By
Bloomberg
Published
May 23, 2024
Teresa Cheung fired up her Xiaohongshu app, turned on her camera and dazzled her nearly 1.8 million online followers over a seven-hour livestream.
One moment, she was demonstrating a palette of eyeshadow: “This color is called ‘Love Letter’,” she said in Mandarin, touting a dark berry-colored shade. The next, she was reciting an excerpt from the poem A Valediction: of the Book by John Donne in perfect English:
“Study our manuscripts, those myriads
Of letters, which have past ‘twixt thee and me,
Thence write our annals, and in them will be,
To all whom love’s subliming fire invades,
Rule and example found.”
By the end, the 60-year-old actress from Hong Kong had promoted dozens of beauty products, read some Shakespeare verses and become the first on the platform to top 100 million yuan ($13.8 million) in sales in a single session.
Xiaohongshu Technology Co. — part Instagram, part Pinterest — has boomed in recent years as a combination of top influencers like Cheung, its artificial intelligence technology and soft marketing tactics make it a lifestyle bible for many of China’s high-income earners. It also created a $6 billion fortune for its co-founders, Charlwin Mao Wenchao and Miranda Qu Fang, according to the Bloomberg Billionaires Index.
“Xiaohongshu is a powerful tool for brands wanting to enter the Chinese market or attracting Asian customers in the United States,” said Frost Li, founder of Loup.ai, an e-commerce solution provider that helps online retailers use AI to engage with customers. “They really double down on the view time and click-through rate.”
Founded in 2013, the company, whose name translates to “little red book,” has defied the government’s crackdown on the tech industry. After venturing into the realm of live shopping, it hit $500 million in profit last year, beating peers including Weibo, the Chinese equivalent of X that has almost twice as many users.
Backed by heavyweight investors including Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Singapore’s Temasek Holdings Pte, Xiaohongshu was valued at $20 billion in its last funding round in 2021. Mao and Qu own about 27% and 3% of the company, respectively, according to people familiar with the matter, who requested anonymity because the information is private.
While shares trading in the secondary market last year indicated a lower valuation, the Shanghai-based company has since shown better-than-expected business growth and China has eased its attitude toward tech. Next month, a mid-year shopping bonanza similar to Singles’ Day will test the app’s ability to attract buyers.
A Xiaohongshu representative didn’t respond to a request for comment.
Started as a shopping guide for Chinese tourists abroad, Xiaohongshu now counts 300 million monthly active users. Its success is based on what is known as “content seeding”: Key opinion leaders, also called KOLs, upload posts that often look like travel hacks or tips to help consumers with things such as finding the best makeup to match their skin tone or the right dress to land a finance job. The firm’s technology then tracks what content users spend time on and shows them similar posts when they return.
“The management team has spent time building up the quality of the user community,” said Cao Rui, senior analyst at Tianfeng Securities. “The posts are often relatable with daily life, and it has become a popular and unique search tool for consumers to look for beauty and lifestyle products.”
At a time of economic malaise, when many larger e-commerce incumbents are poaching price-sensitive buyers, Xiaohongshu has become particularly appealing to marketers: Most of its users are young female professionals and about half were born after 1995. Almost 17% spend at least 3,000 yuan online every month, the biggest proportion among major Chinese social apps, according to data from internet business intelligence service QuestMobile. More than 100,000 sales advisers and key fashion influencers post on Xiaohongshu regularly to market products, and luxury brands including Dior have set up online “malls” on the app to tap young wealthy customers.
Mao, 39, Xiaohongshu’s chief executive officer, was in the US when he thought of building an aggregator of lifestyle tips for tourists from the second-largest economy. The former Bain Capital consultant, who has an MBA from Stanford University, shared the idea with long-time friend Qu and convinced her to quit her job at a culture business to join forces. They earned backing from Chinese venture investor ZhenFund at the very beginning of the project, with other big-name investors, including Alibaba, GGV Capital and Tencent soon following.
The app quickly gained popularity outside of mainland China, with Hong Kong, Taiwan, the US and Malaysia now driving most of the traffic, according to an analysis from digital data intelligence firm Similarweb. In Hong Kong, where finance professionals commonly post about banker life and mainland tourists share their travel experiences, Xiaohongshu has become so ubiquitous that a lawmaker earlier this year went as far as warning the government itself is paying too much attention to what people say on the platform, giving the impression the app is “administering” the city.
While its e-commerce bets are paying off, Xiaohongshu’s long journey to an initial public offering has been anything but smooth. Qu, who manages strategic partnerships, business development and external affairs, said in a 2018 interview with Bloomberg the company was targeting a listing in two to three years — there’s still none on the horizon. China’s tech crackdown has since hindered growth at many internet firms, while TikTok’s divest-or-ban ultimatum in the US could turn off global investors’ interest in the Asian nation’s social-media companies.
Competition in the e-commerce space is also intensifying. Many existing larger players — including Alibaba, JD.com Inc., PDD Holdings Inc. and ByteDance Ltd.’s Douyin, TikTok’s Chinese twin app — are leveraging AI to make shoppers spend more time on their platforms.
“Xiaohongshu has built up a relatively higher user loyalty than other platforms based on the uniqueness and branding of the KOLs,” said Tianfeng’s Cao. “It needs to maintain its differentiation in its e-commerce offerings to gain more market share.”
