ZWC Insight | Discussion on Investment in E-commerce Live Streaming
2019年12月27日

The Rise of E-commerce Live Streaming

At Alibaba Group’s 2019 Investor Day, the data on Taobao live streaming was very striking: GMV of Taobao live streaming exceeded 100 billion yuan for fiscal year 2019; GMV since fiscal year 2020 (April to September 2019) has increased by 140% on a year-on-year basis. By the end of fiscal year 2019, the live streaming penetration of Tmall merchants exceeded 50%. Among them, the live streaming penetration in cosmetic sellers was over 80%. About 30% of the new SKU first-day sales of clothing came from live streaming. More than 30% of the new SKU first-day sales of jewelry came from live streaming (comprehensively calculated based on data from January to August 2019); GMV of food from live streaming increased by 240% on a year-on-year basis (comprehensively calculated based on data of fiscal year 2019). Since its launch in 2016, Taobao Live has yielded remarkable results from 2018 to 2019 after three years of development. Xuan De, General Manager of Taobao’s Content E-commerce Division, believes that live streaming e-commerce is an epoch-making milestone for Taobao’s content ecology, and its significance can even be parallel to CloudTaobao established in 2015.

The data on Taobao’s live streaming platform was remarkable. Moreover, top live streaming KOLs also achieved stunning results: Viya, the “No.1 Anchorwoman of Taobao Live”, caused 2-hour maximum sales of over 267 million yuan, maximum sales of single commodity of over 27 million yuan and GMV of about 2.7 billion yuan in 2018. On the day of “Double Eleven” in 2018, Li Jiaqi, the Lipstick King, sold 15,000 lipsticks in only 5 minutes via live streaming. Their popularity and influence can be comparable to celebrities. The 2019 Taobao Live Streaming Ecological Development Trend Report revealed that the number of anchors joining

Taobao live streaming platform in 2018 increased by 180% on a year-on-year basis. Among them, 81 anchors have caused annual sales of over 100 million yuan; 100 anchors have a monthly income of over 1 million yuan, and the live streaming platform has marketed more than 100 billion commodities, an increase of 400% on year-on-year basis.

Top consumer brands have earned enough brand exposure on live streaming platform, opening up new sales channels to “digest” overstocked products through live streaming. Furthermore, many unbranded agricultural products are no longer dull of sale thanks to live streaming. For example, 4,000 jin of cherries from Haiyang, Yantai were sold in 2 hours through village live streaming platform, with sales exceeding 100,000 yuan.

In addition to KOLs and the brand-name companies, MCNs that serve KOLs and technical support companies, distribution and promotion companies and data monitoring companies that serve the brand-name companies are also thriving.

The industrial chain of e-commerce live streaming is maturing rapidly along with the increasing transaction volume. Our focuses are:

-Who has the strongest voice along the industrial chain of e-commerce live streaming?

-Who will be the policy makers and beneficiaries with respect to the industrial chain of e-commerce live streaming?

-What opportunities are there for investment institutions?

 

Industrial Chain of E-commerce Live Streaming

To answer the above questions, we need to be aware of the structure of the industrial chain of live e-commerce first. Here we temporarily designate the upstream and downstream according to the direction of business flow, namely, the upstream

refers to the source of products, the middle reaches refer to sales scenarios, and the downstream refers to consumers.

Photo: ZWC Partners

Source of products: At present, the main sources of commodities are the brand-name companies. Their demand for channels is brand exposure and improvement of sales. Compared with traditional channels, live streaming, a channel with high conversion rate, is the key focus of emerging channel layout. Among many other brands, cosmetic brands get the quickest benefit from their investment in e-commerce live streaming. In addition to cosmetic brands, various overstocked inventories, bulk products of smaller brands and factory direct supply products with high cost/performance ratio are all sources of commodities for the industrial chain. The source of products for e-commerce live streaming has a distinctive feature, that is, commodities need to be displayed for sale. For example, after wearing jewelry, clothing and cosmetics, anchors can demonstrate their effects in an instant and clear manner, which can more accurately fit the needs of viewers, thus boosting the sales.

Sales scenarios: According to the direction of products sales flow, upstream commodities will then appear at the live streaming bases, in the on-line store’s warehouse, their origins, or self-built live streaming studio. These are the physical spaces where anchors sell commodities. It is not easy for the upstream commodities to perfectly match with anchors that are suitable for selling them, nor is it easy for anchors to find the suitable source of products. For these two reasons, a large number of supply chain service companies have emerged, in a bid to help anchors to match with the suitable source of products. In addition, the difference of commodity marketing anchors, salesmen or on-line influencers is that they represent a new type of career that combines sales ability and personal influence. Their personal influence and marketability should be trained and developed by professional training institutions. MCNs are institutions that specialize in serving KOLs. MCNs incubate and help KOLs to connect with the supply chain. So MCNs are similar to talent agencies. In this way, a total of 4 groups of stakeholders emerge from the sales scenarios:

1.Supply Chain Service Companies: Their business model is to connect source of products and KOLs. As service-oriented enterprises, they earn commissions from selling products.

2.MCNs: Their business model is to train and incubate on-line influencers, and then form a community of interests with on-line influencers by contracts. They can get their share from total sales caused by on-line influencers. It is worth noting that the top on-line influencers, or top KOLs, often separate themselves from MCN organizations and build up their own teams. In this way, they can secure the dominant position in the distribution of sales commissions.

3.Physical space for sales: Essentially, providing physical space for sales is to provide commercial real estate service. Most of these service providers rely on local supply resources, and help match the on-line influencers with the source of products by providing sales venues. Finally, the physical space for sales will establish connections between consumers and the live streaming/transaction platform through the Internet.

4.Live streaming transaction platform: It is the end of the closed loop of the sales scenarios. These platforms are mostly controlled by e-commerce giants who are the policy makers of the supply chain, the controllers of traffic resources and the provider of the core live platform technology. Taking Taobao as an example, live streaming service is a powerful engine for the growth of platform’s GMV. Taobao attaches great importance to and keeps control of the supply chain at all times. For example, the exposure ranking algorithm for KOLs will greatly affect the traffic distribution of KOLs, thus affecting their sales performance.

On the whole, the industry chain of e-commerce live streaming is approaching its standardization, which drives the specialization of industrial division. We believe that the company that has the leading position in each aspect can make profits in the rapid development of e-commerce live streaming. Specifically, MCNs with a large number of high-quality anchor resources; supply chain companies with in-depth supply chain services and high-efficiency supply of selected products; as well as the live streaming/transaction platform companies that have an efficient closed loop, have the best competitive edge.

Discussion on Source of Products and Investment Opportunities in Supply Chain

1.Source of products

Currently, source of products can be roughly divided based on three dimensions: brand, channel and sales purposes.

As a new sales channel, e-commerce live streaming provides opportunities for the above sources of commodities. We pay more attention to the opportunities concerning brand-name companies.

Big-name brands:

It is reported that “Singer Wu Chun recommended milk powder brand ‘Wyeth Illuma’on Taobao Live. Within 60-minute live streaming, a transaction volume of more than 1.2 million yuan was achieved. During the live streaming, the conversion rate of single product was as high as 36%, which was seven times as much as the daily conversion rate. More than 300,000 bottles of Lancôme ‘Advanced Génifique’ Youth Activating Concentrate, or Lancome“Black Bottles”, were sold with the recommendation by Li Jiaqi, and the deposit income for a single product reached 10 million yuan; 300,000 L ‘Or é al Youth Code Essence were sold; nearly 100,000 sets of Shiseido Ultimatum Power Infusing Concentrate were sold out; 20,000 Elizabeth Arden Advanced Ceramide Capsules were sold out.”

 

New Brands:

According to reports, “At Viya’s live streaming studio, 3,000 pieces of Dr. Arrivo Ghost Premium, which cost 9,088 yuan, were sold out in only one second.” Actor Fan Bingbing also conducts products marketing. She invited on-line influencer Cherie to promote the facial mask of her own brand FANBEAUTY with her. In a few minutes, the total sales volume exceeded 110,000 and the sales exceeded 10 million yuan. According to information released by Alibaba, on the first day of T-mall “Double Eleven” Pre-sale in 2019, 17,000 brands initiated live streaming, and the turnover of several brand items exceeded 100 million yuan, among which cosmetic brand Whoo recorded a turnover of over 100 million yuan in just six minutes after the beginning of pre-sale.

Most of the above brands are cosmetic brands. Based on Taobao’s data, the five industries with the highest turnover driven by live streaming are jewelry, women’s clothing, popular accessories, cosmetic and skin care products, and children’s clothing. Zhibotong.com has launched 12 commodity pools, totaling about 130,000 commodities. The commodity pools cover the five major industry categories, namely clothing, cosmetic, home products, FMCG and food, gathering commodities of merchants in the industry, as well as commodities from T-mall Global and good.tmall.com.

Look back at the explosive growth of Three Squirrels, HSTYLE and the Perfect Diary, we will find that every channel reform would give birth to some new top brands. We also believe that the bonus of e-commerce live streaming will help new brands build their images and boost their explosive growth.

Of course, where there are opportunities, there are problems and risks. For products sold through live streaming e-commerce, if the quality of the products is not up to standard, refunds are inevitable. The sales ability of anchors may promote short-term sales, but only when the quality is ensured can this mechanism work continuously.

Our research found that the e-commerce live streaming anchors choose products based on three principles: their fans should trust the products; the products should be of high quality; and products should be highly popular. Trust always comes first. To maintain their position as an opinion leader, anchors must maintain a good reputation. Trust is the basis for marketability. Trust also means the understanding of fans’ needs. The common needs of fans will gather the fans together and form a circle of fans. So the products must accurately meet these common needs, otherwise fans won’t trust the anchor. The second is products. What is good productsExcept for good quality, the anchors shall be able to anticipate and control consumption trends, which requires the anchors to keep up with hot issues on the market and lead consumption in terms of products functions and forms. Only products with popularity and of good quality can have explosive growth potentials.

The above-mentioned principles put forward higher requirements for the quality of source of products, which is actually C2M principle. In other word, in order to meet the fragmented and layered needs of consumers, it is necessary to accelerate the transformation of the design and production process of products suppliers. Taking the clothing industry as an example, the so-called “good products” can be personalized design or clothes with extremely high cost/performance ratio. The “capability of small order but quick response” and “lean production” that have been emphasized for many years are even more important under e-commerce live streaming background. We focus on new manufacturing enterprises suitable for e-commerce live streaming’s needs, technology providers that empower participants in the industrial chain, and operation service providers that improve the efficiency of all links in the industrial chain.

 

Live Streaming Supply Chain

The rise of live streaming supply chain service companies reflects the trend of detailed and specialized industrial division of labor. At present, the main service providers of the supply chain service companies are the anchors. The common painpoints for the anchors are: insufficient ability to select proper products, high intensity work that requires high efficient in products selection; weak supply chain support. The anchors are just responsible for sales and fans management. However, the sales, refund & change and pricing need to be completed by the rest parts of team. The anchors who lack powerful team support lack the above capabilities.

Take small and medium size anchor teams on Taobao as examples, most of such teams are understaffed with less than 5 staff including operators of the supply chain and assistants. However, the number of SKUs they live stream every month is 1,000 +, and the daily live streaming period is more than 6 hours, with 50 SKUs per live streaming secession, which poses a great challenge for the anchors and their teams. The current situation is that anchor teams are prone to sell fake products if they select the products themselves, or mislead the consumers because of incomprehension of product characteristic. If the operation team spend more time on selecting products, the live streaming process and the subsequent traffic distribution would be influenced, because the Taobao Live does not allow suspension of live streaming, and the traffic distribution is proportional to the frequency of live streaming. The conflict between the time and efficiency of the operation team leads to extremely low efficiency in independent product selection.

Anchors serve users while supply chains serve the anchors. A supply chain will have its value only if it meets the requirements of the anchors in the selection of products. As the importance of the supply chain is self-evident, supply chain service platforms emerge in the market. Some of them are self-operated, such as Mushroom Street. There are also third-party independent service platforms, such as the platform operated by Pinliang that relies on Taobao Live , and the Mockuai.com, which serve the Kwai platform.

From the perspective of the industrial chain, the supply chain service companies exist between the source of products and anchors, to earn transaction commissions by providing support services. Currently, the upstream source of products is relatively scattered, especially the small and medium-sized brands and hoarders. Downstream anchors as KOLs, especially new and medium-level anchors are scattered. Then the supply chain service companies that provide matchmaking service and supportive services can improve the operation efficiency of the industrial chain and immediately generate value. What they control are: products (resources), product selection and supply chain (support), commissions and upstream and downstream bargaining power (control). We believe that the core capabilities of supply chain service companies are exactly the same as the above mentioned, thus the evaluation of investment targets can also be based on the above three capabilities.

In the short term, supply chain service companies pose higher requirements for operational capability, and their current capabilities of systematization and business process standardization are relatively low. In the long term, we believe that opportunities may be seized by companies with excellent management system capability, strong selection algorithm capability and high degree of service process standardization.

(III) Discussion on Opportunities Concerning MCNs

MCNs

With the maturity of the e-commerce live streaming industrial chain, pan-content MCN (Multi-Channel Network) organizations are becoming more and more specialized. The MCN organization is originally an industry model derived from YouTube, which is equivalent to agents between the content creator and YouTube. Different business forms have been derived from MCN organizations in China. At present, the main operation model of MCNs in China is gradually focusing inward from video, e-commerce and platforms with very rich content formats, and presents seven major formats including agents, e-commerce, marketing, operation, community/knowledge payment, content production, IP authorized copyright, etc.

Here we mainly discuss the conditions of e-commerce MCNs and the potential investment opportunities related to it.

As shown in the above e-commerce live streaming industrial chain, e-commerce MCN organizations connect the supply chain with the sources of commodities in the upstream, and provide them with more efficient and flexible sales channels. In the downstream, they connect with live streaming platform, and provides more traffic and exposure opportunities for on-line influencers. After determining the demand of the upstream products owners, MCNs will allocate the existing anchor resources. At the same time, it places orders on the supply chain to purchase and distribute data analysis, creative design, etc. from the server. Then, it distributes the final plan to the contracted anchor, then distributes the works through its own flow channels, and obtains income from the cooperation with the anchor and the platform, the advertising fees provided by advertisers and the related consumption of fans.

Photo: iResearch

At present, MCN organizations are at the intersection of business flows in the entire e-commerce live streaming industrial chain, and they have also been the focus of capital investment in the past few years. From 2018 to January 2019, more than 60 MCN organizations have received financing, mostly Round A (28.6%) and Angel Round (23.8%) financing.

According to Crawley’s survey on the conditions of 315 Chinese MCNs, over 30% of the surveyed MCNs had a revenue scale of over 50 million in 2018, and the number of MCNs with a revenue scale exceeding 100 million yuan accounted for 6%. Among the e-commerce MCNs, Chenfan E-commerce, Ruhan Holding, M.SOUL, Intalk Studio, Meione and other companies are the leading companies.

The value of e-commerce MCN organizations comes from the efficiency improvement brought about by specialized division of labor. Based on our observation, the leading companies in the market all rely heavily on top KOLs without exception.

Taking Ruhan E-commerce as an example, Zhang Dayi serves as its core anchorwoman. According to its released data, Zhang Dayi and Ruhan E-commerce have established a joint venture. The joint venture owns 49% of Ruhan E-commerce’s net profit, which is reflected in the income statement of listed companies under minority shareholders’ profit and loss. In 2018, Zhang Dayi generated revenue of 480 million yuan, accounting for 52% of the company’s total revenue and 28.7 million yuan of profit. However, the company’s net loss in fiscal year 2018 was 90 million yuan, which meant that the loss except for Zhang Dayi’s part was 120 million yuan. The company explained it as the loss caused by high cost of incubating new on-line influencer.

 

The above cases reflect several problems.

First, top online anchors are extremely scarce resources, and they are in a strong position in the distribution of benefits in MCN organizations.

Second, the growth of the new online anchors require a large amount of resource investment, including early investment such as traffic purchasing and training. However, it is still not a definite thing if the new online anchors can become top anchors, and there is a greater risk of default. Once the new online anchor breaches the contract and leaves the company, the final result is lose-lose situ between the MCNs and the anchors.

Third, the valuations made by investment institutions focus more on “top anchors”, but the risks bearers are “new anchors”.

 

MCN organizations are very similar to artist agencies, since on-line influencers and anchors have the attribute of artists. Referring to the relationship between artist and agency companies, the risks of MCN organizations are also very clear: the risk of breach of contract by the costly trained new anchor after growing into a top anchor, and the risk of the top anchor becoming unpopular with no successor. Ultimately, it is a risk of human resources.

In the long run, we believe that due to platform traffic rules, there will be more top anchors among the anchor groups in the future, and medium-level anchors will only enjoy the dividends from the growth of e-commerce live streaming industry in the short term. Therefore, with regard to investment in MCN organizations, for top MCN organizations, the focus should be placed on profit distribution mechanism and professional service capability, while for medium-level MCN organizations, the focus should be placed on contract mechanism and industry resources (such as traffic resources, data capability, supply chain matchmaking capability, etc.)