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Douyin's E-Commerce Efforts & Increasing Taobao-fication
Douyin’s E-Commerce Efforts & Its Increasing Taobao-fication
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Douyin’s E-Commerce Efforts & Its Increasing Taobao-fication
Background: Why’s this important?
It is well known that Chinese internet giants, unlike their American counterparts, do not often stay in their own lane. Whether it is due to paranoia or a result of sound business strategy, we’ve seen over the years Alibaba’s attempts in digital entertainment and social media, Tencent’s efforts in e-commerce, and Meituan’s forays into ride-hailing. ByteDance, of course, is no exception. In fact, it is probably the least restrained of the lot, having made high profile investments into gaming, education, ecommerce, healthcare, and more. But in the last two years, ecommerce has been its primary focus, especially in livestreaming, where it has taken the crown from Taobao, one of the pioneers of the format. While its goal of $200Bn in GMV for 2022 is very ambitious, it is still just a fraction of Alibaba's $1.1Trn GMV, because livestreaming e-commerce is just 14% of total online retail. More worryingly, some Douyin insiders apparently believe that the entire (livestreaming e-commerce) market may top out very soon at $3-400Bn. No wonder then that the Douyin team has stepped up its more “traditional” e-commerce marketplace efforts with the re-brand of Douyin Shops 抖音小店 to Douyin Shopping Mall 抖音商场 last August, as it expects livestreaming growth to slow. To double its total e-commerce GMV to $400Bn in two years, the Shopping Mall will have to contribute $140Bn or more of GMV as soon as 2023. How have Douyin’s e-commerce efforts fared in general, and how has its Taobao-fication fared in particular?
Douyin’s E-Commerce Efforts
Livestreaming E-Commerce: Challenges and Opportunities
Challenge 1: Balancing E-commerce and entertainment content. LatePost reported recently that Douyin’s internal data showed if there was more than 8% traffic dedicated to e-commerce content, there would be a hit to retention and time spent. Our experts echo these findings and give 10% as the cutoff, and internal experiments have shown that e-commerce videos have one-seventh the clickthrough of gaming content, for example. It is no surprise then that in the past few quarters, Douyin has lowered the ratio of e-commerce livestreams from 30% to 20% and reduced the probability that e-commerce related short videos can trend (go viral under “Hot Videos”) to one-sixth of other videos.
Challenge 2: The format restricts how many SKUs sell well. For influencer livestreams, a brand is typically only paying for one spot during the session. For brands who operate their own livestreams, they tend to focus on 1-2 products as well. Even if they choose short videos, each video can only accommodate one link, so typically only the bestsellers are shown. The result is that 5-7% of the SKUs, often just 2-3 items, contribute over 80% of the GMV for the average Douyin store. Conversely, this is an argument for the expansion of the Shopping Mall product, otherwise brands will see Douyin as a promotion channel and not a serious distribution platform.
Challenge 3: Some categories have high return rates, impacting ROI for merchants. The jewelry and gems category is the highest performing category in terms of advertising revenue, with paid traffic accounting for 60-70% of GMV, probably due to its high margins. However, it’s also prone to high customer returns, hitting as high as 80% after CCTV’s annual March 15 programming on fraud for World Consumer Rights Day. Clothing also has high returns, with women’s clothing at 40-50%, men’s at 30%, women’s shoes at 70%, men’s shoes at 35%, and bags at 35-40%. Sportswear is significantly lower at 25-30%. Paid traffic though, is also much lower, at 15% for sportswear and up to 25% for the other apparel categories. The entire platform had 20% return rates in 2021, with 17% of GMV in paid traffic (and something like 40% of user traffic), for an ROI of 4x, not counting other platform fees and taxes. Experts seem to think though that the ROI will continue to be attractive for at least one more year, but then the “traffic dividend” could be greatly reduced to an ROI of 2 or less.
Challenge 4: Building out logistics. Douyin also has fewer fresh foods on its platform, primarily because it does not provide logistics services yet, unlike the other platforms. Brands therefore have to manage their own. However, that is changing as we speak. For this Single’s Day, Douyin is already beta testing its own logistics service in a few major cities, in a form that looks more like Alibaba’s 4PL Cainiao than JD Logistics. It is too early to say what strategy it will ultimately adopt, although many think that there is no avoiding building out one’s own delivery fleet if Douyin is serious about going down the e-commerce route, even though that is very costly.
Livestreaming E-Commerce: Optimizing Operations
Livestream traffic is currently estimated to be 40% organic, 40% paid, and 20% from the “follow” mechanism. In 2021, the breakdown of e-commerce livestreams on Douyin was roughly 48% third party and 52% by the brand itself. In 2022 that reversed slightly to 54% third party and 46% by the brand, mostly because Douyin now has more than 180 livestreaming bases (直播基地) all over the country, where they cooperate with local governments and corporations to help brands develop their livestreaming business. Unlike MCNs (multi-channel networks), these bases do not try to make influencers out of talent. Instead, they focus on studio rentals and integrating supply chains, a key value-add to the streamers. The bases also can have a sector focus, such as fashion or baijiu related in Guangzhou, food related in Shenzhen, etc. A few retail categories with stricter quality standards, such as jewelry and baijiu and nutritional supplements, require that the store must be part of a livestreaming base. Stores selling nutritional supplements in particular can only be opened via invitation for compliance reasons.
Currently, cosmetics is the category with the highest number of brand sellers at 90%. Food, however, has lagged at below 50% and is an area where Douyin is increasing efforts to recruit brands. The reason why food is a category of interest for Douyin is due to its high repeat purchase rate. If we define repeat purchases as buying from the same store within 30 days, regardless of channel (e.g. livestream or otherwise), then food is at over 18%, double the average. It has also generated over $1.8Bn in advertising revenue in 2021, more than 6x the amount in 2019.
The Taobao-fication of Douyin: The Douyin Shopping Mall
The Business Plan
The original business plan for 2022 was to have half of GMV come from livestreaming, 25% from video, and the Mall (sometimes called “shelf e-commerce”) accounting for the last 25%. However, livestreaming is still at 70-80% as of Q2 2022, not too different from year-end 2021, when it was 70-75%, the Mall was 9% and videos were 17-18%. Short videos have been reduced to 10% or so, primarily because of their negative effect on users, with the Mall / search-based GMV making up the last 10%. Therefore, we should expect to see more and more traffic directed to the Mall, and the 9.9 RMB initiative (see below) is a good indicator of that.
In terms of revenue contribution, recall that Douyin’s primary source of income from e-commerce is not transaction fees but advertising revenue, much like Alibaba’s beginnings. Therefore, it shouldn’t surprise you that white label makers (e.g. non-name brands, generally 20RMB or less in AOV, sometimes up to 80RMB) are expected to spend more on advertising and therefore make up 60-70% of the revenue, despite being only 40% of the GMV. These numbers aren’t broken out by livestreaming vs. Mall, but overall. Again, more Taobao and less Tmall.
Current Traction: Still Very Early
While Douyin Shopping Mall was officially launched in 2H 2021 as an upgrade from Douyin Shops, which itself was only released in 2019, the Mall really got a boost when the app began more actively beta-testing it as a top-level menu item in March of this year. Therefore, data collection is still early. According to experts, recent data show that 15-20% of users are clicking through to the online mall, with an average view time of 20 seconds. The vast majority, over 90%, do not buy anything. The online mall is still a small percentage of total e-commerce GMV: in November / December of 2021 it was contributing 135-150mm RMB per day (~$18-21mm USD) or about 5%, with livestreaming still dominating at 70-75%. For 2022, projections are for the Mall to nearly triple to 400mm RMB per day, or $55mm. Most stores are small: at the beginning of 2022, around 80% of Douyin stores had less than 10,000 RMB in sales in the last 30 days and only 3% had more than 100K RMB (~$14K USD) in sales. It is difficult to say what is the exact number of merchants this represents though, as a merchant can open up multiple stores (for example, Midea has 20).
Another way to categorize Douyin’s traffic is by recommendation or search. Currently, 80% of purchasing behavior on Douyin is still via the recommendation algorithm, whether that be in the form of directing users to livestreams and short videos; the remaining 20% is intent-driven, such as via search or browsing. By either metric, it is still early days yet for the Mall, but expectations are high.
Going After Pinduoduo
In October, just in time for Single’s Day, Douyin Mall launched a new section called 9.9RMB (~$1.40), same as a popular Pinduoduo category, leading many to comment that it is going after the Pinduoduo / rural / “sinking market” consumer base. However, there is a core difference between the two products that still has Pinduoduo coming out on top right now. That’s because Pinduoduo’s cost per click is lower than Douyin’s, as it can and does use these cheap items to entice users to browse and transact on other items that it can direct the user to. Douyin, on the other hand, does not control the content of the e-commerce short videos or livestreams that users may click through to after the Mall. Remember, the typical user is still used to transacting via content instead of listings, and the difference in volume is over an order of a magnitude. Otherwise though, there is little difference between the subsidies given by Pinduoduo vs. Douyin. Subsidies account for about 10-15% of GMV (13% in Q1 2022 and 9% in 2021).
As of now, operating on Douyin is still more expensive than on Alibaba, and isn’t suitable for premium brands (AOVs over 100 RMB). To improve the user experience, Douyin has been consolidating flagship stores (20% of total) this year, much like Tmall and JD did, but ultimately, it is difficult for brands to use Douyin as a regular sales channel when it is more effective for marketing and promotions for getting rid of unwanted inventory.
Douyin is aggressively expanding into “shelf e-commerce” AKA traditional marketplace e-commerce because it believes that it is close to reaching the ceiling for livestreaming e-commerce
In addition, e-commerce content (livestreaming, short videos) negatively impacts usage and retention, so Douyin restricts traffic for such content to <10%
Livestreaming content on Douyin continues to grow, but have several major challenges, including exposure to limited SKUs and high return rates. In addition, Douyin needs to invest in logistics to be competitive with other platforms. Ideally, if all goes to plan, livestreaming should only account for 50% of GMV, and video 25%.
The remaining 25% GMV should come from the Shopping Mall marketplace product, which was upgraded from Douyin Shops last year. The business plan calls for GMV to nearly triple this year, but it is not clear if that is on track. What we do know is that 80% of buying behavior is still directed by the recommendation engine, and that in order to entice more users to explore the Mall, Douyin has just launched a 9.9 RMB area, which makes it compete head to head with Pinduoduo. The advantage of this price point is that these are white label manufacturers who are willing to pay for traffic and so generate, in total, 60-70% of advertising revenues, and it is easier to “operate,” AKA run campaigns, subsidies, direct traffic, etc. The disadvantage is that overall Douyin is still quite an expensive sales channel and it is unclear that this is sustainable for low margin businesses, not to mention it is relatively disconnected from the content-driven sales parts of the product, which Douyin has less control over. If it succeeds though, this puts Douyin’s 700mm+ DAU directly in competition with Taobao and Pinduoduo.