Ruhnn Holding’s 3 Strategy Lessons for Digital Asia (Jeff’s Asia Tech Class – Daily Update)

Ruhnn Holding is a Chinese company that not many people follow. Based in Hangzhou, tied with Alibaba and vaguely described as a talent agency and/or social commerce company, it’s a strange animal. And it is currently being taken private and off the US exchanges (maybe).

But the company is fascinating and has some really important lessons in digital strategy for Asia, specifically SE Asia.

A Bit About Ruhnn Holding

Here’s the description from the company’s profile on Yahoo Finance (Dec 24, 2020):

“Ruhnn Holding Limited, together with its subsidiaries, operates key opinion leader (KOL) cultivation and incubation platforms in the People’s Republic of China. The company engages in the sale of various fashion and lifestyle products to consumers through its KOL online stores; and provision of various KOL sales and advertising services to third-party merchants. Its online stores primarily provide women’s apparel, cosmetics, shoes, and handbags. As of March 31, 2020, it owned and operated 19 online stores; and had 168 signed KOLs. The company was founded in 2016 and is headquartered in Hangzhou, the People’s Republic of China.”

Ruhnn calls itself a KOL ecosystem. But it is really business services company that creates and supports influencers – and then sells services to brands. So it is a talent agency that works with influencers and helps them build their reach and impact. Then it monetizes this by selling directly via online stores and by selling marketing services to brands. Think talent agency meets home shopping network.

Looking at the company’s 2019 annual report, they then had about 113 KOLs engaging with about 148M “fans”, mostly via social media channels in China. This activity was monetized by self-owned ecommerce stores (associated with the influencers) plus some contracts with +500 brands. And the company provided 5 core services for influencers / KOLs.

  1. Talent agency
  2. Production and marketing services
  3. Online product sales
  4. Product development for products
  5. Marketing contracts

If you look at their headcount, about 480 of their 971 FTEs (at that time) were in KOL operations. Mostly in product design and content production.

That’s the story told in their reports. However, in practice, virtually all revenue came from the online stores. And mostly from 3-5 influencers. And this all has a lot to do with their association with Alibaba. There are lots of other issues floating around this company, which you can easily find in the news.

Plus, three big risks jump out at me from their filings:

  • They are highly dependent on a few KOLs.
  • They are highly dependent on a few dominant ecommerce and social media platforms in China.
  • They are constantly dealing with changing consumer preferences and behavior in shopping and entertainment.

As mentioned, it’s a strange animal. But my interest is not really the company itself, but what you can learn from it about digital strategy.

And if you can look past the questions about its viability as a stand-alone business, the company is actually on the frontier of some important digital trends in China. They are doing some interesting things. And that has important lessons for all of Asia.

Here are my three take-aways.

Lesson #1: Build for Digital Consumer Networks

I’ve written a lot about the China Digital Consumer Network (CDCN). In my article “Chinese Consumers Are the World’s First +1B Person Digital Network”, I described it as the following:

“Chinese consumers are increasingly acting like a +1B person, interconnected network, which I call the China Digital Consumer Network. And it is really powerful. For example:

  • Reviews, experiences and word of mouth spread broadly. A company’s brand and image are now far more determined by what connected Chinese consumers say than by what the company says. If you have a service in China, a hotel in New York or a restaurant in France, Chinese consumers are talking about you online.
  • Widely shared content, such as short-videos, long-videos, live-streaming and KOL content, is mostly happening within the CDCN.
  • Good and bad events about a company can go viral within hours. Even companies that don’t do much business in China, like United Airlines, have discovered this to their surprise.”

The connections and interactions between digitized consumers are far more numerous, powerful and authentic than communication from companies to consumers. C2C dwarfs B2C in terms of volume and influence. And KOLs are creatures of the China digital consumer network. They exist to create content, interactions, and engagement between consumers. And, ultimately, to have impact on companies’ brands and sales.

If you look at Ruhnn’s description, you can see they talk a lot about their ability to get attention and engagement from consumers. The word “impact” is used frequently. This is how they are able to sell directly through their own stores. And it is why brands hire them (in theory). It is also why Alibaba is encouraging KOLs, and live streaming in particular. Influencers / KOLs are creatures of a digitally connected consumer world – and China is way ahead of the curve here.

Now translate this to SE Asia, where rising middle-class consumers are now on their smartphones all the time. The ecommerce and payment platforms are being built out. And content is just beginning to be merged with commerce. We are going to see the same important (i.e., influential) role for influencers soon.

Ruhnn is a service business founded to develop and support influencers. Founded in 2016, the company really jumped to the frontier in how you engage with consumers in digital China. You need to incubate and support individuals who can create content, audiences and communities around themselves. If outdoor marketing and tv ads are the most traditional types of marketing, KOL-based marketing is the newest type.

Lesson #2: KOLs Are a Key Tool in the Arms Race for Attention

I wrote an article called The Arms Race for Attention, Engagement and Spending. My argument was basically that time and attention are fundamentally limited. But the supply of articles, videos, games and so on keeps growing. Brands and other companies that have to reach consumers are in an ever escalating arms race to get limited user attention and engagement. It’s an increasingly difficult fight. It’s a zero sum game. And you alawys need the latest tools. My explanation was:

“…there is an increasing fight for the attention, engagement and spending of consumers. And that this is a natural result of our age of abundance, where there are more and more products, services and content than consumers could ever consume – but there is a limited amount of consumer time and attention. It’s just getting more and more difficult and expensive to reach, capture and retain consumers. And we are seeing this struggle in business after business. For example:

  • Everyone is struggling with the increasing marketing fees at Google, Facebook and Amazon in order to keep reaching their customers.
  • In my article and podcast about Ctrip and Meituan, I talked about the increasing struggle online travel companies are having getting their customers from search engines.”

KOLs are the latest tool in this arms race. And they are particularly effective at getting consumer attention. But this fight never really ends. If a competitor starts doing live streaming, then you need to do the same. If they do short video, you need to do the same. The media will continue to change. But KOLs are well positioned creatures of the consumer network.

I like this about Ruhnn. I like that brands increasingly have to use KOLs. It’s not really a choice. That’s an important long-term trend.

Side Note: The Arms Race for Retention

A quick aside. The above argument is only half true. It turns out much of the fight is not for consumer attention. It is a fight for retention. If you are in a business where you are continually having to acquire new customers, you are in trouble. That fight is getting harder and harder. And more and more expensive. This is great for Google and Facebook but bad for most everyone else.

The better fight is retention. Focus on keeping the consumers you have. Focus on getting churn down. This fight is actually much more under your control. Retention may be the best you can hope for in a world overflowing with options. And within the fight for retention, the two biggest levers are arguably content and community. And KOLs excel at both.

If you want to retain customers, content is very helpful. It is a way of entertaining and engaging customers. It is a way of providing value. It can have utility. And KOLs are basically content creators. So this is their strength. Their #1 job is to create content and an audience.

Community is the other big lever. Once you have the audience, you want to turn it into a community. You go from one-to-many to many-to-many. This is how you really get people to care about your product. Build a community around it. Or an activity. People are active in the Nike Running Club because they really like running (not just shoes). This is another area where KOLs are doing so much better than companies and celebrities online. KOLs are far more authentic. Most people don’t want a relationship with a company. But individuals you feel you know online can build real communities.

Ok. Last lesson.

Lesson #3: Adaptation Is a Competitive Strength

In Podcast 48 with Martin Reeves of Boston Consulting Group, we talked about adaption and speed as competitive strategy. He has written extensively that speed is the new scale. And that how fast you can learn and adapt as an organization can be your most important advantage. While this may not be the case in more stable and predictable industries like energy, it is definitely the case in more dynamic and unpredictable industries like fashion.

Think about how difficult it is to predict demand in fashion, gaming and entertainment. All three of these are rapidly changing in consumer tastes. And they all have changing technology. Music styles rise and fall. Movie genres (like superhero movies) come and go. And fashion changes season by season – with retailers perpetually struggling to choose their inventory months in advance.

Against this type of dynamic behavior on the demand side, you can see how certain companies are getting pounded and others are adapting quite quickly. Game developers and Hollywood studios have to make major bets on which games and movies to develop several years in advance. If they get them right, they do well. If not, they get crushed financially.

But Steam and YouTube don’t seem to have this problem. They have tons of content creators creating tons of content and the system naturally surfaces what consumers want. Audience-builder platforms are great at rapidly adapting to trends. And to individual consumer preferences. Martin refers to this as self-tuning enterprises.

KOLs are good mechanism for adaptation, especially in the areas of gaming, entertainment and fashion. Thousands of KOLs are continually try to build and re-build their audiences, by giving them what they want. They shift content, styles and media formats very rapidly – and stay on top of constantly shifting and evolving consumer preferences. Ruhnn’s agency approach to KOLs is a great approach to adaptation. Especially since KOLs follow a power law distribution, with most failing, some succeed and very small number becoming huge.

Note: In their 10k, Ruhnn cites changing consumer preferences as one of their primary risks. And this is an important lesson for digital Asia. You have to have a mechanism for adaptation to changing behavior and preferences. It’s too difficult to predict successfully. And things change to rapidly. You need a structural mechanism.

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Overall, I think Ruhnn is on the frontier of digital China / Asia. They smartly used KOLs to target a digital consumer network, to build the next wave of marketing tools and to systematically adapt to changing preferences.

That’s all great.

However, that doesn’t mean it’s a great business. That’s a different question.

Ok, a couple more points on SE Asia.

Consumer Networks in SE Asia Will Be Much More Localized. KOLs Will Be Important.

Alibaba (via AliExpress and Lazada) is currently trying to support KOLs in SE Asia and elsewhere. But there are some problems.

This is often called “social commerce” (a bad term) because the KOLs are dependent on both ecommerce and social media platforms. In China, Ruhnn uses Weibo, Weitao, WeChat and others to spread their content and build their audiences. They also use sites like Taobao Live, Red and Bilibili. And the ecommerce platforms (Alibaba, JD, Pinduoduo) do the transactions. Ruhnn”s model is very dependent on China’s dominant ecommerce and social media companies.

But the social media and ecommerce companies are very different in SE Asia. In Thailand, people use Line. In Indonesia, they use WhatsApp. And there is Facebook. And Instagram. And now TikTok. The ecommerce sites include Shopee, Lazada and others. And every country uses a different language. It’s just a much more complicated and less developed landscape. And it differs country by country.

We are clearly going to have multiple digital consumer networks in SE Asia. It won’t be like China. So you can see that local influencers are going to be important in each country. It is an open playing field right now. Ruhnn really depends on what Alibaba, Weibo and others decide. But things are less controlled in SE Asia. And I think influencers and their agencies are going to have a more independent role.

The Supply Chains of SE Asia Are More Cross Border – and Difficult.

Most Chinese consumers are using dominant platforms to buy goods mostly produced in China. It is a big country and a lot of the world’s manufacturing base. But in SE Asia, the supply chains are more fragmented country-by-country. And a lot of the manufacturing products are moving cross-border – and coming from China.

That creates an interesting dynamic where the KOLs are going to be more localized. And the supply chain is going to be more foreign. Lazada has the latter and is trying to build the former. Local companies are racing to digitize and lock-up their local customers before that happens.

I started this article saying Ruhnn provided 5 things to KOLs (and therefore brands):

  1. Talent agency
  2. Production and marketing services
  3. Online product sales
  4. Product development for products
  5. Marketing contracts

In China, Ruhnn is mostly providing these KOLs with their own stores and with advertising contracts to do ads, films, and live streams. The rest is via platforms.

But I think SE Asia will be much more localized in #2, especially in marketing services. And I think #3 is going to be a lot about foreign sourcing.

Ok. That’s it for today. Cheers, Jeff

Related articles:

From the Concept Library, concepts for this article are:

  • China Digital Consumer Network (CDCN)
  • Influencers and KOLs
  • Arms Race for Consumer Attention and Retention
  • Adaptation and Resilience

From the Company Library, companies for this article are:

  • Ruhnn Holding
  • Alibaba
This is part of Learning Goals: Level 6, with a focus on:
  • #24: Share of the Consumer Mind in a Digital Age

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I write, speak and consult about digital strategy and transformation.

My book Moats and Marathons details how to measure competitive advantage in digital businesses.

I also host Tech Strategy, a podcast and subscription newsletter on the strategies of the best digital companies in the US, China and Asia.

This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

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