Little Red Book Turns a Profit: Xiaohongshu Thrives as China's Instagram

Chinese social media platform Xiaohongshu, often dubbed the "Little Red Book," has reported its first ever profit, a testament to its growing popularity and burgeoning revenue streams. The Instagram-like platform, known for its focus on lifestyle, travel, and beauty content, generated £3.7bn in revenue last year, yielding a £500mn net profit. This marks a significant turnaround from 2022, when the company recorded a £200mn loss on £2bn in revenue.

The Shanghai-based app has become a success story amidst a challenging period for the tech sector, marked by declining valuations and investor withdrawals. Valued at £16bn in its last funding round in 2021, Xiaohongshu boasts a star-studded investor roster including Alibaba, Tencent, GGV Capital, and HongShan, the former Sequoia China venture capital firm.

Xiaohongshu's appeal lies primarily with young Chinese women, who flock to the platform for inspiration and recommendations across various lifestyle domains. However, the platform has also been expanding its male user base, tapping into growing interest in automotive content, science fiction, and memes.

While advertising forms the backbone of Xiaohongshu's revenue, the platform has been aggressively scaling its ecommerce function. Influencers leverage the platform to showcase and sell products through live streams and short videos, generating substantial sales.

Despite the positive financial figures, one investor, who requested anonymity, highlighted the uncertainty surrounding Xiaohongshu's future trajectory, specifically the absence of a clear path towards an initial public offering (IPO). "While I am optimistic about the company's prospects, the lack of a definitive IPO strategy poses a significant challenge," the investor noted.

Beijing's recent resumption of approvals for tech companies to list on US exchanges, following a hiatus due to national security concerns, offers a glimmer of hope. However, experts caution that listing large social media companies like ByteDance and Xiaohongshu is complex given the vast amounts of consumer data they hold.

Xiaohongshu's user base expanded by 20% in 2023, reaching 312mn monthly active users, making it the fastest-growing large social media platform in China. Li Chengdong, head of the tech think-tank Haitun, attributed the strong financial performance to increased marketing expenditure by brands on Xiaohongshu, citing the platform's higher advertising effectiveness compared to its rivals.

Xiaohongshu has carved a niche for itself as a go-to platform for brands targeting affluent young women. With 70% of its users being female and 50% under 30, the platform offers brands a unique opportunity to connect with a discerning audience.

The platform's reputation as a more upscale alternative to competitors like ByteDance-owned Douyin and Kuaishou has been instrumental in its success. While Xiaohongshu initially faced challenges in monetising its service, users often resorting to Alibaba-owned Taobao and Tmall for actual purchases, the platform has found its footing in recent years.

The emergence of "slow livestreaming," where influencers promote products in a calm and deliberate manner, has played a pivotal role in differentiating Xiaohongshu from Taobao. This approach aligns with the growing trend of "quiet luxury," a stark contrast to Taobao's fast-paced, heavily discounted livestreaming model.

Xiaohongshu's gross merchandise value (GMV), a metric representing the total value of goods sold on the platform, surged fivefold during last November's "Singles' Day" shopping festival, a testament to the platform's growing ecommerce prowess.

"Xiaohongshu provides a more conducive environment for companies to build brand identity and cultivate customer relationships than Taobao, where the primary focus is on driving sales," said Olivia Plotnick, founder of Shanghai-based social media consultancy Wai Social.

Despite its smaller user base compared to Douyin and Kuaishou, Xiaohongshu's audience is concentrated in affluent cities, making it a highly effective marketing platform for reaching high-spending consumers.

Li of Haitun highlighted the role of China's exit from its zero-Covid policy in Xiaohongshu's profitability journey, as it spurred businesses to increase their marketing investments.

"Xiaohongshu's unique value proposition lies in its non-price-driven nature," he explained, "ensuring that it doesn't undermine brand value."

While Xiaohongshu declined to comment on its financial performance, its robust growth and strategic positioning suggest a bright future for the platform, particularly as it continues to refine its ecommerce offerings and tap into the growing trend of quiet luxury.