Xiaohongshu is in a dilemma, and Mao Wenchao doesn't have much time left

1 E-commerce "hunting" Xiaohongshu

A highly dramatic business narrative has taken place in the field of Internet e-commerce.

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

Dai Shan, the head of Alibaba Group's Taobao business, greatly promoted the strategic position of "Guangguang" when she first took office, and regarded it as a content connector from "transaction to consumption". Similar to Taobao, JD's "Guang" community is also placed at the second entrance at the bottom of the homepage. Pinduoduo puts "Pinxiaoquan" in the most prominent position at the top of the homepage and adds the element of sharing consumption among acquaintances.

Building content communities is becoming a standard in the e-commerce industry, and most of these motivations stem from the content seeding logic of Xiaohongshu. Among the many imitators, Douyin is undoubtedly the most devout and radical one.

At the end of 2021, Douyin launched the picture and text function. With the support of a large number of users, the number of content creation in the fields of travel, food, fashion, technology, and national style has increased significantly. In 2022, Douyin even launched a special grass-growing APP "Croissant" to fully compete with Xiaohongshu. Douyin, which worked hard and fast, failed to fully learn the essence of Xiaohongshu, but this momentum still brought a great shock to the industry.

Since its establishment in 2013, Xiaohongshu has gone through 10 years. By the end of 2022, Xiaohongshu's MAU will reach 260 million, and its revenue is reported to be 30 billion yuan. Compared with Alibaba, Pinduoduo, and Douyin, which have 1 billion users and hundreds of billions of revenue, Xiaohongshu is at most a "small and medium-sized factory", but in the past three or four years, it has been the most deeply studied 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 platform's average daily note publishing volume exceeded 3 million; 60% of users conducted high-frequency searches on Xiaohongshu, with an average daily search query volume of nearly 300 million times.

With content seeding notes, life search portals, experience sharing and word-of-mouth communication, Xiaohongshu has influenced users' life consumption decisions before they "trade". This has greatly subverted the business strategy of traditional e-commerce platforms that rely on hard advertising, soft articles and brands to open up the market.

However, the threshold for content seeding is not high. With the support of billions of users, super e-commerce platforms such as Douyin and Taobao have quickly made up for their shortcomings and formed a countermeasure to Xiaohongshu in terms of scale.

This is like Xiaohongshu first occupied a piece of land with lush grass and abundant products, but did not build a high walled city, and in the end it could only watch outsiders gallop and plunder at will.

What’s more serious is that as a number of e-commerce platforms have used the promotion of content to gather users’ minds and create a more complete closed-loop consumption, 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 had a hard time defending itself in the content community, but also had no power to attack in the process of commercialization.

2 Commercialization Dilemmas under the Grass-Seeding Model

Xiaohongshu, which started out as an overseas shopping content community, began commercialization very early on, but struggled to make a breakthrough.

At the end of 2014, Xiaohongshu launched the cross-border e-commerce brand "Fulishe". At that time, its main competitors were NetEase Kaola, Tmall Global and JD Global Shopping. Due to the lack of advantages in product procurement, supply chain and quality control in the early days, this business progressed slowly.

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.

Xiaohongshu co-founder Qu Fang did not care much about this unsuccessful attempt. She once said in public: "Cross-border e-commerce is just a temporary concept." Later, facts proved that this was indeed just a small episode in Xiaohongshu's attempt to test the waters of e-commerce.

In 2016, third-party merchants were allowed to join the platform, and in March 2018, the company launched its own brand "Youguang". In June 2018, the company opened its first offline experience store in Shanghai. In just a few years, Xiaohongshu has tried multiple e-commerce models, including cross-border e-commerce, third-party e-commerce, self-created brands, and offline stores.

However, this superficial and weak strategic business practice has failed to bring sufficient commercial value to Xiaohongshu. Public reports show that Xiaohongshu's e-commerce GMV targets for 2018-2019 fell short of expectations.

The obstruction of commercialization and the decline of e-commerce status are mutually reinforcing. After 2018, Xiaohongshu's strategic focus gradually shifted from e-commerce business to community content ecology, and the platform's monetization model changed from e-commerce business to advertising-based.

Xiaohongshu began to invite popular female artists to join the platform, and sponsored popular variety shows such as "Idol Producer" and "Produce 101", gaining a large number of users' hearts and minds. At the end of 2018, Xiaohongshu had less than 50 million monthly active users, but one year later, the number exceeded 100 million.

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

Qu Fang has emphasized on many occasions that Xiaohongshu is positioned as 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 transactions are an important part of community life. Therefore, e-commerce should be placed in the community, users' consumption mentality should be cultivated in the community, and merchants' transaction ecology should also be produced in the community.

In January 2022, the e-commerce department was adjusted to a second-level department under the community department. Conan, the head of the Xiaohongshu community department, is not only the head of the e-commerce business, but also the head of commercialization technology. The advertising sales business, which is an important part of commercialization, is in the charge of Zhiheng, Xiaohongshu's CMO and sales director.

The integration of commercialization into the community reflects Zhiheng's embarrassment. Recently, news about "Zhiheng's recent resignation" spread like wildfire, and Xiaohongshu subsequently denied it, but it is not news that the heads of Xiaohongshu's e-commerce and advertising business have been frequently transferred.

Xiaohongshu, which is led by content strategy, doubled its user base in 2022, but its commercial revenue only grew by 20%. During the same period, Douyin and Pinduoduo's GMV were estimated to be as high as 1.5 trillion and 3.4 trillion, with growth rates of about 80% and 40% respectively.

An important reason why Xiaohongshu's commercialization is hindered is that its content community strategy has greatly extended the path of commercial realization. It is very easy for users to plant grass on Xiaohongshu, but it is very difficult to complete consumption here. In Xiaohongshu's current shopping portal, the product categories are single, and most of them are non-standard brand stores, making it difficult for users to gather consumption minds here.

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

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-driven recommendation logic. Advertisers cannot obtain accurate marketing data feedback on Xiaohongshu, so they are more willing to put their budgets on Douyin and Pinduoduo.

Xiaohongshu is certainly aware of the seriousness of the problem. However, the content community strategy is Xiaohongshu's mindset, but it also has its own difficulties.

Among Xiaohongshu users, 40% are from first- and second-tier cities, 50% are born after 1990, and nearly 70% are women. They use the app for a long time, open it frequently, like in-depth interactions, and are willing to share useful and interesting content. The decentralized traffic distribution logic gives small and medium-sized bloggers more opportunities to be seen, and also allows diversified brands to gather on Xiaohongshu.

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

Facts have also proven that once the community is given enough commercialization, Xiaohongshu will become less credible and even face the risk of losing its core capabilities, which is what Xiaohongshu is most reluctant to see.

In 2019, a large number of Internet celebrities joined Xiaohongshu, and posts showing off their wealth, micro-business articles, stupid popular science, ghostwriting, and fake advertising were all the rage. The community marked by life was "watered down and distorted" and became a mess. Xiaohongshu App was removed from major app stores for 77 days.

The rectification of content communities has consumed a lot of Xiaohongshu's mental energy. In 2018, Xiaohongshu launched "Shu Guanjia" to strengthen content and commercial marketing management. After that, Xiaohongshu also launched special operations such as "Woodpecker Plan" and "Panda Plan" to increase its "weeding" power. Throughout 2021, Xiaohongshu has dealt with more than 530,000 notes on counterfeit sales, handled more than 100,000 accounts for counterfeit sales, and covered 502 brands.

In May 2022, Xiaohongshu launched the "Community Business Convention" to oppose false advertising and the sale of anxiety, and strengthen relevant agreements with merchants and brands. However, the platform and users began to be trapped in the negative labels of "filter books", "showing off wealth", "white, rich and beautiful people per capita", and "false advertising".

Content community governance is becoming increasingly complex, while Xiaohongshu's commercialization pace is becoming slower and slower, so Xiaohongshu has to seek external breakthroughs.

During the Double Eleven period in 2022, Xiaohongshu and Tmall launched an in-depth linkage to create a commercial path of "Xiaohongshu seeding and traffic diversion + Tmall venue conversion". Xiaohongshu was extremely reluctant to make wedding clothes for others at the risk of sacrificing the community user experience, which further confirmed its urgent mentality of commercial realization.

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

3 Capital market dilemma

Xiaohongshu’s problem is not just commercialization, listing is another one.

In September 2022, Xiaohongshu CFO Yang Ruo resigned for "personal reasons" and joined Fosun Group right after he left. People began to attribute Yang Ruo's departure to the obstruction of Xiaohongshu's listing.

Yang Ruo's resume adds to this credibility. Before joining Xiaohongshu, Yang Ruo served as the managing director of Citigroup's TMT investment bank in Asia Pacific, and also worked at Ernst & Young and PricewaterhouseCoopers. When he first joined, industry insiders bluntly said, "Yang Ruo came here just for the IPO."

What happened later also verified the above inference. Before and after Yang Ruo joined the company, 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 it is expected to raise no more than US$1 billion. Xiaohongshu declined to comment on this.

In October 2021, many domestic media outlets broke the news again that Xiaohongshu had shelved its plan to go public in the United States and was considering an IPO in Hong Kong, planning to raise $500 million. However, Xiaohongshu denied the news again, saying that it had no clear plans yet.

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

But the market environment has since deteriorated dramatically: the US listing environment has tightened, global stock markets have fallen rapidly, and coupled with the impact of the COVID-19 pandemic, the valuation of technology and Internet companies has begun to shrink significantly...

On September 16, 2022, ByteDance announced a new round of stock repurchase plan, intending to repurchase shares at a price not exceeding US$177 per share. According to this plan, ByteDance's total valuation will be less than US$300 billion, lower than the high valuation of US$400 billion given by the private equity market a year ago.

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

According to the IT Orange report, 77 Chinese companies were newly promoted to unicorns in 2022, a 33% decrease from the previous year. Given the general environment, Xiaohongshu could not escape the fate of falling valuations.

The unclear commercialization path has further affected Xiaohongshu's market valuation. Many industry insiders predict that if Xiaohongshu goes public at this time, its market value is likely to be lower than the valuation of pre-IPO financing, which is not allowed by investors. However, Xiaohongshu's commercialization ability is not strong, and it urgently needs to go public to ease the financial pressure, which puts Xiaohongshu in a dilemma in the capital market.

4 Live streaming leads the way in commercialization

Finding a more efficient commercial monetization path is the key for Xiaohongshu to solve the above two problems.

Xiaohongshu has once again turned its attention to the live broadcast business. In fact, Xiaohongshu has entered the live broadcast sales business in 2020, but it has been relatively restrained, which has also caused the live broadcast business to be tepid.

Nowadays, live streaming sales have emerged. In 2022, Douyin live streaming sales drove the rapid growth of GMV. After Dai Shan took over Taobao in 2022, the live streaming business began to fight back after gaining a foothold. In 2023, live streaming ranked first among Taobao's five major strategies.

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

Recently, Xiaohongshu upgraded its live streaming business from a secondary department under the community department to an independent department, which will manage live streaming content and live streaming e-commerce business in a unified manner. The new live streaming business will be managed by Gintoki, who is also the head of the Xiaohongshu community ecology.

The two businesses have been developed simultaneously, increasing the possibility of efficient collaboration between live broadcast and content. Xiaohongshu seems to have found a new breakthrough in its years of commercialization and community struggle.

Xiaohongshu, which has a "content cleanliness obsession", is obviously unwilling to blindly imitate the industry's "hawking" style live broadcast. It has chosen a way that is more harmonious with the community.

Taking Dong Jie's second live broadcast as an example, she shared the clothes, shoes and snacks that people might buy in daily life in a gentle and soft voice, which attracted 2.2 million viewers and achieved a sales volume of more than 30 million, far exceeding Xiaohongshu's expectations.

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

For Xiaohongshu, this is a win-win for both fame and fortune. However, whether this new model and new gameplay can help Xiaohongshu achieve commercial breakthrough still faces many uncertainties.

The first is whether "Dong Jie" can be replicated in large quantities, which is the most important issue at the moment.

Dong Jie is the only one, and it is still unclear whether other stars can become popular. Even if they become popular, they still face the limitation of the number of top celebrities, which tests the ability of Xiaohongshu's neck and waist broadcasters to bring goods. Judging from the Xiaohongshu live broadcast room, these broadcasters have obviously not fully grown up, and there are many rooms with less than 100 people watching in real time.

The second is product strength, which is related to the future.

In 2021, Taobao Live did several meaningful things, including expanding the size of the product operation team to match more suitable and attractive products for anchors. Now one-third of the employees in the Taobao Live team are working on the product pool.

The main reasons why Xiaohongshu's e-commerce commercialization is hindered are the lack of high-quality categories and poor ability to operate good products. These problems will also appear in the live broadcast business. In the end, the competition in live broadcast sales will be product strength.

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

After 2014, Xiaohongshu’s slogans changed successively from “Find good things from abroad”, “Good things from all over the world”, and “Mark my life”. Xiaohongshu’s strategy and mindset shifted from “things” to “life”.

Guided by this concept, e-commerce business has become increasingly subordinate. A series of attempts such as cross-border e-commerce and self-operated e-commerce are not completely without opportunities, but Xiaohongshu ultimately gave up the strategy.

Today, the status of live broadcast business has been raised, but no matter the content form or organizational structure, live broadcast is still governed by the content community. Similar to the shopping column, the live broadcast column is also hidden deep inside, and selling goods is only one of the three major businesses of live broadcast (selling goods, chatting, and living happily). The future height of live broadcast selling goods depends on Xiaohongshu's strategic determination.

It is gratifying that Xiaohongshu’s live streaming sales have got off to a good start.

5 Conclusion

In the current depressed Chinese Internet industry, Xiaohongshu is one of the few non-listed companies that is still considered by the public to be on the rise.

However, as commercialization and listing have not been successful, it is very likely that investors and the industry will gradually wear out their patience in the long run, and it will no longer be considered a high-growth new model enterprise, but will be defined as an enterprise with huge flaws in its business model. Once it is defined in this way by the outside world, Xiaohongshu will face a more difficult situation.

Mao Wenchao, the founder of Xiaohongshu, who has always been low-key and Buddhist, has performed well in terms of the number of users and traffic of Xiaohongshu and Xiaohongshu in recent years, and has proven his ability. Now it is time for him to show his ability in commercialization. Otherwise, judging from the current dilemma of Xiaohongshu, Mao Wenchao has little time left to keep a low profile and be Buddhist.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.