Two years ago, Daniel Zhang downloaded Xiaohongshu so he could order a special edition of “Flowers of the Amazon Forest,” a book by the British botanical artist Margaret Mee that was only available on the Chinese social app. What he didn’t anticipate was that Xiaohongshu would become an indispensable part of his daily life.
The 35-year-old mid-level manager in south China uses the app to find answers for everyday issues like finding a good restaurant, get advice on travel and stay on top of the latest events.
“It works much better than the combination of Weibo, Baidu, Dianping, and Mafengwo because there are much more authentic users on the platform,” Zhang told Nikkei Asia, referring to the Chinese equivalents of X, Google, Yelp, and Tripadvisor.
Launched in 2013 by two young entrepreneurs as a cross-border community where women could share shopping tips, the privately held company now counts some of the biggest names in Asian tech and investing as backers, including Tencent Holdings, Alibaba Group and Singapore’s Temasek Holdings. Charlwin Mao Wenchao, one of the co-founders, serves as its CEO.
The company, whose name means “little red book,” has over 300 million monthly active users. It says half of them were born after 1995 and around 70% are female.
Some international media outlets have described Xiaohongshu as the Chinese equivalent of Instagram, but it offers far more than photo and video sharing. It occupies a unique position as a lifestyle encyclopedia and guide to daily life that few if any competitors seem able to match. There is even a popular saying now: “Whenever you can’t make a decision, go on Xiaohongshu.”
Of course, sharing photos is part of the appeal, too. It is a common occurrence for users to descend on a restaurant or little-known tourist spot after it was recommended on Xiaohongshu and take photos to show that they, too, were there, even if it is in Hong Kong or Japan.
Given the app’s huge base of young female users, some previously unknown or struggling brands have used this to their advantage. Cosmetics maker Perfect Diary and carmaking joint venture SAIC-GM-Wuling, for example, have found success with targeted marketing campaigns on the platform.
Xiaohongshu’s interface features a unique double-column layout for users to scroll through, but for a lot of users, the platform’s big selling point is its recommendation algorithm, which many say is more targeted than those of its peers, including TikTok’s Chinese sister platform, Douyin. Users regularly report feeling that “Xiaohongshu knows me so well” and say it was quickly able to identify their sexual orientation and preferred topics. The algorithm is also aimed at identifying additional topics that a user might be interested in based on similarities to a given group and geographic location.
In a written reply to Nikkei, Xiaohongshu said the platform’s recommendation algorithm takes a “decentralized” approach, with half of the traffic distributed to users with fewer followers in order to increase their exposure. It also tries to identify specific user groups and bring out “excellent” content from each.
“We have strived to create an environment where users can comfortably share and interact, and to let more ordinary people be seen,” the company said. “We envision a future where every individual, upon entering Xiaohongshu, can not only see a vast world far away, but also experience the warmth of a community nearby.”
In recent years, users have been increasingly using the platform’s search function. As of the end of 2023, 70% of monthly active users performed searches on Xiaohongshu, and 42% of new users search within their first day of using the platform, according to the company.
Unlike Douyin, which separates its users from the rest of the world by having an international version, namely TikTok, Xiaohongshu only has one version and is available to the global Chinese community. Over the past year, more than 90% of its website’s traffic was from mainland China, but that portion started to gradually decline this February and dropped below 90% in June as traffic from other regions increased, according to Similarweb, a data aggregation company.
On the app side, in the first half of the year, 90% of Xiaohongshu’s monthly active users were from mainland China, followed by Malaysia, Taiwan, Hong Kong and the US, according to Sensor Tower, a market intelligence firm.
In the second quarter, monthly active users on Xiaohongshu’s mobile apps—downloaded through the iOS or Google Play app store—were slightly higher than those for Douyin, which also saw a 4% year-on-year decrease while Xiaohongshu witnessed a 16% increase, according to Sensor Tower. Users spent an average of 144 minutes per month on Douyin and 73 minutes on Xiaohongshu, it said.
But popularity alone does not pay the bills.
Xiaohongshu’s main source of revenue is advertising, and over 50% of that is from cosmetics brands, a former executive with the company told Nikkei. One of the most important features for commercialization on Xiaohongshu is called seeding: generating consumer interest in an item so people will buy it in the near future. However, that approach has created a paradox for the company because although users indeed make purchase decisions based on posts on the platform, they often buy the items somewhere else, such as Alibaba’s Taobao and Tmall, rather than Xiaohongshu.
At least 20% of the traffic to Taobao and Tmall is from Xiaohongshu, though Xiaohongshu is also snapping up some advertisement revenue from Taobao and Tmall, the former executive said.
“One big problem for Xiaohongshu is that it still has not found the most efficient way for commercialization,” he said. “There is a big overlap between Xiaohongshu’s users and Taobao’s VIP users, and that group is susceptible to macro[economic] conditions. And on top of that there is a price war going on among all e-commerce platforms, which Xiaohongshu doesn’t really have resources to fight. So in terms of e-commerce, it is not attractive enough to either vendors or buyers.”
Increasing the amount of ads to bring in more revenue could potentially be a double-edged sword, if doing so came at the cost of the app’s much-loved user experience.
Compared to Bilibili, a short-video platform with a similar level of monthly active users, Xiaohongshu is doing better in terms of commercialization, as it turned profitable in 2023, reporting a USD 500 million net profit, while Bilibili is still losing money.
“But Xiaohongshu falls significantly behind Douyin in terms of monetization,” the former executive said. “Despite having around half the monthly active users of Douyin, Xiaohongshu’s total revenue is less than one-twentieth of Douyin’s. This wide gap in performance may cause some investors to question the success of Xiaohongshu’s commercialization efforts.”
In the past few years, it has been rumored several times that Xiaohongshu was about to publicly list. However, the company has repeatedly said there is no timeline for an IPO.
Xiaohongshu has gained investments from Temasek, Tencent, HongShan, Hillhouse Investment, Boyu Capital, and Alibaba. The platform reached its peak valuation of USD 20 billion in a fundraising round led by Temasek and Tencent in 2021, but that has declined recently. HongShan, formerly Sequoia China, invested in Xiaohongshu at a valuation of USD 14 billion in September last year. The Financial Times reported this month that Xiaohongshu recently arranged stake sales of existing shares to current and new investors that valued the company at USD 17 billion.
In a further sign that there are no immediate plans for an IPO, Xiaohongshu is following ByteDance’s suit in offering to buy back more shares from employees, a senior manager told Nikkei.
Wayne Shiong, a partner at Beijing-based China Growth Capital, agrees that the outlook for a public listing for Xiaohongshu is not optimistic. “The global capital markets are weak, coupled with the fact that investors are indifferent towards Chinese stocks, particularly in the USS. Xiaohongshu may choose [the] UK or Hong Kong if it were to go public,” he said.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.