It may have a valuation of over US $3 billion, but social commerce platform Xiao Hong Shu (RED) is not without its set of growing pains. Should luxury brands consider it as a channel to reach China’s growing base of millennial consumers?

 

Launched by Miranda Qu and Charlwin Mao in 2013, 小红书 (Xiao hong shu, which literally translates to “Little Red Book”) or RED, as it is better known as in English, is now one of China’s fastest growing social commerce applications. Initially conceived as a platform for users to share shopping experiences and recommendations from their travels abroad with the community, it has since evolved into something far bigger. The recent launch of its Brand Partner Platform is as good an indication as any of the growing value of RED's community.

With the improving quality of life among young Chinese came an increased level of consumption and spending power. Overseas travel became more and more commonplace, and the platform’s user base grew very quickly. Noting that the primary concern of its core users (predominantly female urbanites in their 20s and 30s) was overseas shopping-related, the platform soon evolved from a model purely driven by user generated content (UGC) to one that also incorporated elements of cross-border e-commerce. Think Instagram’s Shop function that allows items in posts to be tagged and linked to their respective e-commerce listings – but better integrated and far more advanced. A pioneer of the social commerce concept, RED now retails a range of luxury, beauty and fashion products.

RED’s cross-border e-commerce model works in a couple of ways. Items from overseas merchants can either be stocked in its local warehouse and delivered through domestic logistics, or procured directly from the seller overseas and delivered via international post. As RED will declare, check and pay taxes for items under the first model, it is suitable for goods that are routinely and widely purchased by users. The latter model works better for specialised commodities with higher price points. In integrating the overseas supply chain and maintaining partnerships with foreign brands, to RED gives consumers the assurance of high-quality products. 

In May this year, the registered number of RED users stood at 100 million, with 30 million of them being monthly active users (MAUs). Recently the company completed its round of Series D financing, raising over $300 million. Having secured investments from tech giants Alibaba and Tencent, it is clear that the social commerce model pioneered by RED is truly taking off. But can it really live up to its valuation of $3 billion? Like any other platform before it, RED also faces its own set of issues.
 

Issues With Product Authenticity and Quality

 

Image: Screentshot from Zhihu

 

In the last three months, around 50 questions related to product authenticity were raised on Chinese question-and-answer platform Zhihu (the Chinese equivalent of Quora). Among them was a post followed by 1,608 people and viewed 5 million times. Over 290 people have since commented on this post with anecdotes of their unpleasant shopping experiences on RED. The cosmetics and skin care segment on the platform appears to be one users are most wary of, citing concerns of counterfeiting.

 

Image: Zhihu user一起好不

 

In one post, user "一起好不" ­– a self-professed online shopping enthusiast ­– relates her experience of purchasing a Lacues face slimming massager on the platform. While she initially had high hopes for the platform thanks to good reviews from a personal friend, as well as favourable press about RED (CCTV has run coverage about it), she was sorely disappointed when the product arrived damaged and stained.  

 

Image: Zhihu user芋头

 

Yet another user by the moniker of "芋头" lamented that the Estee Lauder eye cream she purchased on RED exhibited distinct differences from the one she bought at a duty free store. Besides displaying inconsistencies in terms of packaging, the cream also had a rough, granular texture. Having failed to arrive at a conclusion regarding the item’s authenticity following several rounds of discussion with the platform’s customer service, this user deleted the App.

 

Customer Service Reliability

 

Image: @希尔王奇

 

A brand’s success is highly reliant on its ability to handle customer queries and complaints, especially in a market like China where high service standards on e-commerce marketplaces and platform are almost a given. However, user "希尔王奇" who purchased seven limited edition Hello Kitty notebooks on RED, details her experience as being rather unsavoury. After placing the order, this user was informed that she had to cancel it and request a refund as the item’s listed price was lower than its actual cost. Instead of honouring the erroneous price, RED then went on to terminate the user’s order without her consent.

 

Image: Screentshot from Zhihu user陈荔颖

 

Yet another user 陈荔颖 claimed to be at the receiving end of calls from a “customer service personnel” to verify her personal online payment information for an item refund that had been successfully processed months before. This suspicious turn of events led her to deduce that the calls were fraudulent, and that the platform had lapsed in terms of customer data protection.

 

Exaggerated Promotions and Advertising Law Violations

 

 

Image: Screentshot from Zhihu user刘锦辉

 

Following the 2015 amendment of the Advertising Law in China that tightens regulations with regards to advertising, the State Administration of Industry and Commerce (SAIC) has been paying close attention to online advertising in the country. The new regulation clarifies the type of content that is considered internet advertising and lays down rules for publishers of online advertisements. In practice, any digital content placed on any online platform with the intent of promoting a product or service could be subject to the regulation. The Advertising Law prohibits superlatives such as “the most” and “the best”. However, these taboo phrases are still used rather liberally on RED. Several users on Zhihu have expressed discontent at this blatant use of puffery when items on the platform are, in actuality, of inferior quality.

Having evolved from a UGC platform to one driven by professionally generated content, RED has built up a very strong community (a few celebrities have even opened official accounts on the platform) and amassed a huge amount of user data. The value of its community is its primary traffic generator, and also what drives brands to pursue partnerships with it. Traffic and conversions are the core of e-commerce. Generating and retaining traffic while stimulating sales within the RED ecosystem is critical. But when price is no longer an issue, what will keep users coming back – service, products or content? How can the platform evolve while staying relevant and bringing value to the end consumer? At the same time, how can RED improve its value proposition to brands and maintain its growth on this front? Currently, it charges brands a commission between 10 to 15 percent for goods sold on the platform. Should they be engaging in a price battle with other platforms to gain market share?

Despite these issues, luxury brands should not entirely rule out RED as a retail platform – especially those in the beauty industry. The platform is still a strong one for those in this field, and the power of its community has its benefits. While improvements still have to be made in order for luxury goods to be effectively retailed on the platform, RED should be considered by brands as an alternative channel to WeChat and Weibo for growing visibility – especially through product seeding and the posting of reviews. This exercise does not necessarily have to include the e-commerce element, and can be viewed as a pure marketing venture to maximise product exposure.

RED allows brands to set up official accounts on the platform which can help in increasing brand awareness, garnering fans and building a base of potential customers. The power of word-of-mouth marketing is also another highly attractive facet of the platform. Through its unique social commerce feature, a massive amount of content is created by users, KOLs, celebrities and the platform itself to stimulate purchasing.

The jury is still out on whether RED could be a sustainable platform for luxury brands to retail on. But there’s no doubt that it’s here to stay.

 

Data collected from Zhihu in Q4, 2018, by searching keywords “小红书正品”

Cover image: Appcoach


About the author

Elsie Zhang

Client Development Director , Luxury Society

Elsie Zhang is the client development director of Digital Luxury Group in China