Article / 18 February 2015 at 6:08 GMT

Alibaba leads Chinese New Year red letter bonanza

China Watcher / Shanghai
China
  • China’s tech firms are undertaking an expensive effort to boost their user bases 
  • They are offering a combined total of RMB 14 billion in red packet prizes
  • Tech giants as well as start-ups are offering them on their mobile apps

By Neil Flynn

As the year of the goat approaches, China’s tech firms are getting into the spirit by offering users the traditional gift of red packets filled with money. While the tech giants do so in order to boost consumption over their respective payment systems, start-ups are finding that this is an effective way to build a user base in order to compete with larger rivals in the new lunar year.

Paying for future consumption

China’s tech firms are undertaking an expensive effort to boost their user base and future consumption by offering a combined total of RMB 14 billion to customers in red packet prizes. During the Chinese New Year festival, families give their children and elderly relatives red packets (红包) filled with money, as opposed to presents.

The likes of Alibaba, WeChat and Weibo have been offering red packets on their mobile apps. For example, Alibaba’s Taobao app has a countdown on the app’s homepage until the next red packet giveaway, meaning that if users want to compete for a red packet, they have to be using the app at that specific time. 

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 China's technology companies are giving away traditional red packets on their mobile apps as a way to build their user base and boost future consumption. Photo: iStock

To win a cash prize, users have to play a game where red packets appear on the screen, and the user has to click on them before they disappear. Most of the red packets are empty, and obviously the more red packets that a user clicks on, the higher the chance that they will find one with money inside. 

At the end of the game, the user finds out whether or not they have won money, with prizes between RMB 1 and RMB 5 in cash or shopping vouchers. These prizes can only be spent using the Alipay payment system, meaning that Alibaba will eventually earn revenue from this giveaway.

Tencent has had a similar red packet giveaway competition, which will culminate tonight on Lunar New Year’s Eve. WeChat has reportedly partnered with 10 major advertisers, who will each offer red packets totalling more than RMB 10 million. In order to win money, users have to use WeChat’s shake function and hope that the red packet that they collect contains money, which would be paid into the user’s WeChat Pay account.

Along with these tech giants, start-up apps are finding that this is an effective way to build a user base, because the possibility of winning money by downloading a free app is a good enough reason for users to partake. Giving away monetary prizes in order to build a user base has recently been used by many firms in order to compete with larger rivals. Gaming firm NetEase launched its WeChat rival Yixin, and offered China Telecom users RMB 300 in mobile credit for downloading the app.

Third-party merchants restrict sales events during spring festival

Chinese New Year would seem like a good opportunity for online retailers to hold big sales events, because consumers have a week’s holiday and with most being away from big cities in their family’s home town, there is likely little else to do other than shop online. 

However, the problem is that online retailers rely heavily on third-party merchants, who sell their goods on the retail platforms, as well as local couriers, both of whom won’t work during the New Year holiday. For example, if I try to buy something on JD.com from a third-party merchant today, the earliest that it would be shipped is on February 24, and depending on where it’s based, may not arrive until March. 

Retailers such as Alibaba and JD.com have tried to counter this by maintaining their own operations throughout the festival. They offer third-party merchants the opportunity to use their state-of-the-art warehousing facilities and nationwide logistics services, meaning that third-party merchants can have their goods delivered in a much shorter space of time. 

For JD.com, these goods are still delivered within 24 hours in Shanghai, and this should help to maintain revenues during the otherwise quiet national holiday. 

JD.com's State Of The Art Warehousing System
 














JD.com’s state of the art warehouse in Shanghai. Photo: JD.com

The next opportunity for online retailers to have a big sales event is likely to be Labour Day, which falls on Friday May 1, and this will probably be extended over the weekend. The calendar second quarter is typically the second-best quarter for online retailers in China behind the fourth quarter, due to the size of the sales events. 

Alibaba and JD.com are the biggest beneficiaries from big sales events in China, because they are much bigger than their rivals. They can therefore offer better discounts, and with their warehousing and logistics infrastructure, they are able to deliver goods much more quickly than their smaller rivals, particularly outside of the Tier 1 cities.

The typical New Year’s greeting is 恭喜你发财, meaning "may you be happy and prosperous". China’s tech firms will be hoping that their efforts at the end of the lunar year will result in a strong end to the first quarter and the seasonally important second quarter.

– Edited by Gayle Bryant

Neil Flynn is portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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