Companies switch tactics as gains from online ads slip

After years of hype, China's online spending on advertising has hit a slowdown that is not unexpected.

E-commerce powerhouse Alibaba reported that its customer management segment, which includes advertising, posted a mere 3 percent year-on-year gain in the quarter ended September 2021.

Tencent, which runs an all-in-one app WeChat, fared no better, registering just 5 percent growth year-on-year in terms of online advertising during the same period. That represented a drastic cool-down from 23 percent in the previous quarter.

Rising star Pinduoduo, which connects farmers directly to consumers and is known for offering good values online, posted a 44 percent rise in online marketing services for the third quarter of 2021, compared with the same period in 2020. This was down from the 54 percent jump in the second quarter of 2021, and the 157 percent surge in the first three quarters of the previous year.

ByteDance, which operates viral short video platform Douyin, also saw squeezed online ad margins, according to reports by several Chinese media outlets including 36kr and LatePost, citing company insiders. The company isn't listed and financial earnings aren't available publicly.

Tightened oversight and weaker consumer buying have contributed to the slide, experts said.

Felix Liu, an analyst at UBS Securities, predicted that e-commerce platforms and other online businesses would find it hard to advance substantially in online ad revenue, given that no recovery in customer spending is expected on the immediate horizon.

Slowing spending growth in the final months of the year implied challenges ahead, experts said. December consumption－often perceived as a year-end booster－grew just 1.7 percent year-on-year, down 0.18 percent compared with the previous month.

With tech companies－both the established and high-flying newcomers－reporting waning ad growth, brand executives are trying to allocate their marketing budgets in a smarter way.

One approach is boosting accuracy in picking the right online influencers, better known as key opinion leaders, and having them endorse brands or products.

Over two-thirds of the brands surveyed by the China Advertising Association and data marketing technology firm Miaozhen Systems said they would prioritize KOL promotion in their digital marketing efforts. That would be followed by promotions via short video and a brand's official account, according to the survey report, released last month.

While KOL marketing is not new in China, the fast-changing online environment is pushing brands to increasingly factor in cost-effectiveness.

The survey found that 54 percent of brands are looking for immediate consumer affinity for a product after it's endorsed by a KOL, with 37 percent expecting a direct translation into sales. Primarily building a positive brand image has dipped 4 percentage points from a year earlier to 27 percent in terms of a goal.

But driving sales shouldn't always be prioritized using this technique, experts said. KOLs differ from celebrities largely because of their aura of authenticity, meaning more followers trust their opinions and recommendations, according to Elijah Whaley, chief marketing officer of Parklu, a company that helps businesses find the most relevant opinion leader for their brand and customers.

"Authenticity is important, and the focus is on providing content that's real, interesting and useful. A good KOL will understand how to shape their followers' perception of a brand," he was quoted as saying in an interview with the New Zealand Trade and Enterprise on China's KOL marketing landscape.

As such, trusted experts in certain niches or who have professional specialties stand out. The Miaozhen report found healthcare professionals, designers and scientists are gaining more clout as opinion leaders.

"You need to have a value proposition you want people to engage with－one that provides affinity and trust. It's something you can leverage later to sell, and that's what KOLs are doing," Whaley said. A value proposition is a statement of the benefits a company offers a customer.

In a high context culture environment like China－where communication is often indirect－consumers hope to establish trust and affinity with a brand, and KOLs, or even the more ordinary key opinion consumers, might serve as the best catalyst, experts said.

On lifestyle community app Xiaohongshu, brands from a wide variety of different industries－including fashion, skincare and food and beverage－roared into the Chinese Lunar New Year with a range of creative tiger collections－for the Year of the Tiger－that they are actively marketing.

Xiaohongshu also tracks emerging trends among China's young urban population by reflecting KOL content and users' daily routines through a function known as Note. It spotlights popular trends such as "glamping"－a combination of the words glamour and camping－sweet wines and trendy skincare regimens.

Last month, Xiaohongshu listed air fryers, going green and modern Chinese style among the emerging lifestyle trends for 2022, creating an abundance of opportunities for brands to leverage.

"We are able to provide insights to brands on how to ride the wave of these lifestyle trends from a business perspective," said Wang Yajuan, Xiaohongshu's chief marketing officer.

"The lifestyle content shared by users on the platform can help other consumers make better decisions, and because the user community is constantly generating opinions and actively participating in conversations, Xiaohongshu can help brands better understand user needs and support them in their iterative process," she said.

Internet platforms, on the other hand, are working hard to foster new influencers, who have yet to develop a sizable fan base but produce high-quality content in the form of short videos.

WeChat is doubling down on short videos by beefing up the presence of its Channels short video platform within the app.

The platform will prioritize support for individuals posting original videos about knowledge-sharing, lifestyle and information. It also will offer rewards, including cash incentives and traffic bonuses, to over 10 million content creators. That is expected to maximize exposure of their work to a wider audience, Zhang Xiaochao, who is in charge of Channels, said during a WeChat annual open class event in Guangzhou in January.

Apart from getting tips from fans, more online hosts stand to receive commissions from sellers of merchandise they endorse in their livestreaming sessions. Channels also connect qualified content creators with brands, enabling video producers to monetize their dedicated following thanks to large amounts of traffic.

Merchants can also bank on livestreaming via Channels to facilitate online transactions. WeChat says three-quarters of purchases via Channels were made by women, with top transactions including clothing, furnishings, food items, skincare and cosmetics.

"Channels has vast potential for smaller merchants to attract and retain customers and close the loop from traffic to transaction, because it is based on a distribution mechanism of social connections derived from WeChat," according to a report on Channels by domestic media tracking agency TopKlout.

With the recent fall from grace of several leading online hosts such as Viya, livestreaming-based e-commerce is likely to become less transaction-focused and more driven by interest or content, providing an advantage to platforms that encourage such content, said Zheng Zhuoran, an independent digital marketing analyst.