and Morgan Stanley as joint underwriters, and is expected to raise no more than $1 billion. Xiaohongshu said it would not comment on this.

In October 2021, a number of domestic media once again broke out that Xiaohongshu shelved its plan to list in the United States and considered an IPO in Hong Kong, planning to raise US$500 million. But Little Red Book denied it again with no clear plan.

In November 2021, Xiaohongshu completed a Series E financing with a valuation of up to $20 billion. Investors such as Tencent, Temasek, Alibaba, and Tiantu Investment are on the list, and the market once again has high expectations for its listing.

But since then, the market environment has begun to deteriorate sharply: the US listing environment has tightened, the global stock market has fallen rapidly, and coupled with the impact of the new crown epidemic, the valuation of the technology Internet has begun to shrink sharply...

On September 16, 2022, ByteDance announced a new round of share repurchase program, intending to repurchase shares at a price of no more than US$177 per share. Under this package, the total byte valuation would be less than $300 billion, down from the high valuation of $400 billion given by the private market a year ago.

According to the "2022 Mid-2022 Global Unicorn List" released by the Hurun Research Institute, Douyin ranked first with 1.3 trillion yuan, but it fell by 43%; Ant Group's valuation fell 20% to 800 billion yuan.

According to the IT Orange report, 77 new unicorns in China were promoted in 2022, down 33% from the previous year. The general environment is such that Xiaohongshu cannot escape the doom of falling valuations.

The lack of clarity on the commercialization path further affected Xiaohongshu's market valuation. Many industry insiders predict that if Xiaohongshu is listed at this time, its market value is very likely to be lower than the valuation of pre-IPO financing, which is not allowed by investors. However, the reality that Xiaohongshu's commercial manufacturing ability is not strong, and it urgently needs to be listed to ease the financial pressure, which makes Xiaohongshu also fall into a dilemma in the capital market.

4

Live streaming leads the breakthrough of commercialization

Finding a more efficient path for commercialization is the key to solving the above two problems.

Xiaohongshu set its sights on the live broadcast business again. In fact, in 2020, Xiaohongshu cut into live streaming goods, but it has been relatively restrained, which has also caused the live broadcast business to be tepid.

Nowadays, live streaming goods are on the rise, and in 2022, Douyin live streaming has driven the rapid growth of GMV. After Dai Shan joined the big Taobao in 2022, the live broadcast business began to fight back after gaining a foothold. In 2023, among Taobao's five major strategies, live streaming will rank first.

Xiaohongshu, which is in a commercialization dilemma, has no reason not to restart live streaming.

Recently, Xiaohongshu upgraded its live streaming business from a second-level department under the community department to an independent department, and unified management of live streaming content and live streaming e-commerce business. The new live broadcast business is in charge of Yinshi, who is also the head of Xiaohongshu community ecology.

The two major businesses are grasping together, which increases the possibility of efficient collaboration between live broadcast and content. Xiaohongshu's years of commercialization and community disputes seem to have found a new breakthrough.

Xiaohongshu, which has a "content cleanliness", is obviously unwilling to imitate the industry's "shouting" live broadcast, and it has chosen a way to be more harmonious with the community.

Taking Dong Jie's second live broadcast as an example, through telling and softly sharing the clothes, shoes and snacks that she may buy every day, she attracted 2.2 million views and achieved more than 30 million goods, which greatly exceeded Xiaohongshu's expectations.

Mr. Sky, the founder of Xiaohongshu MCN's "Zero Gram Interactive", believes that Dong Jie live broadcast is a transmission of real lifestyle, which redefines live streaming e-commerce and creates a new way of playing.

For Xiaohongshu, this is a double gain of fame and fortune. However, whether this new model and new gameplay can help Xiaohongshu complete its commercial breakthrough still faces many uncertainties.

The first is whether "Dong Jie" can be copied in batches, which is the most important issue at present.

Dong Jie is the only one, and whether other stars can be popular is still inconclusive. Even if it is popular, it also faces the limit of the number of head celebrities, which tests the power of the broadcaster at the waist of the neck of Little Red Book. Judging from the Xiaohongshu live broadcast room, this part of the broadcasters has obviously not fully grown, and rooms with real-time viewers of less than 100 people abound.

The second is product power, which is about the future.

In 2021, Taobao Live has done several meaningful things, including expanding the size of the product operation team and matching more suitable and attractive products for the host. Today, one-third of the Taobao Live team is working on the product pool.

An important reason for the hindrance of Xiaohongshu's e-commerce commercialization is also the lack of high-quality categories and poor ability to operate good goods, and these problems will also appear in the live broadcast business. In the end, the competition of live streaming will be product power.

The third is strategic determination, which depends on the will of the top.

After 2014, Xiaohongshu's Slogan experienced "finding good things abroad", "good things in the world" and "marking my life" in turn, and Xiaohongshu's strategy and mind focused from "things" to "life".

Under the guidance of this concept, the e-commerce business is becoming more and more subordinate, and a series of attempts such as cross-border e-commerce and self-operated e-commerce are not completely without opportunities, but Xiaohongshu finally gave up its strategy.

Nowadays, the status of live streaming business has increased, but regardless of content form and organizational structure, live streaming is still governed by the content community. Similar to the shopping bar, the live broadcast column is also hidden in the depths, and bringing goods is only one of the three major live broadcast businesses (bringing goods, chatting and LOHAS). The future height of live streaming depends on Xiaohongshu's strategic determination.

It is gratifying that Xiaohongshu's live broadcast has made a good start.

5

epilogue

In China's currently sluggish Internet industry, Xiaohongshu is one of the few unlisted companies that is still considered by the public to be in an upward potential.

However, with the delay in commercialization and the delay in listing, it is likely to gradually consume the patience of investors and the industry in the long run, so that it is no longer considered a high-growth new model enterprise, but is defined as an enterprise with huge defects in the business model. Once it is so defined by the outside world, Xiaohongshu's situation will be even more difficult.

Mao Wenchao, the founder of Xiaohongshu, who has always been low-key and Buddhist, has proven his ability in terms of user and traffic scale over the years, and now it is time for it to show some commercialization. Otherwise, judging from Xiaohongshu's current dilemma, there is not much time left for Mao Wenchao to continue to keep a low profile and the Buddhist lineage.