Future Tech China: Why Shopify Will Fail in China, Even With Alipay Partnership

Plus: What's actually good about TikTok, a bargain-hunting red penguin, and Douyin nabs a God of Songs.

Nov 19, 2020

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This just in: retail platform Shopify and Alipay have announced a partnership that will allow Shopify merchants in the United States to accept payments from Alipay users.

It sounds like a classic love story: The world's biggest D2C underdog, the anti-Amazon, pairing up with China’s biggest fintech company, gaining access to a billion-plus consumers and the world’s leading e-commerce market, which continues to grow at a rapid clip.

What could go wrong? Shopify is great, and so is China’s $1.5 trillion online retail market — yes, trillion with “t” and in U.S. dollars.

So why is this an unhealthy relationship?

1. The Shopify Store Business Model Won’t Work in China

How do Shopify stores actually work and get traffic? Some of it comes from SEO, but the majority is from ads on social media. On platforms such as Facebook and Instagram, it's easy to place and buy targeted ads. But Chinese social media is not about ads. There are no "accessible" ads, and the closest you get to this type of affordable advertising in China is via KOL (aka influencer) marketing. (Read more about why targeted ads don't exist in China here.)

As a result, it’s a lot harder (read: impossible) to run a small e-commerce business on Shopify when social ads (like the ones in China) are incredibly expensive, restricted, and don't allow hypertargeting. China’s online merchants solve this problem by paying for advertising directly on e-commerce platforms. Taobao's revenues, for example, come mostly from advertising, since they don't charge transaction fees.

Shopify's business model for merchants is contingent on social media. Specifically, they depend on social media ads, which don’t exist in China.

Don't mistake Chinese social commerce for the non-China model of e-commerce that’s facilitated through social media ads. Adding a "buy" button on Facebook doesn't make something social commerce. A store that lives on social media is not social commerce. Social commerce happens when people and tech come together to build an ecosystem where friends recommend purchases and deals to each other. That's Pinduoduo's business model, supported by a game-winning pass from their investor Tencent. Big score.

2. WeChat Stores Own Native E-commerce on Social Media

China really only has one "pure" social media play, and that’s WeChat. Douyin (TikTok’s Chinese version) is often mistaken for it, but Douyin is not social media — it’s entertainment that’s moving into e-commerce. Who texts their friends via Douyin? Or Xiaohongshu and Weibo for that matter? Conversations and connections happen on WeChat in China, and that’s pretty much it.

So WeChat might be where Shopify looks to build traffic. But that would mean direct competition from Tencent's native-built WeChat shops. Tough luck. Tencent is aiming to boost its e-commerce might in the face of growing competition, and Shopify’s partnership with Tencent’s arch-nemesis Alibaba won’t help it on WeChat.

3. Shopify on Taobao or Tmall Turns Shopify Into Amazon

Shopify could pull an Allbirds. Globally, Allbirds sells through Shopify. In China, they sell through Tmall. The problem is that this turns Shopify into Amazon.

Shopify and Amazon are very different because Amazon is consumer-friendly, whereas Shopify is business-friendly. One example of how this difference manifests itself is that Amazon has a big search bar. Nearly two-thirds of consumers in key e-commerce markets start their online shopping searches at that big search bar. But Shopify doesn't connect any of its vendors to each other — there is no Shopify space that allows consumers to search all vendors, unless you count Google. That's a feature, not a bug. It allows Shopify stores to stand apart on their own two feet with pure branding, and no price comparison. Shopify's business model is predicated on vendors not being connected to each other, in other words, it’s business-friendly.

4. Chinese Consumer Nightmare: Shopify Is Based on Browsers

China’s shoppers will not buy via internet browsers. I’ve long wondered why Shopify doesn’t simply develop an app that Shopify stores can opt in to use. But then, we would bump into issue number three: If all products were connected or aggregated, it would just turn into Amazon. Zero aggregation is Shopify’s biggest strength. Even creating a feature such as "starred shops" would impose some level of aggregation for consumers. There is no overview of all the Shopify products through a Shopify search, and it’s both a strength and weakness.

So Shopify mainly encourages its merchants to either build mobile-optimized web stores or create their own apps. Sigh.

In the end, Shopify might be making the mistake that nearly all Chinese market-entry hopefuls make: the idea that you just need a small slice of the market to be successful. It's not entirely wrong, but it's also a great way to invest millions into driving your business into the ground.

I'm just a girl standing in front of Shopify, asking it what its next step into China really is.

Further Thoughts and Resources:

I'm a fan of Shopify but am skeptical about its business model. Shopify is not in the e-commerce business, it's in the lifestyle business and sells the modern e-commerce dream: for a measly $15 a month and a certain percentage of all transactions, you can call become an online entrepreneur.

The Founder’s Zodiac: What Business Should You Start, Based on Your Sign? Shopify’s blog. So Shopify’s official blog has an article series called The Founder’s Zodiac. This screams lifestyle business.
McKinsey's new report on how e-commerce in China eclipsed $1.5 trillion in sales, McKinsey
Shopify Tutorial For Beginners 2020, YouTube. A video with 4 million views highlighting how dropshipping and Facebook/Instagram ads can turn anyone into a successful entrepreneur.
Shopify rises 175% year-to-date as investors pour in, CNBC, YouTube

- by Tanya Van Gastel

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Mentioned in today’s newsletter: Alibaba, Allbirds, Amazon, Bilibili, Bytedance, Douyin, Facebook, Instagram, Kuaishou, Pinduoduo, Shopify, Tencent, TikTok, Tim Hortons, Xiao’e Pinpin, Xiaohongshu, WeChat.

CCI Take: TikTok Is a Content-Commerce Conduit for Global Gen Z

by Avery Booker

Amid the whiplash-inducing news surrounding TikTok’s future in the United States, which has left even the company itself struggling to understand its future status, the Bytedance-owned app continues to move forward with monetization efforts in international markets (with the obvious exception of India) as it gains popularity among the increasingly lucrative Gen Z demographic.

TikTok is looking to replicate the success of Douyin, its more feature-rich mainland China counterpart, through the development of shoppability and content-commerce. Last month, TikTok announced a partnership with Shopify, representing one of its most important moves to incorporate social commerce and advertising since the launch of TikTok for Business earlier this year.

The Shopify partnership represents a strong shift towards content-commerce for its the global app, and it stands to benefit brands in the direct-to-consumer (DTC) brands space first. In the U.S. market, as in China — where “internet-famous” (wanghong) brands are all the rage — Gen Z consumers have proven themselves to be extremely interested in these fast-moving brands, such as ultra-cheap Chinese fashion label Shein.

The question now is whether TikTok can follow in Douyin’s footsteps and successfully build a vertical entertainment-and-shopping infrastructure that keeps young people engaged with its content while giving them the ability to shop within the app (something that Instagram is also trying to do, with mixed success). Douyin recently moved to bolster its e-commerce business by blocking links to third-party sellers from livestreamers on its app, requiring viewers to be directed to Douyin’s in-app shops (outside links are still allowed from short videos, however).

TikTok could follow a similar path over time (especially if e-commerce livestreaming takes off on the platform) and it could potentially force brands to use a proprietary e-commerce infrastructure, along with its in-house influencer identification and marketing tools.

Read the full article on Content Commerce Insider

Digital Connections: How Arts Organizations Can Leverage Livestreaming in 2021

CCI sister site Jing Culture & Commerce has released the first extensive report to focus on livestreaming in the context of cultural institutions. Covid-19 has radically impacted how cultural institutions around the world engage audiences and livestreaming is emerging as an increasingly vital tool.

The report presents four key case studies from 2020 (British Museum, Palace of Versailles, UCCA Beijing, and the National Museum of China) that showcase the dynamic application of live video.

In addition, the report draws from industry insights to offer tips and actionable steps for organizations considering integrating livestreaming within existing strategies.

Download the report here

Brand Film Pick: Tencent’s New Penguin IP Supports E-commerce Expansion

Stepping up the competition with Alibaba on its dominance of online retail, Tencent has been moving aggressively to boost its e-commerce footprint in recent months, rolling out Mini Shops, a new feature on WeChat that allows merchants to easily create digital storefronts on the super app, and sales via WeChat mini-programs have seen significant gains as well, rising 115% year-on-year in the period from January to August.

The tech giant also launched a WeChat-based challenge to the discount-oriented social commerce platform Pinduoduo (in which Tencent is also a major investor). Xiao’e Pinpin made its debut in April as a mini-program available to WeChat’s 1.2 billion-plus users, with an emphasis on sharing to unlock bigger discounts.

Although officially released earlier this year, Xiao’e Pinpin saw little marketing fanfare until earlier this month, when Tencent launched a cross-platform blitz ahead of Singles’ Day starring the Xiao’e Pinpin mascot, a red penguin (Xiao’e means “little penguin”) that appeals to fans of the company’s longstanding black-and-white penguin mascot.

The little red penguin looks set to play a major role in entertaining content that can be used to promote Tencent’s social commerce ambitions. On Xiao’e Pinpin’s Bilibili channel, five videos were released in the lead-up to Singles’ Day starring the mascot, ranging from a catchy rap music video to a news report parody to an animated comedy sketch.

News From China

Bilibili by the numbers: Chinese Gen Z’s favorite video platform continues to grow its audience and revenues, according to its latest quarterly report released on Wednesday.

The platform added more than 25 million average monthly active users (MAUs) since June, for a total of 197.2 million, up 54% year-on-year, and MAUs exceeded 200 million in August. More viewers are paying for Bilibili content as well, with average monthly paying users reaching 15 million, up 89% from the third quarter of 2019.

Revenues were RMB 3.2 billion ($475.1 million) up 74% from a year earlier and beating analyst expectations. While games are still Bilibili’s leading source of revenue, accounting for nearly 40%, advertising and the category known as “value-added services,” which encompasses paid memberships and livestreaming, are growing faster (more than doubling year-on-year) and making up a larger share of the total.
But heavy spending to acquire users and generate buzz has also impacted the bottom line. The company spent RMB 1.2 billion ($175.3 million) on sales and marketing, up 227% year-over-year, and it posted a net loss of RMB 1.1 billion ($162.1 million) compared to RMB 405.7 million in the same period of 2019.

In the latest high-profile celebrity livestreaming scandal, the popular TV host Wang Han came under fire over allegations that the vast majority of products he sold during a recent e-commerce broadcast were later returned, fueling speculation that Wang and his intermediary agency were using fake traffic to boost sales, a practice known as brushing.

According to a screenshot circulating on Chinese social media, the appliance company Shunde paid RMB 100,000 ($15,000) to have Wang promote its products during a five-hour broadcast, but more than 76% of the roughly 1,300 units sold were later returned and refunded.
Wang’s agency claims that it did not engage in any fraudulent conduct and has blamed the high rate of returns on competitors’ malfeasance, and said it is cooperating with authorities to investigate. The incident is sure to add more impetus to calls for greater regulation of China’s booming and sometimes chaotic e-commerce livestreaming industry.

While Kuaishou scored a big coup back in June when it announced that king of Chinese pop Jay Chou would join its platform, rival Douyin recently got legendary Canto-pop singer Eason Chan, known as a “god of songs,” to make his debut on the app.

Chan’s first foray into short video quickly rose to the top of the Douyin charts, and like Chou, he had previously kept a fairly low profile on mainland China’s social media scene, fueling fan excitement over his appearance.
Chan’s arrival on Douyin was also welcomed by numerous other celebrities, leveraging the platform’s advantage as a hub for China’s top stars.

News in English

E-commerce livestreaming on Taobao Live during the Singles’ Day shopping festival contributed more than $6 billion in sales to Alibaba’s $74 billion total, representing a more than 100% increase from 2019. Forbes
Tencent, a major backer of Canadian chain Tim Hortons’ expansion in China, has opened a co-branded esports cafe in China featuring themed food and beverages and gaming-related activities. Dao Insights
“Branded content every week”: Rogier Bikker, founder of Shanghai-based creative agency Tomorrow, talks about helping foreign brands succeed in China’s fast-moving market. SHPPLUS
Chinese consumer demand for products from overseas remains robust, with purchases of imported goods on Tmall Global up 52% year-on-year in the first quarter of the year. Technode
Superstore chain RT-Mart came under fire and was forced to apologize for creating a sizing chart that referred to larger-size women as “rotten” and “extra rotten.” New York Times
Unrealistic beauty standards were also in the spotlight with the debut Tencent Video’s “Hear Her,” a monologue-driven show on women’s issues directed by Vicky Zhao. Radii