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The Rise of Social Media E-commerce in China: Benefits and Challenges for Brand Licensors

By: George Williams

Originally Featured in Total Licensing China – Read full article here

The universal acceptance of the WeChat social media platform as a primary mode of communication in China, coupled with the rapid adoption of the WeChat Pay and Alipay electronic payment platforms, has revolutionized China’s e-commerce industry in recent years, with I-media Consulting forecasting that some 570 million consumers will generate as much as RMB 3 trillion in online sales via social e-commerce in 2020.  Industry giants such as Pinduoduo, JD.com/Tencent and Alibaba, along with many smaller players, are all racing to lay the technology and logistics infrastructure that will power the next phase of e-commerce growth with a particular focus on China’s second and third-tier cities.  While the increased velocity in sales and efficiencies realized in retail operations and fulfillment will be a boon to both licensors and licensees, challenges lay ahead for those seeking to protect their brands in this important market.

500 Million Commissioned Sales Agents

Through the power of Tencent’s WeChat Pay platform, every consumer with a mobile phone can receive a commission for recommending a product to a friend via social media.  On WeChat, users are able to invite their WeChat friends to a group, which they create and for which they are the leader. Groups can be as large as 500 WeChat friends, and there is no limit to the number of WeChat groups that one can create.  When a group leader recommends a product to the members of her group, an app tracks the users who purchased the product, and a commission is paid to the group leader via the WeChat Pay platform for every recommendation that results in a purchase.  Companies like JD.com have already developed the infrastructure to support this model, which enables users to recommend products to their friends, who can then review and purchase products at the touch of a button and have the products delivered to their door.

A Lifeline for Main Street

For companies like JD.com, offline retail chains are not viewed as competition. They’re an important part of the total social e-commerce solution, where consumers can still experience products first-hand before ordering them online and having them delivered to their homes.  Large online players have been acquiring controlling interests in their larger offline counterparts and distribution agents and retail store operators are all part of the connected, social media network, providing aftersales service and developing relationships with end-consumers whose word-of-mouth reviews on their WeChat groups can help them to advertise in-store promotions and lure new customers to experience their good service and points programs.

The Last Mile

While there remain near-term challenges in terms of developing the logistics infrastructure required to support next-day delivery across all of China’s second and third-tier cities, the cost efficiencies related to inventory management and local logistic centers are significant, and are a key driver for companies like JD.com to make the required investment.  Once in place, these logistics platforms will extend benefits to offline retail partners via effective warehousing and delivery solutions to take those burdens off of their shoulders, while also enabling the bundling of products into single shipments to end-consumers, rather than multiple shipments from separate warehouses which is often the norm today.

Big Data

It goes without saying that, as the pace of e-commerce purchasing accelerates and the number of buyers increases in the next few years, the stockpile of data will be invaluable to retailers and brands alike, driving efficiencies in inventory management, product development and merchandising, not to mention cost-effective, targeted marketing programs. 

Benefits and Challenges for Brands

China remains a challenging business environment for brand licensors where visibility into actual sales numbers for licensed product can be less than optimal in some cases.  As more and more of China’s commerce moves online it is reasonable to assume that access to solid sales data will become the norm for accurate royalty reporting and payment, and also for new product development that depends heavily on past consumer purchasing behavior.

For licensees, the growth and acceptance of the e-commerce model in China has greatly reduced the risk and investment related to developing new licensing programs, eliminating the need to establish offline retail stores as a means to introduce new brands or products to end-consumers, and permitting the licensee to serve China via one or a handful of online points of sale.  With the advent of social media, the potential pace with which consumers can be informed about new brands and products via cost-effective, word-of-mouth recommendations from friends and associates, and act on those recommendations in real-time is astounding.

And it is the pace of information flow and the sources of that information that may hold the greatest potential risk for both licensors and licensees in a social e-commerce world. Just as good recommendations may sway a friend to embrace your brand and products, bad reviews will influence purchase decisions as well.  Perhaps more so.  Chinese consumers have become well-accustomed to checking product reviews before reaching a purchasing decision on more traditional e-commerce sites like Alibaba’s Tmall and JD.com.  In the world of social e-commerce, they’ll be receiving reviews from family, friends and others they know – an arguably much more influential cohort than the man on the street.

It is for this reason that licensors will need to be even more diligent in monitoring their licensees’ performance in China and other territories where social e-commerce can play such an influential role in the public perception of their brands across product quality, marketing and communications and aftersales service. 

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