Social commerce is the fastest-growing segment within the relatively mature e-commerce segment in China. Pinduoduo does almost $145B in annual GMV on top of sales by Alibaba and JD. In comparison, the entire Indian e-commerce GMV of Flipkart and Amazon combined is projected to reach ~$41B in 2021 indicating the massive headroom which exists in the Indian market. While e-commerce is estimated to emerge as a $2T category in China, social commerce is slated to emerge as the fastest-growing market cornering a share of ~13%. Over the last 3 years, the amount of time spent by users in China on social commerce apps has grown 6x indicating the growing importance of social commerce as a category. Three business models have gained prominence in this space — the group buying model pioneered by Pinduoduo, the membership-based model developed by Yunji, and the community-based buying model being pursued by Shihuituan. Pinduoduo: The group-buying giant Since its founding in 2015, PDD has amassed an astounding 487M MAUs which compares favorably with Alibaba’s 846M mobile MAUs. PDD provides a fun and immersive buying opportunities using the group purchase model leveraging social platforms like QQ and WeChat. This is enabled by a gamified social interaction based interface in the PDD mobile app. It has focussed exclusively on the value for money buyer groups residing in lower-tier cities across China. Tencent’s investment provides a strong moat for PDD as Alibaba/JD would never be able to access the 1B+ highly engaged users of WeChat and QQ. The secret sauce for PDD is its group-buying model. Under the model, a buyer can initiate or join a team purchase to enjoy lower prices if there are enough buyers for the team (usually two). After a team purchase is initiated, it will have 24 hours to meet the minimum team size set by the merchant. Buyers can use an extensive suite of social sharing tools deeply integrated with WeChat and QQ to complete their teams on time. It even offers certain products for free if users can acquire new users. The number of subsidies that the user receives when inviting each friend to open PDD’s app will diminish from more than RMB 30 to lower than RMB 1. As the users usually don’t want to waste their previous efforts, many of them will choose to continue inviting friends. In the end, the users may need to invite tens of friends to download or reopen PDD’s app to get free products. PDD, on the other hand, gains new users or activates existing users with a very low expense. PDD has developed mini-games within the app to deepen user engagement. Duoduo orchard is one example. An interactive recommendation feed based shopping format allows users to discover new products they might not have known they wanted. Most product discovery on the PDD app is feed based. Only about 44% of users on PDD end up using the search feature in the mobile app. PDD’s 3P marketplace focusses on selective SKUs that are popular across users instead of the long tail of products being offered by search-driven platforms like Alibaba and JD. Alibaba stopped focussing on unbranded smaller merchants on Taobao from 2011 onwards. These merchants were captured by PDD to build its supplier base. There’s no shopping cart in the PDD interface, as every transaction is only for the product from that specific Team Purchase. Hence, PDD enjoys more number of transaction but lower ticket size structurally. Monetization is done using two approaches — similar to larger marketplace platforms like Alibaba/JD: 1. Merchants are asked to pay for display ads, slots in the recommendation feed, and better ranking in search results. Initially, larger merchants were offered free traffic to build supply and demand. This accounts for more than 85% of revenue. 2. Commission to cover the costs arising out of providing transaction services such as payments. A sharp focus on its user base, gamified shopping interfaces, and deep integration with WeChat/QQ have allowed PDD to grow rapidly. It would need to continue adding new users and expanding the share of wallet from existing users to continue on its growth path. The increasing focus from Alibaba/JD on the lower tier markets in China could potentially spell trouble for PDD. Yunji: The online Chinese Costco Yunji has adopted a membership-based model for social commerce. It curates and distributes its own merchandise in partnership with local Chinese manufacturers. It does not rely on ad sales or sales of merchant services for revenues. It exercises complete control over merchandise, logistics, and distribution with a full range of service capabilities. Approx. 88% of revenue comes from merchandise sales with the rest coming from memberships. In 2018, it had 7.4M members and did an annual GMV of $3B. Major categories include personal care, electronics, fresh products, food, and apparel. Yunji’s membership is very similar to what is offered by Costco in North America or Easy Day in India. Members have access to exclusive benefits including discounts and also double up as a potent sales force for selling both merchandise and enrolling new members. Members earn incentives (between 1% to 30% of GMV) by referring buyers even if they do not themselves make purchases. WeChat and QQ are most commonly used for selling merchandise or recruiting new members. New users can become members either by signing up for a 398RMB membership or by spending more than 598RMB on the platform over 3 months. There are also periodic promotions where memberships are given out by premium brands or top users. Top 1% of members are hired as service managers to manage communities on key platforms. Service managers are provided customized training to develop their sales and marketing skills. Almost 83% of members on the platforms end up buying or sharing products contributing 2/3rds of the GMV. Non-member customers buy from Yunji typically through invitations or product links from members, who actively share their opinions and recommend good products to others. Non-members can also go to the app directly as they may hear about Yunji from members. However, they do not enjoy discounts and other membership benefits. Buyers access the Yunji platform primarily through mobile channels, including its flagship Yunji app, webpages opened from their social networking tools, and mini-programs. To encourage members to share, Yunji provides support such as promotional materials, training, and customer services, and handles order fulfillment, so members don’t have to worry about all these execution details and can focus on sharing. Initially, Yunji focussed on discounted products from large well-known brands to develop its base of members and buyers. Of late, emerging brands as well as private labels have gained prominence on the platform. Emerging brands are developed through C2M (customer to manufacturer) initiatives where feedback from customers is used to define what products are developed. It can offer higher referral incentives on emerging/private label brands as compared to leading brands. Unlike PDD which allows all suppliers on to its platforms, Yunji actively curates suppliers of high-quality products and then enters into exclusive agreements with them. Major brands drive eyeballs and trial while emerging/private label brands drive profitability. This chart summarises the key differences between PDD and Yunji quite succinctly. Shihuituan: Community-based group buying Shihuituan is the newer kid on the Chinese social commerce blog. It has pioneered a community-based group-buying model to develop inroads into lower-tier cities in China. Stay at home moms or local mom and pop stores share group buying deals with other people in their locality, place orders using the company’s WeChat mini-program, receive the package from the company, and handle the last mile distribution earning a commission of ~10% in the process. With its network of 80,000 community influencers, the company currently serves 20 million households in 60 cities in China. For November of 2019, it recorded a monthly GMV of 500 million RMB (roughly $71M). The merchandise is supplied by third party vendors who use the platform to access aggregated customer demand. On average each community leader handles around 100 customers. This model allows Shihuituan to significantly lower the cost of customer acquisition. The most prevalent categories on the platform are fresh fruits, vegetables, frozen seafood, and personal care items. Given the nature of products, there is very high repeat usage. Some of the older cohorts average around 14 orders a month. Without a full cold chain, Shihuituan is able to achieve 12-hour delivery for fresh produce across China for most of its orders. This is enabled by using community leaders for last-mile delivery and a just-in-time fulfillment model in its warehouses. Suppliers are encouraged to supply goods as and when orders are received. As a result, fresh produce stays in the supply chain only for 5–7 hours in cold boxes or frozen boxes. Consequently, the company can keep logistics costs to less than 10%. The logistics are completely outsourced while warehouses are self-managed. Suppliers of fresh produce to supermarkets comprise a large chunk of the vendor base. Shihuituan is able to provide better payment terms and access to a larger number of customers compared to traditional supermarkets. Listing on the platform is also free, unlike supermarkets, making Shihuituan an attractive proposition. Implications for India Lessons from these three very distinct business models can point to why social commerce still struggles in India. There are bottlenecks on both the demand and the supply side that have stunted the growth of such models in India. Demand-side 1. PDD, Yunji, and Shihuituan leveraged the Weixin ecosystem (WeChat + QQ) to acquire customers and drive word of mouth. The closest substitute to WeChat that India has is Whatsapp which is very limited in its ability to facilitate commerce. This gap did not allow social interaction based viral loops to take hold in India. 2. China’s e-commerce ecosystem is more mature than the Indian ecosystem. E-commerce is predicted to of overall retail in China by next year. As a result, people are more comfortable with buying goods online. Except for the metros, this level of comfort is still not present in India. make up more than 50% 3. Alipay and WeChat pay are ubiquitous in China with almost everybody using one of these two apps to make payments. Till recently, India did not have an ecosystem that allowed seamless payments across platforms. Cash, which is very expensive, has been the dominant mode of payment for e-commerce users. UPI could be a game-changer with its open-loop architecture and easy to use interface. 4. Chinese companies mixed entertainment with shopping. Expensive phones and internet did not allow for this to happen in India. Jio and cheap handsets are already enabling this. 5. Product quality continues to remain a concern eroding buyer trust. Even on platforms like Amazon, people end up receiving fake or poor quality products. Supply-side 1. China has a lot of spare manufacturing capacity allowing the manufacturing of unbranded products in bulk. This allows costs to remain low which in turn leads to lower pricing for customers. Indian manufacturing ecosystem is still getting organized making it difficult to offer quality goods at low prices. 2. Logistics infra in India remains stretched leading to higher costs of shipping. Existing models have a high cost of logistics, which makes it difficult to service low average transaction value in non-metros. 3. Current crop of e-commerce apps has started adopting discovery-based shopping formats. Most incumbents in this space, continue to rely on search led discovery. In addition, components around social fun and gamification are still missing from mainstream apps. All of this could change as the right macro themes begin to coalesce together, thanks in part to CoVID: 1. CoVID has accelerated the adoption of e-commerce esp. in tier 1/2 cities. Big Basket has claimed that its daily orders became 3x of last year during the lockdown. Post-CoVID sales share of e-commerce distribution channels has doubled for leading consumer electronics brands. Expect this trend to persist. 2. UPI has emerged as a radical disruptor for driving the adoption of digital payments in the country. With 155 banks live and 1.33B transactions in Jun’20, UPI seems poised to capture a significant share of payments in India. The much-delayed launch of Whatsapp Pay could catalyze the development of a WeChat like ecosystem in India. 3. Launch of Jio and the resultant drop in data prices continue to remain a strong underlying theme for deepening penetration of e-commerce in India. The recent partnership between Jio Platforms and Facebook could be the beginning of a new phase in Indian e-commerce. 4. Govt. of India’s increased focus on ‘Atmanirbhar Bharat’ could catalyze the development of local industries to manufacture daily use products in large quantities reducing pricing for end- buyers. 5. Continued investments in logistics, agri-warehousing, and cold-chain infra would also allow movement fo fresh produce from farmers to customers at affordable prices. While China has followed the fresh produce led model to capture users, India might as well end up choosing a different set of products. It would be interesting to see whether social commerce would take off in India at this time. There are a large number of start-ups trying out various models to make it work. The partnership between Jio and Facebook definitely adds a lot of excitement to this space.
