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Text｜Digital Business

"Exquisite girls riding high-speed trains" has become an abstract performance art that has recently become popular on the Internet.

More than 30 kinds of goods are displayed in 2 minutes, and people are arranging flowers, using laser keyboards, playing the piano, and soaking their feet on the high-speed rail... It's getting more and more outrageous.

This type of video first emerged on Xiaohongshu and Douyin, and was widely criticized on social networks. It then evolved into satirical works such as "Exquisite X-students Going to the Toilet" and "Exquisite X-students Going to Internet Cafes".

The reason why it appears on these two platforms is that Douyin has a large amount of traffic and high commercial value, while Xiaohongshu has precise target users.

"Planting grass" and "Notes" make Xiaohongshu's user value extremely high, but with the deepening of commercialization, the problem of balancing content and commercialization has become prominent.

Valuation shrinkage

After two and a half years of silence, Xiaohongshu became active in the capital market starting from the second half of last year.

Last September, it was reported that Sequoia China acquired a portion of Xiaohongshu's shares, with a valuation of US$14 billion. At the end of December, market sources said that Xiaohongshu may go public in Hong Kong as early as the second half of 2024, and plans to conduct another round of financing before launching the IPO.

This month, media reported that Xiaohongshu has arranged to sell shares to existing shareholders and new investors in recent weeks. DST Global has invested in the company, and Sequoia China, Hillhouse Capital, Boyu Capital and CITIC Capital have added investment, with the latest valuation of $17 billion.

It seems that the valuation has increased significantly in less than a year, but in fact, the current valuation of Xiaohongshu has shrunk significantly compared with 2021. At that time, it was reported that Xiaohongshu's post-investment valuation exceeded US$20 billion, led by Temasek, Tencent and Alibaba.

Compared with three years ago, Xiaohongshu's valuation has shrunk by US$3 billion, or about RMB 20 billion.

In fact, the latest round of financing is not a pre-IPO. According to 36Kr, this round of financing was carried out in the form of old stock transfer. In order to help early investors exit, Xiaohongshu personally managed the transaction. It can be seen that the original shareholders have a strong demand for profit-taking.

Why has Xiaohongshu’s valuation failed to return to its peak?

The capital environment is an important factor, but it is not the decisive factor. In November 2021, Xiaohongshu had 200 million monthly active users, and in 2023 it will be 312 million. From the overall scale, Xiaohongshu is far beyond the valuation period of 20 billion US dollars, but the valuation has declined.

The main reason is that Xiaohongshu’s development has encountered obstacles.

Shortly before the news of the new round of financing was revealed, Xiaohongshu also reported layoffs. Many media reported that Xiaohongshu's e-commerce product department, commercialization department, community technology department and other departments have started layoffs, with the layoff rate reaching 20%. Many departments are in the stage of locking recruitment quotas (HC). The reason behind the layoffs is that Xiaohongshu's new senior management is dissatisfied with the human efficiency ratio (i.e. human resource efficiency).

It was also reported that the organizational structure of the e-commerce operation department of Xiaohongshu's e-commerce secondary department has been adjusted. The e-commerce operation team is no longer managed by Yin Shi (Shu Ming) alone, but is jointly managed by multiple persons in charge. Including: Yin Shi is in charge of the industry merchant group; Meixian (Shu Ming) is in charge of the buyer group; Xuanshuang (Shu Ming) is in charge of the commercialization of luxury clothing and the newly established KA (Key Account) group; Dongzhang (Shu Ming) connects the e-commerce strategy platform with the strategy platform, efficiency platform, and strategic team of the commercialization department.

From this point of view, in the past six months or so, Xiaohongshu has not been favored by the capital market, but instead has faced considerable troubles.

The contradiction between content and commercialization

In recent years, Xiaohongshu has developed rapidly.

Earlier this year, Xiaohongshu revealed that its monthly active users would increase by 20% year-on-year to 312 million in 2023, its revenue would increase by 85% year-on-year to US$3.7 billion, and its net profit would reach US$500 million (about RMB 3.5 billion). In contrast, in 2022, Xiaohongshu's revenue was about US$2 billion, and it was still mired in a full-year loss of US$200 million.

According to the revenue scale and user volume, Xiaohongshu and Bilibili are basically the same size, but its profitability far exceeds that of Bilibili. This is consistent with the overall impression of the public. For a long time, the commercial value of Xiaohongshu users has been far higher than that of Bilibili, Zhihu and Weibo.

Under the mountains of two Weibo, one Douyin and one Kuaishou, it is not easy for Xiaohongshu to break through with its content community mainly composed of pictures and texts. In recent years, Xiaohongshu has been expanding its user base. In 2020, Xiaohongshu tried live streaming to sell goods. In 2021, Xiaohongshu launched the "Male Content Incentive Plan" to call on more male creators to join. In 2023, the live streaming department will be independent, and Dong Jie and Zhang Xiaohui will sell goods.

So far, Xiaohongshu has almost become a "catfish" across all tracks.

In the short video industry, Xiaohongshu is an important participant, and many top accounts also have accounts on Xiaohongshu.

In terms of search, Xiaohongshu revealed that nearly 70% of Xiaohongshu users use search; 1/3 of monthly active users go directly to search when they open Xiaohongshu; Xiaohongshu has an average of nearly 300 million search queries per day. Xiaohongshu has launched products such as "Search Quick Invest" and "Search Direct", and it seems to want to get a share of the search market.

In the e-commerce field, Xiaohongshu already has functions such as live e-commerce and store entry. Theoretically, e-commerce transactions can be completed directly through Xiaohongshu.

However, with the deepening of commercialization, these businesses do not have the effect of 1+1=2, but instead affect the chemical reaction of the entire community ecology.

On the one hand, Xiaohongshu, which is in the stage of e-commerce expansion, does not have perfect e-commerce infrastructure. Many users complained about the slow logistics and the lack of price advantages, which eventually turned into Xiaohongshu making wedding dresses for other platforms. At the same time, the scale of merchants is not large and the traffic inclination of Xiaohongshu is limited. According to reports, the traffic obtained by Xiaohongshu e-commerce mainly comes from community supply, accounting for 5% of Xiaohongshu’s total traffic, and live broadcast accounts for 3%, that is, when a user browses 100 posts, he will encounter 8 products or shopping notes, e-commerce live broadcasts and other non-community content. Obviously, this ratio is not enough. As a result, merchants complained that there was no very intuitive business order conversion through Xiaohongshu.

On the other hand, there has always been a contradiction between e-commerce and communities. Content and business are essentially two different logics. E-commerce focuses on transaction indicators and investment conversion rates. Communities are responsible for indicators such as user experience and retention. In the process of commercialization, users will be very sensitive to the increase in commercial content. Many users have reported that the number of product notes with shopping links and live broadcast links they have seen has increased significantly.

This creates a cycle that is difficult to resolve. Business conversion requires traffic, but community retention cannot open up too much traffic to e-commerce.

During the 618 shopping event this year, Xiaohongshu seemed to have invested heavily, launching rules such as "50 off for every 300 spent across stores, and coupons can be added", showing its commercial ambition. However, judging from the layoffs, this attempt was not successful.

It is reported that Xiaohongshu's e-commerce department hopes to find a balance, so that products and shopping notes can not only bring goods, but also increase users' cognition. But this is an ideal state, and it is very difficult to find a balance.

"Lifestyle e-commerce"

In the latest interview, COO Conan first proposed the concept of "lifestyle e-commerce", which is a new attempt by Xiaohongshu to commercialize.

Conan explained: What users buy on Xiaohongshu is not only good products, but also a desirable life. "The 'people' in our lifestyle e-commerce are not just consumers and users, but people who can truly create, match and select products based on user needs. They are Xiaohongshu buyers and Xiaohongshu managers. These people who create shopping scenarios bring value and lifestyle experience to users beyond price."

Among them, the role of the manager is highlighted. According to Xiaohongshu's explanation, the manager is "someone who understands lifestyle and has a supply chain." Conan cited the example of manager Wang Wei, who shares outfits for slightly plump and pear-shaped girls, and can communicate with the supply chain at any time to adjust the pallet according to user needs, covering the outfit needs in various life scenarios.

From this perspective, KOCs with supply chain capabilities are the key direction of Xiaohongshu's commercialization.

This is more of a roundabout way to save the country. Although live streaming has been deployed in 2020, Xiaohongshu has not acted quickly. Although it has more than 300 million users, to date, there are not many exclusive creators on Xiaohongshu. The major platforms have well-known big Vs, and their influence on Xiaohongshu is not that great. For example, Papi Jiang has less than 5.4 million fans on Xiaohongshu, not even as many as Bilibili's approximately 8 million. Zhao Lusi, who has the highest number of fans on Xiaohongshu, has less than 20 million, while Luo Xiang on Bilibili has more than 30 million. It is worth noting that Luo Xiang broke out of the circle on Bilibili, while Zhao Lusi is a star herself, not made famous by Xiaohongshu.

The role of top creators is to attract traffic and expand the business. Douyin and Kuaishou may have far more commercial content than Xiaohongshu. Three out of 10 posts may be live streaming, but a few big Vs can retain a large number of fans. Obviously, Xiaohongshu does not have such ability. In this case, focusing on personalization and differentiation can not only disperse risks, but also find its own market.

However, strengthening buyers and emphasizing "lifestyle e-commerce" is a relatively risky approach. Over-emphasizing "understanding life" may lead to a vicious circle of "exquisite girls taking high-speed trains." That is, excessive consumerism and excessive promotion of a certain filtered life, ignoring authenticity and cost-effectiveness, and ultimately constantly reinforcing the public's stereotype of the platform. Just like Zhihu, which says "I'm in the United States, just got off the plane," Xiaohongshu needs to avoid being labeled and abstracted while showing lifestyles and life experiences.

At the same time, other platforms are also trying to invade Xiaohongshu's image and text track and grab Xiaohongshu's users. For example, Douyin APP directly added the image and text switching option to the homepage recommendation column, and also made the first-level entrance "Experience" column on the left directly into the image and text section. The page layout is exactly the same as Xiaohongshu. This will also be a challenge for Xiaohongshu. The owner himself also needs to pursue profits. With a larger platform and greater traffic, Xiaohongshu is actually not very attractive.

Xiaohongshu has users with greater spending power than platforms such as Bilibili and Zhihu, but in essence it is not much different from the other two platforms. A research report by GF Securities shows that 80% of Xiaohongshu's revenue in 2022 came from advertising business, and the rest was mostly e-commerce business; the proportion of advertising revenue in 2023 decreased slightly, but still accounted for nearly 80% of total revenue.

Xiaohongshu urgently needs to get rid of the model of relying solely on advertising, but in the process of continuous commercialization, it still faces the same balancing problem as these platforms. Due to its own tone and concerns about the content community ecology, Xiaohongshu cannot commercialize freely like platforms with GMV exceeding one trillion. "Lifestyle e-commerce" is both a roundabout way to save the country and a risky attempt. Xiaohongshu needs to avoid sliding into the abyss of stereotypes at all times.

References:

Xiaohongshu first proposed the definition of "lifestyle e-commerce": activating the power of "people" in the e-commerce field, source: Cover News

Commercialization is not as expected. Xiaohongshu, which is not short of money, has mixed feelings. Source: China Business News

Xiaohongshu's "mid-year review": up to 20% layoffs, a new round of structural adjustments, source: Mirror Studio