Short term success offset by long-term risks
Since 2018, more and more dairy giants including Mengniu and Yili have utilized social ecommerce such as Wechat. Despite the benefits of massive traffic and huge exposure offered by this market entry option, it also poses a number of risks to brands including false advertising and pyramid selling which can damage brand image in the long term.
Pyramid selling
The distribution of “Fiber Milkshake” launched by Mengniu in early 2018 was outsourced to a 3rd party Wechat marketing agency. An investigation into alleged illegal practices showed that the distribution method used by the agency involved developing illegal downstream agents which fitted all the criteria necessary to be classified as a pyramid scheme as defined by “Prohibition of Pyramid Selling Regulations”. This case is by no means an isolated incident and some other high profile brands and platforms are suspected of utilizing pyramid style selling such as “Yunji Weidian”, which previously signed sales agreement with the overseas dairy manufacturer Abbott and Devondale.
Illegal advertising is commonplace
According to China’s “E-commerce Law”, Wechat businesses shall also conform to the stipulations of the “Advertising Law”, despite this exaggerated and illegal promotions are extremely commonplace for products sold through this channel. Wechat traders selling Synutra Briffney infant formula advertised that “this infant formula most closely mimics human breast milk”. The claim is a gross violation of both China’s “Advertising Law” and China’s national infant formula standards.
One advertisement of “Wondersun fiber milk” claimed the product can help consumers lose weight without exercising. Leaving aside the fact that the product does not have health food certification and cannot use label functional claims, the terminology used is also unscientific and considered false according to “Consumption Notice on Health Food Functional Claim False Advertising” issued by SAMR.
Is Wechat business reliable?
Most of the risks associated with doing business on wechat stem from lax regulation and supervision, low business establishment threshold and lack of channel management. Dairy expert Song Liang stated that although wechat business can fulfill the goal of promotion with reduced financial outlay, this is achieved at the cost of losing control over the product. Driven by huge profits, wechat traders often turn to promoting products using exaggerated claims, and even illegal means which ultimately can damage a brand’s image. Additionally, it is hard for manufacturers to control the product. A lack of product lifecycle management and a clear and well defined product chain of custody breeds an environment rife for exploitation by China’s counterfeiters. For premium brands which have navigated China’s extensive regulatory hurdles and have full market access, the risks of leveraging Wechat in a multi-channel China market entry strategy are likely to outweigh the rewards. For products and manufacturers which are excluded from China’s general trade channels due to regulatory barriers, Wechat and other social ecommerce retail methods offers a viable although high risk market entry option.