Few of Last Year's Big Companies Deserve to Be Called Digital Winners | 2016 Corporate Digitalization

This is QDaily's year-end review of corporate digitalization in 2016.

Big companies have become extremely fond of young people. Over the past year or two the fondness has turned into outright courtship, especially at the companies traditionally thought of as big — you can barely find a trace of their old do-as-we-please manner anymore.

That makes sense. There isn't much arrogance left to spend. Most of them are either watching their lead in the industry turn precarious or suffering a decline in business they can't reverse, and with Wall Street bearing down on them, not being abandoned by younger consumers has become a fight for the traditional big company's future.

The problem is urgent, and digital transformation is widely seen as what decides it. That view isn't wrong: according to China's 2010 census, people born in the 1980s made up 17.13% of the population and those born in the 1990s 13.11%. This group, aged 16 to 36, already accounts for nearly a third of everyone in the country.

Another set of numbers goes with it. Smartphone shipments in China grew explosively over the past five years. Even in 2016, the year the industry hit a ceiling, shipments in the first three quarters reached 337 million units, and 90% of China's internet users are mobile internet users.

Young people, as heavy users of phones, have become the group with the most say in the mobile internet era.

The two questions companies face — how information reaches consumers, and how products and services reach consumers — have never changed. But once the phone became young people's most important and usually their first gateway to information, the mobile internet tore apart the old paths of communication and distribution far more violently than the PC internet ever did. The playbook traditional big companies knew by heart stopped working, because brand messages, products and services now reach consumers by scattered routes.

In most industries the information gap — precisely the thing that let big companies keep a grip on consumers — has all but vanished. Information has become not only more transparent but more immediate, and the old top-down style of communication has turned into a far more democratic flow.

Under these conditions, big companies are much less sure how to get consumers to notice their products, or even go looking for them, and then want to buy. Their heavy reliance on internet celebrities and popular WeChat official accounts to spread the word says as much.

In this atmosphere of instant everything, young people online chase novelty and stimulation far harder than they used to. That, as we argued in an earlier article, is why most industries have taken on a fast-fashion character. For traditional companies, it means remaking the industry.

So for large, high-volume traditional companies, digitalization is a risk they have no choice but to take. Following our 2015 series on big companies getting younger, QDaily produced the "2016 Corporate Digitalization" series, covering 10 industries — sportswear, luxury goods, commercial real estate, fast food, cars, beauty, housing rental, phones, entertainment and hotels. Over the past month we published the 10 corresponding reports, researching and touching on more than a hundred companies.

The good news is that over the past year, traditional big companies' fear of digitalization appears to have eased a great deal, and a few have even begun to win back some dignity through it.

The regrettable fact is that in 2016, very few of them deserve to be called winners. QDaily's judgment of who won and who lost rests on influence in the industry, brand visibility, reputation among young consumers, and figures such as sales and share price.

Put simply, the winners are the companies that got the better of digitalization and made real money from it. Accident and luck may have played a part, but what finally shows up is a way of surviving, fully suited to digitalization, that they have rediscovered — or at least the clear potential to get there.

The losers, for now, are companies that did nothing about digitalization and missed their chance; or that went the wrong way with it, so that they lost more than they gained; or whose digital business stumbled and has yet to give them any hold on consumers.

Traditional companies can still take confidence in this: before digitalization completely remakes the industry chain and the way businesses are organized, the capacity to serve at scale that they built over many years, and steady demand, leave them room to live. But they don't have much time or many chances left to experiment.

One aside: when creativity runs short, or the product or the management itself has problems, digitalization almost never solves them, and can even become a burden.

All right, here is the 2016 corporate digitalization scoreboard. Winners first.

Adidas

Adidas was unstoppable in 2016. A company people were still writing off at the start of the year pulled off an almost complete revival over the next twelve months — in results, in the fear it put into competitors, in brand visibility — reaching a height it hadn't seen in years.

Sneakerheads and trend-followers alike now watch for the new styles Adidas drops each week. In the secondhand sneaker market, Adidas passed Nike for the first time last year: a resale market once filled with limited Jordan reissues has been overrun by Yeezys and NMDs.

When the Yeezy caught fire in 2015, everyone still saw it as one hit product. Only after Adidas kept turning out new hits and steering the trends that followed did people realize the winds in sportswear had changed for good.

If the first Yeezy craze, riding on the 26.4 million Twitter followers of the Black singer Kanye West, was partly an accident, Adidas has since worked out a new way to use celebrities in the digital age. Kanye is not only an endorser and designer for Adidas but the trigger for the trends themselves, and with the reach of Instagram and Snapchat behind him, he became the first channel through which the Adidas brand and its products reach young consumers.

Most consumers may have had no idea who Kanye was. It didn't matter. Even if you stood nowhere near the sneaker world, it was hard to miss the noise around Adidas's new releases last year — that is how the adidas NMD became a mass hit.

As we analyzed in detail here, Adidas ended up creating a new way to make, market and release products in the digital age — a complete system, in other words.

Fashion now sways sportswear companies that once looked only at athletes, sweat and the track. Years from now, anyone looking back at the turning points for sportswear brands will have to stop at Adidas in 2016. Its revenue for the first nine months of 2016 grew 14.6%, with North America up 19.3% and Greater China up 22.5%. Its share price got a lift too, rising from $87.54 to $150.15.

All this finally forced Nike, which has always held to professional performance, to change — or more precisely, to speed up how fast it develops and launches products.

Adidas is a deserving digital winner. Its one worry may be that the retro look now in style, or the Black culture Kanye stands for, could fall out of favor at some point no one can predict.

Amorepacific

You could also call this a total victory for Korean beauty. In 2016 South Korea passed Japan to become China's second-largest source of imported cosmetics. As South Korea's largest cosmetics company, according to its third-quarter earnings release, the group posted sales of 1.6543 trillion won (about 9.794 billion yuan), up 22.9% year on year. Asia, which accounts for 92% of overseas sales, brought in 376.2 billion won (about 2.225 billion yuan), up 29%.

Amorepacific, and Korean cosmetics more broadly, are better than the big European and American brands at manufacturing new demand, and the whole industry now studies them on how to capture young consumers.

They are good at cooking up flashy gimmicks: bare-faced makeup, bitten lips, two-tone lips, Korean straight brows, flawless Korean skin, juice lips, "2/3 makeup," Korean semi-permanent makeup, hungover makeup. The endless stream of terms keeps things feeling new, but it also keeps making new trends and steering taste, until consumers start waiting to see what comes next. What that builds, in the end, is control over the consumer. Amorepacific owns 34 cosmetics brands, most of them cheap enough that trying something new costs the consumer very little.

"Fast beauty," the industry's new catchphrase, was pioneered by Korean cosmetics. Whether Korean beauty would have reached its current standing without the mobile internet is hard to say. To hold consumers' attention, beauty products have always needed enormous advertising budgets; television, outdoor ads and the beauty pages of fashion magazines were the main channels for word of a new product or a new trend. Now many people would rather learn from the "experts" on social networks, which lets new ideas ferment online at top speed and become trending topics.

Korean beauty brands are also good at using entertainment. In 2016 the hugely popular drama Descendants of the Sun turned Song Hye-kyo's two-tone Laneige lipstick into a hit; there are countless cases like it. While the show was on television, every digital channel was already running — shade numbers, tutorials and links to buy through purchasing agents were everywhere. Wherever you were and whatever you were doing, nothing stopped you from picking up your phone, and the urge to buy could be satisfied on the spot.

None of this is easy for the big European and American brands to imagine, and the Korean beauty wave that Amorepacific represents is leading another shift as well: opening standalone stores instead of taking a department-store counter or a shelf at Sephora. That is part of why Sephora is in trouble. The reason the dominant beauty brands of the past never ran stores of their own was that they had few product lines and brought out new ones slowly. Innisfree, a single Amorepacific brand, has 800 SKUs.

A cosmetics report from TABS Analytics found that what most influences purchases now is beauty bloggers, with social media playing a huge part; social media also sets off recommendations from people you know. The other big factor is price. Korean beauty ticks nearly every one of those boxes.

As we analyzed in an earlier article, if you think of beauty as a single company, the whole Korean beauty world fits the definition of "internet thinking": win on volume, test the market fast, adjust the product lineup fast. Win on speed, always with something new to offer. The supply chain has been remade.

NetEase

NetEase Games, to be precise.

When Tencent Interactive Entertainment's conference at the start of last year brought nearly every well-known Chinese game developer into its stable of partners, NetEase's prospects looked unclear. Its performance over the year turned out to be striking. From September on, four NetEase mobile games held the top-grossing chart on the App Store; today, apart from Tencent's Honor of Kings at number one, four of the top five are NetEase titles.

Its earnings were just as striking. Net revenue from online game services grew 104.5% and 76% year on year in the first and second quarters of 2016, to 6.015 billion and 6.438 billion yuan. Growth narrowed to 26% in the third quarter, though the success of Onmyoji became a talking point across the industry.

Onmyoji matters to the industry not only because it gave a gaming industry that had been quiet through the second half of 2016 a subject and a model to study, but because it got players who had not cared much about mobile games to open their wallets. For a mobile-game industry whose demographic dividend is fading and whose pool of former PC gamers has largely been converted already, that is a genuinely good example.

But Onmyoji also exposed what NetEase lacks: its product development is strong, its operations still need work. Not long ago a bug in the Fire of Karma dungeon left players fuming — partly a failure of NetEase's own operations, and partly, perhaps, because the game's success made NetEase drop its guard.

And don't forget Tencent. The company with the highest gaming revenue in the world still hangs over NetEase like a sword. Against the cost and uncertainty of NetEase developing its next hit, the returns from Tencent's choice to partner on and operate other studios' games are far easier to predict. Tencent isn't much weaker than NetEase in development, and in the number of partner companies and products it is far ahead. In 2017 NetEase will have to work hard just to hold the lead it has.

That's it for the winners. What we saw more of were companies that still can't make digitalization work. We picked the five most telling ones; each stands for a different problem.

Xiaomi

Xiaomi went from unstoppable to no longer so, and 2016 was the turning point.

The halo of industry disruptor is basically gone. In the phone rankings, traditional brands like Huawei, OPPO and vivo have shown far more momentum.

In marketing and in sales alike, Xiaomi did everything through online channels; on digitalization, it got off to a good start. Its real innovation was its digital remaking of the phone business. Building from nothing into China's largest phone maker in three years counts as a miracle in the industry; the "Mi Fan" model became something every manufacturer tried to copy, and everyone assumed for a while that this alone was enough to build a huge business.

It couldn't be sustained. We once thought it had beaten traditional distribution channels, but it hadn't.

Signing Tony Leung as its spokesman, buying ads in mass media, opening more offline stores — the "internet phone" company behaved more and more like a traditional one in 2016. Having largely saturated first- and second-tier cities, it went looking for growth in smaller ones, and there distribution became its weakness. China's complicated third- to fifth-tier cities, townships included, are a battlefield OPPO and vivo know far better. Walk down a commercial street in any third-tier city, past the several OPPO and vivo storefronts and the giant inflatable balls with their logos taking over the sidewalk, and you understand why Xiaomi struggles there. The internet has reached that market only so far.

Overseas markets are another route for expansion, but Xiaomi's position there is nowhere near Huawei's. The whole smartphone industry hit a growth ceiling last year, of course, and with no major innovation around, the contest is again about brand and offline distribution.

Lei Jun's vision for Xiaomi's future is to become the Muji of technology, but so far that may still be only a concept.

IKEA

Bringing up IKEA's fiscal 2016 results here may seem harsh. According to its full report for the last fiscal year (September 1, 2015 to August 31, 2016), revenue grew from 32.66 billion euros to 35.07 billion euros. Net profit rose 20% to 4.2 billion euros. Sales in China came to 12.5 billion yuan, up 18.9% year on year.

China is also one of IKEA's fastest-growing markets. But given how much IKEA now depends on China, its apparent indifference to the way consumers here are changing what they want from home products and services raises the suspicion that it is simply doing nothing.

Yes, we mean e-commerce. "Why doesn't IKEA do e-commerce" is not just a puzzle inside the industry; Chinese consumers probably can't understand it either. IKEA finally launched e-commerce in China at the end of last August, and, astonishingly, it looked nothing like e-commerce in the mobile era. It would have looked crude even by the standards of the PC era. It couldn't solve the basic problem of making things more convenient, its shipping charges were questioned, and for now it covers only Shanghai.

IKEA's performance in e-commerce is barely worth discussing. Even globally, IKEA still defines e-commerce as a pilot, although it has set a target for online sales to reach 10% of a 50-billion-euro sales goal by 2020. Growth in online sales in fiscal 2016 slowed from 35% to 30%.

Peter Agnefjäll, IKEA's president and chief executive, told QDaily in an interview in Hangzhou late last year that IKEA has to move faster on e-commerce. Yet IKEA's important strategy for China is to open stores faster. And Livat, its shopping-center format combining hotels, housing, office space and retail, has drawn more attention lately than its e-commerce business.

For years IKEA has been the first place young Chinese consumers go for furniture, and for a great many household goods too. But in a Chinese market that changes this fast, you never know when it will hit you over the head.

Wanda

This year nobody in retail talks anymore about O2O, the once-fashionable idea of "connecting online and offline." The traffic dividend from new users keeps shrinking, e-commerce has become its own mature, self-contained solution, and in some industries it may even cost more than offline retail. As for those who insisted e-commerce would fix offline retail's problems, most of them failed.

Wanda learned that lesson painfully in 2016. An e-commerce plan said to come with 10 billion yuan of investment ended with Baidu and Tencent pulling out and Wanda running it alone. In the end Wanda barely used the user data and payment systems those two internet companies control; like most developers, it simply put everything about Wanda Plaza into an app called Feifan. That turned its e-commerce platform into another kind of promotions channel — the app is only at its busiest during the mid-year sales season.

The asset-light operating model and the entertainment business Wanda has kept emphasizing in recent years haven't gained much from digitalization either. According to Wanda Cinema Line's 2016 operating brief, online ticket sales in China came to 5.1 billion yuan, more than 80% of its domestic box office. That puts Wanda's domestic box office for 2016 at roughly 6.375 billion yuan, not far from 6.01 billion in 2015. As China's overall film market slowed, Wanda Cinema Line's box-office growth slowed with it.

Wanda's digital business has taken quite a beating. Its ability to win new customers through that channel has yet to show itself, at least so far.

A few days ago Alibaba announced a plan to take Intime Department Store private. A brick-and-mortar retailer with 29 department stores and 17 shopping centers is about to become a subsidiary of an e-commerce platform; a plan more than three years in the making has worked.

Intime's decline stands for another kind of herd thinking: open all your resources to a mature e-commerce platform, bring the "Taobao brands" that sell well online into your brand mix, turn your storefronts into showrooms on Singles' Day, add a few location-based recommendation apps — and people will come back offline.

As we noted in our year-end trends piece, success in retail, online or offline, finally depends on responding quickly to what consumers want, and on the greater choice and greater supply that follow. For operators of offline commercial property, sourcing tenants and running the property may look unrelated to digitalization, but digital channels can still sharpen their sense for demand as it emerges and for brands as they appear.

Hunan TV

Among the provincial satellite stations, Hunan TV was long the undisputed first — until 2016, when its average ratings slid to third in the first quarter and Zhejiang TV passed it again in the second. In the first half of 2016 Hunan TV's ratings fell 24% from a year earlier, while the other stations in the top six — Zhejiang, Dragon TV, Jiangsu, Beijing, Anhui — all grew, by anywhere from 2% to 58%.

Being overtaken isn't the whole problem. In the digital era Hunan TV has been fading, and 2016 was a dispiriting year for it.

Hunan TV used to succeed because it could gather young viewers. From Happy Camp in the early days, to I Am a Singer imported later from South Korea, to dramas like Sword of Legends and The Journey of Flower, it could always count on one show after another for enormous ratings. In 2016 that ability seemed to vanish.

Video sites — Youku, iQiyi, Tencent Video — are eating into ground Hunan TV once held. Look back at the hits of 2016: Go Princess Go premiered on LeTV, Descendants of the Sun was imported exclusively by iQiyi, Sing! China ran on Tencent Video. None of them had anything to do with Hunan TV. It didn't even get a license to broadcast the New Year's Eve concert, the ratings centerpiece of the year for the first-tier satellite stations.

Hunan TV once believed its winning card was its own strength in developing and producing shows, but that edge is being blunted too. I Am a Singer reached its fourth season in early 2016, and with viewers tiring of it, ratings hit their lowest across all four. Whirlwind Filial Son 《旋风孝子》 and Up Idol also fell short. Hunan TV's ability to come up with new content is not as strong as people assumed.

The weakness showed even more plainly once Hunan TV tried to take on the video sites directly through Mango TV. Dad, Where Are We Going? Season 4 moved to an exclusive run on Mango TV because of the restrictions on shows featuring celebrities' children; its Baidu Index that day was 467,881, a quarter of what season three managed. Against the other video sites, Mango TV's gap in users is still too wide.

Perhaps nothing captures the awkward position of Hunan TV and Mango TV better than the revival of Super Girl. Official figures claimed "video views past 1.4 billion, Baidu search results past 13 million," but everyone understood that this season's champion, a singer performing as "Round Up That 9," would never repeat Li Yuchun's success.

Hunan TV clearly has the ambition to repeat the hits it made a decade ago. Under the conditions of digitalization, the odds are against it.

This is really the problem of digital transformation at traditional media companies. Almost no major newspaper or television station anywhere skipped trying it in 2016, but the news out of the big traditional outlets, The New York Times and CNN among them, has all been bad: users lost, advertisers lost, publications closed, staff cut, office buildings sold.

McDonald's

From the global level down to individual markets, McDonald's has been carrying out the digital transformation strategy set by chief executive Steve Easterbrook. Judged on results alone, McDonald's should count as having tasted the benefits in 2016: same-store sales in China have grown for five straight quarters.

Big-screen self-order kiosks, social marketing, mobile payments, delivery — these digital moves have all let McDonald's reach more consumers, and McDonald's regards them as a method that works.

But here is what to watch, or the worry for the future: as delivery gains more say as a channel, it may end up able to influence or rewrite how profits are divided along the supply chain. Delivery now accounts for 20% of McDonald's revenue in China, and the company treats it as the next priority.

Then there is consumer data, more and more of which sits with Alipay and the delivery platforms. That leaves McDonald's fewer chances to touch consumers directly, which could well dull its feel for the market.

McDonald's was built on certain technical and management strengths, but also on being seen, by one generation and perhaps two, as a fairly cool, youthful brand. That identity is bound up with the soda and fries it sells, with the space to sit in, with warmth and youth. A supplier to a delivery platform plainly doesn't get the same chance.

There is also this: McDonald's China, with its 2,400 stores, has been converted in one stroke to franchising, and its new owner is the well-known, state-backed CITIC. Opening stores and growth come first now. Brand personality hasn't been discussed much.

Some industries — cars and long-term rental housing, for instance — remain largely inside the framework of the traditional industry chain. Companies there are making digital efforts and attempts, but it is hardly time to talk about winners and losers. In the car market in 2016, people barely mentioned e-commerce anymore, and the O2O services in that field mostly collapsed; Tesla, the industry's reformer, is a competitor no one can ignore but has not shaken the industry as a whole. The long-term rental market is the same — QDaily Research Lab, asking whether "internet thinking" can solve young people's housing-rental problem, found plenty of misconceptions in it.

The luxury industry is more dispiriting still. Fashion bloggers and KOLs now have far more say and influence over it than traditional fashion editors do, and the editors, fighting to hold their place as a marketing channel, seem to have nothing to offer beyond some sharp words. The whole luxury industry is only now waking up to new channels, new ways of talking to people and new consumers.

All digitalization comes down, in the end, to the question of what consumers want; the only difference is whether you follow it or lead it. In 2017 we hope to see more digital innovation.

(Reporters Tang Shuchang, Han Fanghang and Xu Bingqing also contributed to this article)

Cover image: Pexels, Pexels