Ensemble Capital Goes to China: Social Commerce vs E-commerce

4 December 2019 | by Sean Stannard-Stockton, CFA

This is part III in a five part series about Ensemble’s recent trip to China. Read part I for more context about the intent of the trip. Ensemble does not currently make direct investments in Chinese companies.

Read Part II

Social Commerce vs E-commerce

While 20 years ago, Chinese companies often followed trends set in the US and Europe, today it is important for western investors to pay attention to business and technology trends that are emerging first in China as leading indicators of what may occur in the US and EU. For instance, while many Americans may look at Amazon Go’s cashier-free stores as an innovation, Alibaba’s cashier-free Hema stores began being tested over three years ago. Today they are approximately 10 times as many Hema’s as there are Amazon Go locations and Hema stores are more varied in their offering with onsite shopping, delivery, freshly prepared food and even live seafood broadly available.

While Western investors are still generally focused on the rise of e-commerce and its displacement of bricks and mortar retail, the Chinese consumer economy is rotating from e-commerce to social commerce. In a classic e-commerce environment such as Amazon, consumers go to a particular website which is an online version of a store. Whether a “mall” type demand aggregation platform like Amazon.com on which third parties can list items, or a more traditional brand website like Nike.com, e-commerce has been around for over 20 years.

But social commerce on the other hand is a more diffuse model of online retail that does not directly map to offline retail in the same way as e-commerce. For a US example, Kylie Cosmetics exploded in popularity, doing half a billion in revenue in its first two years of existence, through a social commerce strategy. While KylieCosmetics.com is an e-commerce website, it is Kylie Jenner’s social media empire that drives sales. Rather than seeking to attract visitors first to an e-commerce website the way that Amazon and other online retailers traditional have, Kylie Cosmetics reaches consumers through social media platforms. Importantly it is not just the Kylie brand’s own social platforms driving users to their e-commerce site, but rather a huge network of fans that have created a cross platform brand that is far more multifaceted and dynamic than a simplistic “online store” in the model of Amazon.com.

According to the Internet Society of China, social commerce is expected to be a $300 billion market in 2019, making up 20% of the country’s e-commerce. However, with the segment growing at over 60% a year, it is forecast to reach 30% of e-commerce in 2020.

Social commerce may seem on the surface like a buzz word for e-commerce companies that advertise on social media. But it is far more robust than that. Importantly, social commerce companies are playing a different game than traditional e-commerce. While B2C or “direct to consumer” (DTC) business models characterize most of developed market e-commerce, B2K2C or “business to KOL to consumer” is driving Chinese social commerce. Rather than using digital tools to access customers directly in the e-commerce business model, social commerce companies utilize both digital tools as well as the broad ecosystem of social media users to drive awareness and sales.

At social commerce companies we visited such as Ruhnn and Mogu, the business strategies discussed by the executive teams was fundamentally different from a traditional e-commerce strategy. In both cases, they viewed their job as supporting and facilitating their KOLs rather than being focused primarily on the end consumers (thus the B2K2C rather than B2C business model). One executive at Mogu pointed to JD.com as the traditional Chinese e-commerce company and explained that shopping at JD.com (much like shopping at Amazon.com) is a solitary, not social experience. Since shopping has been a social experience around the globe since far before the rise if the internet, the idea that social commerce is not a fad, but actually a more traditional form of shopping than e-commerce makes a lot of sense to us.

(A KOL preparing to film at Mogu, Inc.)

For developed market investors, it is important to recognize that consumer sales in China are not just shifting from offline to online, but from e-commerce to social commerce and that the skill sets and competitive advantages of social commerce success are quite different from traditional e-commerce. And just as importantly, the Chinese experience suggests that American and European e-commerce companies may be on the verge of shifting from benefiting from a secular tailwind of offline commerce coming online, to a secular headwind from the rise of social commerce.

Read Part IV

For more information about the positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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