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The Price of Cheap

Low-pricing strategies ushered China’s latest livestreaming e-commerce boom. But behind the hyped data is a bleak truth - the industry is mired in homogenous competition driven by unsustainable price wars that are shaking consumers’ faith in brands

By NewsChina Updated Nov.1

Dong Mingzhu, head of Gree Electric, sold 6.5 billion yuan (US$950m) in products during a livestream, June 1

Luo Yonghao, an online celebrity and businessman, sells products via livestream, June 1

Many years later, as I recall the most embarrassing and shameful day of my life, I’ll tell myself: ‘I was the guy who once did a livestream sell-a-thon and bit the dust,” on July 10, Wu Xiaobo posted on social media app WeChat.  

Two weeks later, Wu, one of China’s most successful financial and business writers, made his livestream debut on Taobao Live - an offshoot of Taobao, China’s biggest e-commerce platform owned by Alibaba Group. 

“In 2020, if you don’t watch livestreams or do it yourself, you’re wasting your life,” the 52-year-old announced at the beginning of his livestream. During the five-hour session, Wu promoted 24 different products, ranging from snacks and household goods to appliances.  

Around 8.3 million netizens watched Wu’s livestream, but sales were underwhelming. Anticipating that Wu would move serious product, a milk powder brand paid the writer 600,000 yuan (US$86,760). He sold 15 cans. Three orders were canceled the next day.  

Wu’s “15-can Milk Powder Incident” gained traction online, where many asked, “has livestreaming e-commerce hit its ceiling?”  

As the coronavirus pandemic continues to wreak havoc on offline retail, many in China’s most battered sectors see livestream commerce as a haven. People are drawn to the peppy hosts as they try products and respond in real-time to consumer queries. Brands are seeking to reach their customers through live commerce. And with many celebrities getting into the game, there’s attention coming from everywhere.  

But beneath the boom lies fierce competition and a slew of problems, from rampant price wars to suspect product quality, as well as consumer complaints and data fabrication.  

“The entire industry is still a jungle. It’s in a phase of primitive growth with a 600 percent compound growth rate,” Wu told NewsChina. “The game has just begun. This explosion has stirred a wind of chance, but also dust and dirt. As more players push and shove to get in the door, the industry has become a feeding frenzy.” 

Li Jiaqi, an online celebrity applies lipstick to Gao Xiaosong, a talk show host and musician, December 12, 2019

Data Anxiety
Teleshopping is not new. But live commerce, which combines influencers, livestreaming, shopping and social media, has become 2020’s hottest way to shop in China.  

“Without the Covid-19 pandemic, the livestream commerce industry wouldn’t have developed so crazily in the first half of the year. The stay-at-home order and shutdowns hampered the offline economy. People had to turn online for a chance. The traditional e-commerce landscape has already been shaped, and only short videos and livestreaming are still undeveloped,” He Haoxun, director of creative content at short-video platform Kuaishou (aka Kwai), told NewsChina.  

According to data from the Ministry of Commerce, more than four million livestream shopping sessions were broadcast in the first quarter. In 2019, the livestreaming e-commerce market was worth 440 billion yuan (US$63b), almost 9 percent of China’s total estimated e-commerce sales (US$723b), according to commercial bank Everbright, which predicts the market will double by the end of 2020. 

More influencers are raising eyebrows with impressive sales records. On May 10, Dong Mingzhu, who runs China’s largest aircon manufacturer Gree Electric, sold 310 million yuan (US$44m) worth of products in a three-hour livestream on Kuaishou.  

Xin Youzhi, known as Simba by his 51 million fans on Kuaishou, sold an estimated 1 billion yuan (US$145m) in cosmetics, kitchenware and food during his five-hour livecast on June 14, livestream e-commerce data platform Bihukankan reported. During a June 8 livestream, high-profile influencer “Xiaoyiyi,” who has 36 million fans on Kuaishou, sold 105 million yuan (US$15.2m) in luxury goods from Rolex, Hermes, Louis Vuitton, Prada and Armani.  

Multi-channel networks (MCNs) are firms that work with social media platforms to attract new followers and provide influencers and content. Like a talent agency, MCNs train the influencers, also known as key opinion leaders (KOLs). The vast majority of top-tier and mid-tier influencers in China work with an MCN. It can be difficult for brands to work with KOLs without going through an MCN. 

According to a 2020 survey on the MCN industry in China from Beijing-based data vendor TopClout, there are more than 20,000 MCNs in China, up about 400 percent year-on-year.  

But in this industry, data determines a host’s value. Indicators include gross merchandise volume (GMV), numbers of transactions, viewers and their duration of view. A host with favorable data demands higher commissions and has more leverage when setting prices.  

Data manipulation has long been a pervasive issue in the digital economy. But according to Zhao Yuanyuan, former operations manager of Taobao Live, the astronomical figures coming from livestreaming e-commerce are even more suspect.  

“Now it’s not even worthwhile writing a news report unless sales from a livestreaming session are in the tens of millions of dollars,” Zhao told NewsChina. 

“Sales of discounted items or 50 percent-off goods are calculated based on their original prices. Page views are counted among the number of online viewers. Everyone brags about their figures, miracle this, miracle that. But on top of all the marketing, high commissions and low prices, how much money can brands actually bring in?” Zhao said.  

There is a whole cottage industry for faking livestreaming data. E-commerce vendors can fabricate statistics such as number of page views, online views, fans and comments. For instance, 7 yuan (US$1) buys 100 fake views, while 129 yuan (US$17) conjures 10,000 views. 

Many hosts employ teams to fabricate data to attract more retailers and demand higher fees.  

“When considering the commercial value of a host, many brand owners only care about the number of followers and online views, but these are easily fabricated. Very often the brands find they’ve been cheated when the hosts they hired prove to be bad at selling,” said Liao Qingqing, founder of the Guangzhou-based MCN firm Guangfeng Jiyue.  

Undercut and Oversold
Low pricing is the most common strategy in livestream e-commerce.  

Hosts compete to get products at the lowest prices from brand owners and retailers. But this strategy eventually squeezes out all the room for profit.  

Hong Tao, dean of the Department of Economics at Beijing Technology and Business University, told NewsChina that pricing is one of the biggest problems in the livestream e-commerce industry. “Many hosts sell products at extremely low prices, and even give them away, which disrupts the market,” Hong said.  

Slipper manufacturer Poiseo partnered with Li Jiaqi, a livestreamer most famous for his lipstick sales, five times. On three occasions they saw no profit. On “Singles' Day,” China’s largest online shopping promotion on November 11, Posieo paid Li 150,000 yuan (US$21,700) in fees and promised 20 percent commission. But after Li’s livestream, the brand was 500,000 yuan (US$72,600) in the hole.  

Huang Xin, an online retailer of a cleaning product brand, told our reporter that every month she cooperates with an influencer on Taobao Live. She pays the host 30,000 yuan (US$4,356) plus 20 percent commission.  

During the first livecast, the host sold over 300,000 yuan (US$43,500) of goods. “But the price the host offered was too low, much lower than the discounted price I could offer on my store. I ended up just breaking even,” Huang told NewsChina.  

As influencers scramble to offer the cheapest online prices, the industry is in an awkward position: livestream platforms and hosts are earning money, consumers believe they are saving, but brands are bleeding as price wars cut into profit margins.  

A cosmetics brand distributor from Wenzhou, Zhejiang Province who requested anonymity told NewsChina: “Except for special offers, pricing of cosmetics should be identical online and offline. Inconsistent pricing not only harms the brand but also the whole beauty industry. I’m neutral when it comes to livestreaming e-commerce, but I very much oppose this ‘cheapest online’ strategy - it hurts retail too much.”  

Kan Hongyan, former vice president of fashion e-commerce platform Jumei, told IT industry news portal Yesky on July 22 of the emerging negative impacts of livestream e-commerce: “This vicious low-pricing strategy and random pricing endangers a brand’s image, pushes consumer trust in the brand and industry too far, and impacts retailers and the traditional market. If smaller businesses, which have weaker management, place too many expectations on livestream sales, they’re just accelerating their demise.”  

Two clothes shop owners sell products via livestream, Foshan, Guangdong Province, April 29

A woman sells clothes via livestream from the back of a van, Hangzhou, Zhejiang Province, July 3

Cooling Off
June 18 marked a turning point for the industry as sales figures came in from the “618 Mid-year Shopping Festival,” which along with November’s “Singles’ Day” is China’s largest day for e-commerce discounts.  

According to data the analysis platform Pangqiu Data released on August 2, the GMV ranking of the top 50 influencers across three major platforms shrunk conspicuously in July to 8 billion yuan (US$1.16b), 40 percent less compared with June at 13.5 billion (US$1.97b).  

The cachet of celebrities is also losing effect. Beijing Business Today reported on June 2 that in the three months prior to June, more than 100 celebrities sold products via livestream. Their sales were disappointing.  

Wu Xiabo’s “15-can Milk Powder Incident” was not the only letdown. On July 9, singer Ye Yiqian appeared on Taobao Live to sell ceramic tea mugs for 200-yuan (US$29). More than 90,000 viewers watched the livestream session, but she only sold 10.  

On July 8, comedian Xiao Shenyang, who has 17.4 million followers on social media app Weibo and 19 million on short-video platform Douyin, tried to hawk a liquor brand on Douyin. He sold 20 bottles, and 16 orders were canceled the next day.  

Other prevalent issues include uneven exposure and little room for newcomers. A handful of top-tier influencers drive most traffic on livestream platforms. The majority of hosts get few visitors. According to “The GMV of the Top 50 Influencers in July,” a report from social media marketing service provider WeMedia and web portal iFeng Entertainment, the combined GMV of top hosts Viya and Li Jiaqi was 3.6 billion yuan (US$524m), equivalent to the total GMV of the next 28 hosts.  

Statistics from job recruitment platform Boss Zhipin show that 76.6 percent of livestream hosts earned less than 10,000 yuan (US$1,456) per month, 66.3 percent entered the industry in the last six months, and 58.2 percent are considering leaving.  

Many MCNs are also withdrawing from the game. Fang Yu, vice president of WeMedia, told NewsChina that according to the firm’s recent survey of 400 MCNs in China, more than 200 were on the brink of bankruptcy or had closed as of March.  

“Many heads of MCNs have stopped updating their WeChat Moments with posts about their companies. This might be a sign of a business transformation or closures,” Fang said.  

Consumer complaints are growing. The China Consumers Association released a report at the end of March that showed 37.3 percent of consumers reported problems with purchases from livestreaming sessions. Many consumers have accused livestream hosts of misleading advertising and selling low-quality or fake goods.  

A brand owner who has cooperated with MCNs in livestream sales told the Xinhua Daily Telegraph on July 20 that product return rates are as high as 30 percent among top-tier influencers and 70 percent for mid-tier. In the clothing sector, the return rate for offline stores is no more than 3 percent. Livestream shopping sees 30 percent.  

Chinese regulators are moving to bring more order to the market. In late June, the Chinese Advertising Association (CAA) announced rules that aim to restrict false and misleading advertising on livestreams and require real-name registration of merchants and individual livestreamers.  

The rules, which went into effect on July 1, require e-commerce livestreams to give “comprehensive, truthful and accurate” descriptions of the product or services. Platforms that host livestream sessions should monitor and train hosts in sales ethics. While the CAA does not have the power to punish violators, it can investigate complaints and refer suspected criminal conduct to law enforcement.  

“Livestream e-commerce in the past few months was overheated,” Xuan De, general manager of the e-commerce business division of Taobao, told financial monthly YiMagazine in August. “Now it’s urgent for all involved to take measures to calm the industry and start doing real business.”