Recent reports indicate that Xiaohongshu has integrated its algorithm departments for commercialization, community, and e-commerce, forming a new Application Algorithm Department. Securities Star has observed that Xiaohongshu's organizational structure has undergone several rounds of adjustments this year, accompanied by significant personnel changes.

Behind these frequent organizational shifts lies Xiaohongshu's challenge in the commercialization process. Despite attempts to diversify revenue streams through the 'lifestyle e-commerce' strategy, the company has struggled to expand its e-commerce offerings beyond niche consumer categories. Additionally, the slowing growth of user engagement poses a hurdle to the development of its e-commerce operations. Balancing content authenticity with commercial objectives has emerged as a pressing issue for Xiaohongshu.

01. Continuous Organizational Overhauls and Substantial Layoffs

According to LeiPhone, Xiaohongshu's newly formed Application Algorithm Department is headed by Xiahou, who also leads the Community Technology Department and reports to Fengdi, the company's Vice President of Technology.

Securities Star notes that adjustments have not been limited to the technology department; the e-commerce operations department has also undergone multiple restructures. In May, Xiaohongshu merged its independent buyer operations and merchant operations into the E-commerce Operations Department, making it a second-tier department within the e-commerce division. Shortly thereafter, in late June, the E-commerce Operations Department underwent another structural change, with multiple leaders now overseeing various aspects of the e-commerce operations team, including the Industry Merchant Group, Buyer Group, Meishu Commercialization, and the newly established KA (Key Account) Group.

Xiaohongshu has also overhauled its job grading system. In August, the company announced the elimination of the R (expert position) sequence, simplifying the management hierarchy and adopting an appointment system for managers at all levels. Post-adjustment, salaries are now more closely tied to job difficulty, and bonuses are linked to performance. Industry insiders suggest that this move decouples incentives from job promotions, enabling more timely and equitable rewards for high performers.

Moreover, the company has initiated large-scale layoffs. On July 4, multiple media outlets reported that Xiaohongshu had initiated layoffs in its e-commerce product department, commercialization department, and community technology department, primarily targeting employees with performance ratings below 3.5, with potential layoff rates reaching 20%-30%.

02. From 'Seeding' to 'Selling': The Unresolved Commercialization Conundrum

Market speculation links Xiaohongshu's frequent organizational adjustments and layoffs to its ongoing commercialization struggles.

Founded in 2013, Xiaohongshu initially focused on 'seeding,' fostering a consumption loop from 'seeding' to 'purchasing' through user sharing and community interaction. As a content platform, Xiaohongshu primarily monetized through display advertising and brand collaborations, with advertising constituting a significant portion of its revenue. According to GF Securities research reports, 80% of Xiaohongshu's 2022 revenue derived from advertising.

To diversify its revenue streams and reduce reliance on advertising, Xiaohongshu has recently intensified its focus on e-commerce. Securities Star observes that while Xiaohongshu attempted to venture into e-commerce early on, these efforts met with limited success. In 2014, the company launched 'Welfare Society,' a self-operated e-commerce platform specializing in skincare, makeup, fashion, and other categories. Later, in 2022, it introduced 'Little Oasis,' a platform dedicated to outdoor sports categories, including camping and related products, to cater to market and user demands.

However, both platforms ceased operations in 2023. Regarding 'Little Oasis,' Xiaohongshu stated that it failed to meet the expected goal of maximizing user outdoor needs. For 'Welfare Society,' the company indicated a shift in focus to concentrate resources on serving buyers, curators, merchants, and brands in e-commerce development.

Capitalizing on Dong Jie's popularity with her 'sharing' and 'seeding' live streaming style, Xiaohongshu proposed 'buyer e-commerce,' a model centered on buyers (including curators, merchants, creators, etc.), aiming to differentiate the platform. Essentially, buyers promote products that align with their personal brand and fan preferences, marketing these products through posts or live streams.

Despite vigorous e-commerce development, Xiaohongshu's revenue structure, heavily reliant on advertising, remains challenging to change in the short term. Data indicates that in 2023, Xiaohongshu generated $3.7 billion (approximately 27 billion Chinese yuan) in revenue and achieved its first profit with a net profit of $500 million. Notably, advertising revenue accounted for nearly 80% of total revenue.

Securities Star notes that in July 2023, Xiaohongshu refined the concept of 'buyer e-commerce' to 'lifestyle e-commerce,' encouraging users to purchase not just products but a desirable lifestyle on the platform. Some analysts suggest that this shift from buyer e-commerce to lifestyle e-commerce reflects Xiaohongshu's indecisiveness, rooted in its desire to 'have it all' by maintaining content attributes while embracing e-commerce.

However, Xiaohongshu's proposed lifestyle e-commerce is not universally applicable. Media statistics reveal that Xiaohongshu's Focus30 live streaming rankings are dominated by categories such as furniture, beauty care, apparel, makeup, handbags, beauty devices, and health foods, primarily mid-to-high-end niche brands. Consequently, Xiaohongshu's e-commerce business struggles to expand into broader consumer categories, particularly low-priced and highly competitive mass consumer goods.

In mid-November, Xiaohongshu released its first Double 11 results for lifestyle e-commerce. Notably, the number of live streaming sessions exceeding one million viewers surged by 850% year-on-year, the number of merchants with sales exceeding ten million increased by 540%, and the number of buyers with single-session sales exceeding ten million rose by 360%. While these figures appear impressive, compared to leading platforms like Taobao and Tmall, sales exceeding ten million are relatively modest. Taobao Live's Double 11 report revealed that as of November 11, 119 live streaming rooms on Taobao had sales exceeding 100 million yuan.

From a business model perspective, Xiaohongshu attracts users through content to drive commercialization, aiming to complete the closed loop of 'traffic guidance - seeding - selling.' However, many users are 'seeded' on Xiaohongshu but ultimately make purchases on other e-commerce platforms like Taobao and JD.com. At least 20% of Taobao and Tmall's traffic originates from Xiaohongshu recommendations. While Xiaohongshu successfully attracts users during the 'seeding' process, it fails to form a seamless purchase loop.

03. Slowing DAU Growth and Negative Perceptions

The development of e-commerce relies heavily on a growing user base and engaged traffic. Securities Star observes that as a decade-old platform, Xiaohongshu's user growth is slowing.

After surpassing 100 million daily active users (DAU) at the beginning of 2023, Xiaohongshu set a goal of reaching 140 million DAU by year-end. However, the company fell short, ending the year with 106 million DAU. As of June 2024, Xiaohongshu's DAU stood at 120 million, still below the initial target.

Further analysis reveals that Xiaohongshu's traffic allocation is heavily skewed towards beauty, fashion, and travel. Specifically, Xiaohongshu's traffic share in the beauty and fashion sectors is 18% and 17%, respectively, while travel (including local life and travel) accounts for about 15%, and food and knowledge content account for 10%-12%. Consequently, Xiaohongshu's user base is predominantly female, comprising up to 70% of the total.

The homogeneity of the user base limits Xiaohongshu's market penetration, impeding its potential to become a 'universal' platform akin to Douyin. In contrast, Kuaishou's Q3 2024 earnings showed that its DAU exceeded 400 million, while Douyin's DAU surpassed 700 million in the first half of the year.

Furthermore, in recent years, Xiaohongshu has been labeled as an 'anxiety vending machine' and a 'negative energy distribution center.' The company has also faced scrutiny over false advertising, account trading, paid rankings, and excessive promotion. Many users complain that the platform has shifted from 'seeding' to 'harvesting,' overwhelmed by advertising.

The slowing DAU growth suggests limited new traffic for Xiaohongshu, posing challenges to the development of its e-commerce business. (Originally published on Securities Star by Li Ruohan)

- End -