Meilishuo and Mogujie Are Merging. How Has the Shopping-Guide Business Changed?

Two companies that grew up in China's peculiar e-commerce environment: can one merger shake them out of the boom they once enjoyed?

"Actually, at first I said no." Asked why Mogujie was able to lead the acquisition of Meilishuo, a rival two years older and valued higher, Mogujie founder Chen Qi opened with this well-worn catchphrase.

Rumors of a Mogujie–Meilishuo merger ran from late 2015 into early 2016 before the deal was finally settled. According to internal emails each side sent on January 11, the two companies will swap shares at a 2:1 ratio, with Chen Qi as CEO. The merged company will be valued at close to US$3 billion and will receive a new round of investment from Tencent.

At a small media briefing on the afternoon of January 11, Chen Qi and Meilishuo founder Xu Yirong explained the decision further. The two sides have only just signed the merger agreement and will work out the details after the Spring Festival. Meilishuo's cross-border shopping business, HIGO, has been explicitly left out of the deal.

Unlike Meituan and Dianping, or Trip.com Group's indirect takeover of Qunar, this merger went smoothly and amicably. The two founders said they got from first meeting to signed agreement within a month because, after careful thought, both concluded the merger would serve their long-term development and was "well worth it."

As for the widely circulated claim that investors such as Hillhouse, Tencent and Sequoia drove the merger, the truth may be less dramatic. Xu Yirong played it down: "The investors are mutual friends, and they helped by offering some leads."

Yet given how the two companies are doing in the market, it seems natural that so many people accept the "capital-driven" explanation. If they cannot go public, or find new investors to take their stakes off their hands, who would want to keep money in two companies that still have not made their business models work?

Both companies first became known for borrowing Pinterest's "endless" wall of images and links, which let female users browse, pick and buy in one place. Riding on Taobao's scale and its commission model, their revenue grew steadily.

But after they left Taobao, both entered a confused period of searching for a new direction. Over the same stretch, Smzdm turned from a blog into a professional cross-border shopping-guide site, and on the very day the two announced their merger, it announced its first financing round: US$100 million.

Since Chen Qi and Xu Yirong started out, the business of shopping guides, or "social e-commerce," has clearly changed a great deal.

Is the shopping guide Meilishuo and Mogujie did back then the same thing Smzdm does?

Chen Qi first became interested in social shopping while he was still a Taobao employee. He was spending 70,000 to 80,000 yuan a year to maintain a community website he had built to keep his wife entertained, and he did not want to cover the losses with plain display ads.

The solution he eventually hit on used a rule at his own company: an outside site that sends users to a purchase page earns a commission. He turned the brand names users mentioned in their discussions into clickable product links. Once the site grew, he could also deal directly with merchants at a higher commission rate.

That is what Mogujie looked like when it was founded in early 2011.

Meilishuo was after the same users, women who love to browse, buy and talk about it, and its founder Xu Yirong recast the format as a simpler, Weibo-like model. Users could follow people who interested them, browse curated content, or post their own images and links and share them to QQ, Weibo, Douban and other social platforms with more users.

With its contracted fashion influencers and a growing number of users and Taobao merchants sharing content, Meilishuo quickly built up a body of content. In 2010, Taobao formally made Meilishuo one of its official shopping-guide sites and paid it a commission for every click it sent over.

In essence, Mogujie's and Meilishuo's business models at the time were no different from the classic "Taobao affiliate" approach: attract users with text or images, post links to Taobao products, and take a cut from merchants per click or per sale.

The same logic explains why Smzdm's content carries purchase links, or why deals from Dealmoon, the North American savings newsletter, come with a custom promo code. But of the people who read them, only a minority will then order from an overseas site and wait for a cross-border parcel.

In China, though, Meilishuo and Mogujie could build this business very large on Taobao alone. At their fastest growth, the two together supplied 10% of all traffic to Taobao.

What did the Pinterest model actually do for Meilishuo and Mogujie?

Much as you might now open Smzdm and Xiaohongshu several times a day, Meilishuo and Mogujie grew their users very fast in their early years, and those users were quite loyal.

Much of this came from attractive web design. For their feeds, both copied Pinterest's look: content pared down to "image + text + link" and staggered across the whole screen.

Pinterest is an image-sharing social site founded in 2011, and one of its biggest contributions to the internet industry may be this "waterfall" layout. With images and text, users can share almost anything that interests them: the season's fashionable clothes, dream travel destinations, work by designers they like...

In its first six months, Pinterest's traffic grew 60-fold, and its users spread from a niche circle of artists and designers to housewives with plenty of free time. It has also lasted longer than expected: in mid-2015 it closed a US$367 million round that raised its valuation to US$11 billion.

In China, Pinterest has spawned variants in many fields, such as the image-focused Duitang and Huaban, or similar products built in-house by large companies such as 360 and Kaixin001.

For Meilishuo and Mogujie, the Pinterest model did solve a number of problems:

• Users can see seven or eight different products or outfits at a glance, which makes comparing and choosing easier;
• Presenting products as images does a great deal to lift final sales;
• The model is very easy to maintain, and a ranking algorithm can slot popular content (or ads) into chosen positions in the feed.

Add some care over color and composition, and that is how Meilishuo and Mogujie made themselves more appealing to female users.

So why did they turn from shopping-guide sites into so-called vertical e-commerce companies?

The story starts when the two were at their peak, and Taobao tightened its policies on shopping-guide sites.

By then, Meilishuo and Mogujie had each been running for a while, and their user bases had grown large enough to threaten Taobao. What worried Taobao even more was the risk of losing merchants: in both how products were presented and how deep its categories went, the Taobao platform looked far too crude.

In 2012, Jack Ma declared that "Alibaba's entrance should be a grassland, not a forest," a veiled complaint that the two companies had grown too big. In 2013, Alibaba formally cut off their access to its commission system. To win back traffic, Alibaba even resumed advertising for a time with its old rival Baidu, steering search results for keywords such as "Meilishuo" and "Mogujie" to its own shopping-guide site, Etao.

According to iResearch, Taobao blocked about 65 similar traffic-referral sites at the time. Their most urgent task was to find a way to survive on their own. Meilishuo and Mogujie chose to build their own vertical e-commerce businesses, exactly what Alibaba had feared most.

In 2013, with a hastily finished e-commerce platform and five or six hundred partner merchants, Mogujie held its own "Singles' Day" promotion with almost no preparation. That day it took 35 million yuan in sales. Not a huge figure, but nearly 10 times an ordinary day.

"This was completely beyond what we expected, and it gave us a lot of confidence. It convinced us we could go after (e-commerce) boldly," Mogujie co-founder Yue Xuqiang once told QDaily.

By 2014, Mogujie's brand concept had become "My Buyer Street," and in recruiting merchants it began deliberately to favor high-quality buyer boutiques with a distinctive style. On the first day of that year's three-day Singles' Day sale, Mogujie took 100 million yuan in sales, beating the overall target Chen Qi had set.

Meilishuo hesitated more over e-commerce. Besides building a "little Taobao" out of its existing Taobao merchants, it also tried a few things that looked less than sound.

For example, at the end of 2014 it positioned itself as "China's ZARA" and launched a private label, MUA. Meilishuo said at the time that it would build its own design team, choose its own fabrics and make its own patterns, contract factories for production, and match ZARA's pace of new arrivals every two weeks.

Then there is HIGO, which was left out of this merger. It is a cross-border shopping app that Meilishuo founder Xu Yirong began planning around September 2015. Like Yangmatou and Taobao Global, HIGO uses an overseas-buyer model that can cover long-tail products with small demand.

Given the celebrity endorsement already lined up for HIGO and its ad placement in the third season of Keep Running, Xu Yirong is unlikely to give up on the business easily.

How many companies want to go after the same people Meilishuo and Mogujie target?

Although they left Taobao more than two years ago and have tried to upgrade their e-commerce businesses, Meilishuo's and Mogujie's core users still look much like Taobao's: young women aged 18 to 25, mostly university students, with little spending power but a strong urge to shop and a taste for trends.

With Taobao sellers opening shops on their platforms, plus content operations, these users are not hard to satisfy. Designs follow the trends set by Taobao-native brands, sometimes to a higher standard; prices are low, so quality need not be high; and merchants handle logistics and customer service, so the platform itself carries little burden.

After its transformation, Mogujie also tried to use the overseas-buyer idea to attract more young professional women aged 25 to 35. "Women in this group actually have high spending power but little time, and of course they are demanding. This is where we see more room to grow in the future," Mogujie's marketing and brand director Fan Yiming once told QDaily.

Meilishuo, for its part, has gradually widened the product categories on its homepage, expanding into menswear, children's clothing, home goods, small appliances, food and other things married women care about, and has repositioned its e-commerce business as a broader "fashion discovery platform."

But if you consider how the e-commerce industry has changed over the past two years, you may feel the two companies have been too slow to transform and add new categories.

Take the rise of cross-border shopping. Favorable policies for cross-border e-commerce drew many companies and entrepreneurs who had not worked out how to do e-commerce into the field. Xiaohongshu, which already had high-income users and a store of good community content, seized the chance to launch its cross-border e-commerce business, "Fulishe," whose monthly sales have now passed 100 million yuan.

Or take traditional e-commerce players breaking into new categories. JD.com's push into fashion in 2015 is one example: over the year it signed up several hundred international brands, and in August sent its own designers to Milan Fashion Week. Though still far behind Tmall and Vipshop, JD.com has moved a step closer to shedding its image as a seller of electronics and home appliances.

Or take Taobao's renewed interest in shopping guides. In 2015 Taobao launched its "Content Open Plan," pledging 2 billion yuan over three years to support content teams of "internet celebrities" and produce compelling shopping-guide content.

All these companies are fighting over much the same group of young consumers. A few years ago, these women might have spent hours on Meilishuo and Mogujie hunting for good-looking, inexpensive Taobao goods. Now their incomes and social standing have risen, and they spend more time on higher-quality, eye-catching products. Their shopping is no longer confined to China; it extends to the whole world.

Meilishuo and Mogujie made another mistake: in the e-commerce era, they forgot that consumers want the emotional pleasures of "browsing" and "sharing," and one after the other they shut their communities. Even though e-commerce brought in steady daily revenue, the user energy built up in the community years gradually drained away.

That is how, over two years, the two companies kept spending money while falling behind.

What does the merger mean?

Before the merger, Meilishuo had taken five rounds of outside investment and Mogujie four. Without Taobao's revenue share, the two companies suddenly became textbook cases of businesses running on investors' money.

So when they pushed hard to get their e-commerce models working, launched new brand strategies, and even tried some less-than-sound experiments, they were also preparing for an eventual IPO: at the very least, they could not afford to disappoint investors too badly when they filed their prospectuses.

But like Meituan and Dianping, the two companies hit a funding winter and a dead end in their business models before going public, and that became their strongest reason to merge.

What to do after the merger, Chen Qi does not yet seem to have decided. Still, Long Yu, founder and managing partner of Bertelsmann Asia Investments, which has backed Mogujie since its Series A, remains optimistic about him:

"The industry is actually underestimating the impact of this merger. People have always seen them as female fashion e-commerce, cheap small categories, but what is really changing is the sense of service and the kinds of service in e-commerce. It is about how to do non-standard goods well, with taste, brands and quality service, so that this generation can shop with dignity."

To get there, the combined "Meilishuo + Mogujie" still has much to rebuild.