October 25, 2021

Direct-to-consumer Businesses May Have Their Next Chance In China

By Ainar Abdrahmanov

Direct-to-consumer companies are struggling in the US – rising cost for user acquisition and fierce competition with e-commerce marketplaces leave them without a scalable growth model. In China, things are completely different and startups that got to a plateau in the US might have a better chance there.

What are the challenges for the D2C industry?

The direct-to-consumer business model enables entrepreneurs to build a growing business the moment they see the customer demand in a niche market that isn’t covered well enough by the big players. They take advantage of consumers dissatisfied with what these big players can provide. So they create a new brand, find a manufacturer who already knows how to make this product, improve it in some way, and sell it. Marketing and selling the product becomes their core expertise and draws the line between a profitable sensation or a bust.

Just 5-10 years ago companies like Warby Parker, Dollar Shave Club, or The Honest Company (brand founded by Jessica Alba) started when driving traffic via Facebook advertising was 2-10 times cheaper. Facebook's algorithms were much more friendly to brands. On this wave, it became possible to manage growth by investing money at the beginning of the funnel and directly converting that money into orders. Investments in good copywriting, fresh design, and Facebook advertising always paid off. But the further we go, the more expensive ads become. And it killed one of the most important channels for the growth of D2C. Venture Capital loved direct-to-consumer businesses precisely for the opportunity of quick growth and then everyone saw it wasn’t working this way anymore. Dollar Shave Club took 30% of the razor market and defeated even Gillette, so Unilever had to acquire them. We are unlikely to see a similar story again. D2C brands simply no longer have economies of scale in the USA. Brandless raised $410M and was backed by Softbank but even pouring that much capital hasn’t helped.

American entrepreneurs have mastered building great consumer brands with a huge focus on design and storytelling but there wasn’t much to do for user acquisition. Many had no choice but to go to Amazon. They had to pay fees for that opportunity but were able to enjoy all of Amazon’s user base. But that story quickly ended too. In many categories, Amazon has launched its own Amazon Basic products that undercut the sellers. Nobody is safe, even if your category is independent right now, as soon as you get successful they see it and will launch yet another addition to their line-up.

And if earlier Amazon was selling cheap knockoffs, like their parody Allbirds, now they produce high-quality yet cheap products. By creating its own replacements, Amazon pushes all sellers from the leading positions to the second, third, or fourth page, just as it happened with a vegan cookies brand backed by some major investors. In a single year its business has taken off and this demand put them on the first page of the search result. Then, Amazon's subsidiary brands suddenly came out on top. And there is no alternative. In order to enter a conventional retail chain, a company needs to have a big cash flow and sell tons of products to make itself legit.

Why China?

The e-commerce market in China is very different and deserves the utmost attention. Most people have heard of Alibaba

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(Get Free Alerts for BABA) but there’s a number of eCommerce platforms out there and they don’t compete with their sellers. In fact, I’ve often felt they care deeply about the opportunity they can enable. Their seller support, their ecosystems, even the unique data they provide – Amazon

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(Get Free Alerts for AMZN) sellers can only dream of stuff like this.

The way you market your products is also quite different. Of course, there are influencers in the West as well, but they are far more important in China. First, instead of posting photos tagging your product on Instagram, they conduct regular live streams telling their audience about your product. That behavior is common among consumers who spend their time shopping by watching these streams. Brands that were relatively unknown yesterday can nail their selection of streamers and jump to 20 million dollars in sales in 1 hour and I’ve seen such cases myself. The streamer showcases your product and the people watching can buy it right there since streams are conducted through the apps in the Alibaba ecosystem. There’s no need to click on any links, go to a separate web store and put your payment details. The key difference from Instagram influencers is that live streamers are incentivized to support your product as their primary revenue comes from the fees on sales initiated by them. That ensures reasonable marketing costs that are always in line with what you’re getting.

In the US, the conversion rate for ads at 0.5-1.5% is considered healthy in most industries. In China, 10-15% is a good conversion rate for live streams. This leads to an interesting asymmetry. American brands in fact are trusted by Chinese people. For example, US brands control 30% of the supplements market, one of the most sensitive categories. And most FMCG incumbents, even if they have entered China, aren’t really using all these tools available to them.

There is a tremendous opportunity for many direct-to-consumer brands to take the lead in the Chinese market if they adopt the right tools and practices. For example, BabyCare started selling on Chinese Tmall 5 years ago. Today they sell more diapers than Pampers, which dominates almost every other country. Ginka Drinks defeated Coca-Cola and Pepsi. Perfect Diary fought Mac and Estee Lauder. And these examples speak for themselves. Even small direct-to-consumer brands in China have great opportunities to become huge.

What do you need to know to sell in China?

The Chinese market is the largest in the world right now. China's retail market is projected to double by 2025 and over 50% of it is in e-commerce. It provides tremendous opportunities if you know how to use it.

In order to conduct operational activities in China, most businesses engage with local partners which are called TPs: Tmall Partners. It is a company that runs your store, engages live streamers, and handles your marketing overall. Their revenue is tied to the sales they can make so they only earn when you do. As I said, the same goes for live streamers. It’s very different from Facebook or Instagram, which make money on ads regardless of the outcome for you.

And this is what makes the difference. In the US, platforms are interested in brands shedding their money left and right until they’re dried out. Chinese e-commerce platforms seem to be genuinely interested in helping you grow sales and then taking commissions from that. It’s simply more sustainable.

An American brand can gain an edge by entering the Chinese market simply because of its origin that is still respected by the consumer who believes in these goods’ quality and grows sales using all unique tools enabled by the local ecosystem. But first, American brands have to learn to look at the world beyond America and see the opportunity.


Ainar Abdrahmanov is the CEO of Longevica, a direct-to-consumer life sciences company, and a co-founder of China How Club which gathers international merchants interested in the Chinese e-commerce market.