CHINA VOICES | Is community group buying maturing?

Community group buying is the hottest story in e-commerce. Major tech companies are pushing hard into the industry, with Alibaba alone backing five such platforms (in Chinese).

Most recently, Alibaba led a $750 million investment round for grocery app Nice Tuan on March 31. Pinduoduo founder and CEO Colin Huang said he is ready to go all in on March 11, and Meituan chairman Wang Xing named Meituan Select, its community group buying platform, as the company’s top priority in an earnings call on March 26.

But with a dip in sales after the group-buy industry hit peak volume during the Spring Festival, the Chinese internet doesn’t expect a feast. 

After a year of all-out growth during the pandemic, regulators in Beijing have cracked down on the industry, with the State Administration of Market Regulation (SAMR) and the Ministry of Commerce setting nine rules in December to govern this sector. SAMR also concluded an investigation into community e-commerce in March, levying fines for irregular pricing on five tech majors, including Alibaba, Tencent, and JD.Com. Regulators are likely thinking of former fad industries, such as second landlords, bike rental, and P2P loans, that eventually blew up and left consumers holding the bag. 

In recent Chinese analysis, the consensus is that the market is consolidating, and platforms are fighting a different war to survive. Last year, many companies rushed into the industry, spending big to claim territory, but community group buying is now shifting from sprint mode to creating sustainable profits. 

Commentators discuss how far along the consolidation process is, debating when and how the winners, if any, will be decided.  They also talk about those getting the short end of the stick, from companies being pushed out of the industry to suppliers being squeezed by platforms. 

Pick your battles 

It doesn’t look like one company will wind up owning the whole community group-buy market.

Commentators are optimistic that the community e-commerce market offers room to grow. Major group-buy platforms may have wide reach, with Meituan Select presently operating in more than 90% of cities and counties in China, but continuing negative profit margins means other players have the chance to dominate in specific regions. The jury is still out on who will sink or swim. 

Chinese magazine Ran Caijing writes that different winners are emerging in different regions. 

‘Community group buying moving in different directions’

Yan Junwen
Ran Caijing, March 30

Community group buying has gone through half a year of rapid progress, with startups and big businesses currently moving in different directions. Some focus on counties, towns, and rural areas. Others have turned toward Beijing, Shanghai, and Guangzhou. 

In the community group buying market of today, the players are not all squeezing together, but have instead chosen their own directions for key breakthroughs. They continue in regions where they are able to succeed. In regions where they are unable to succeed, the companies pivot or exit the market. The situation of order volumes for different regions and different companies probably vary greatly. For example, in Hunan and Hubei, Xingsheng Youxuan holds an absolute advantage. However, in Guangdong, Jiangxi, and Shandong, Meituan Select is the leader.

The way forward is not rosy for all group-buy companies, though, and Ran Caijing emphasizes that staying in the industry means taking on greater risks. Summer, with its high temperatures and humidity, will be the next challenge. There is also the problem of getting good customer ratings. 

Ran Caijing points to the community e-commerce platform Chengxin Youxuan as a cautionary tale: Chengxin Youxuan offered flash sales and cash incentives to customers and saw growth potential in various cities and provinces such as Wuhan, Chengdu, Jiangxi, and Guangdong. But consumers in some places did not bite, and with an uneven unit volume of sales, things quickly turned from good to bad. A source in the supply chain industry told Ran Caijing that they’re about ready to write the company off: “Right now, Chengxin Youxuan is already on a downhill trajectory. There are not many cities in which it has done well overall.”

Tough decisions

The industry is maturing, She Xiaochen and Ke Xiaobin write in finance and business outlet Jiemian News. Companies who are still in the game are building moats, reinforcing their strongholds. Even as platforms continue to expand, seeking economies of scale, they are closing operations in low-efficiency areas and cutting low-performing business development teams. Leading group-buy platforms aren’t exempt from these pressures either. Many of them gave out free promotional products to attract consumers across a wide range of cities and counties. Jiemian argues that, soon, they will be unable to settle accounts. 

An investor told Jiemian that the main reason for streamlining isn’t regulations. The market is also pushing companies to cut costs.

‘Community group buying pauses war to strategize: with free promotional products in many locations, tech giants are close to unable to settle their accounts’

She Xiaochen and Ke Xiaobin
Jiemian News, March 31

An investor who has followed the new consumer industry for a long time said that apart from the impact of policy, the other reason for community group buying entering the streamlining stage is the particular characteristics of the industry: “Community group buying touches upon many links in the supply chain, including categorization, logistics, and warehousing. The input cost is sizable, and the business is not really suited to the cash-burning model that used to work for internet companies.” 

The co-founder of a mid-size player told Jiemian that the company is giving up on areas that aren’t turning a profit.  

According to the co-founder of a mid-level community group-buy platform, “after almost a year of operations, we have found that the performance of group buying in certain regions is not high. Streamlining operations means that business development activities that do not perform well will be retired.”

But Jiemian also writes that platforms still have a long way to go in terms of sound business models and operations. To cut costs, major group-buy platforms are shifting responsibility to merchants to ease the financial pressures on themselves. The writers worry that this is a bad sign. Not only are mid-level companies experiencing profitability issues, Jiemian writes, but the tech majors are also in trouble. 

Meituan Select, Xingsheng Youxuan, and Shihui Tuan have employed a mix of direct operations and third-party agents in county markets in pursuit of profits. An industry insider familiar with the supply chain for community group buying told Jiemian that this model allows platforms to shift risks to their agents: “Every agent individually bears the responsibility of profit and loss. This ‘dual mode’ of operations allows leading players to maximize cost-cutting and minimize losses.”

Squeezing bottom lines

Some suppliers say they’re having second thoughts about community group-buy as platforms squeeze their bottom line. 

A supplier for Chengxin Youxuan told Jiemian that the platform had asked them to fill large orders at rock-bottom prices as it built up operations in new regions. By Lunar New Year 2020, which came on Jan. 25, he had already emptied almost half of his inventory, giving it away for free or at low prices. This supplier has been happy to go along with the platform up to that point, led by the promise of strategic losses for greater gains. But he says that he wants to see profits soon: “Volume is not our only standard. We still look at whether we can make money. Speaking as businesspeople, our ultimate goal is to profit.”

Other commentators warn that it will become impossible for small suppliers to live off what they earn from community group-buy platforms. 

WeChat blog Future Consumption (Weilai Xiaofei) explains that compared with selling directly to supermarkets, the group-buy model requires product suppliers to shoulder more risk and cost in terms of logistics and operations. This has caused suppliers to leave the group-buy industry.

Writer Zhao Xiaomi describes the predicament of  Lao Liu, who joined community group buying at the beginning of this year.

‘Major suppliers flee community group buying’

Zhao Xiaomi
Future Consumption, March 17

Previously, when supplying to supermarkets, Lao Liu only had to consider how to sell his products to the markets. However, with community group buying, things are not the same. Risks, losses, and operations responsibilities that were originally borne by the supermarket have all been passed onto the supplier.

Suppliers have to cover attrition costs for perishable goods such as tofu shipped to warehouses near consumers for quick delivery. They are also responsible for the costs of returned products, including fresh foods unsuitable for resale. Platforms charge them fines for these returns. One supplier told Future Consumption that platforms have strict policies that make suppliers financially responsible for customer returns.

“The first time the return rate for a supplier’s products in a given period is between 0.3% and 1%, the supplier will be fined 5% of the transaction amount. The second time and each time thereafter, the supplier will not be able to register products on the platform for three months. If the return rate for a supplier’s products is greater than 1%, the supplier will pay a fine of 25% of the transaction amount the first time this happens. The second time will result in termination of the agreement between the supplier and the platform,” the supplier said. 

Dog eat dog

The community group buying that exploded in the second half of 2020 was quickly rolled out. It sprung up fully, and the construction of infrastructure for supplying, warehousing, and logistics was basically completed. In the coming summer, high temperatures and humidity will further put the results of the last six months to the test. User ratings may be divided on which platforms are better or worse, further determining if this platform business will continue or shrink. Summer is a test. By the end of 2021, the industry will probably be able to see who is swimming and who is left standing on the shore. 

Ran Caijing, March 30

The winners of community group buying are still unclear, but commentators are betting on many losers. They argue that surviving in the industry means being able to sustain substantial losses, which is often only possible for the largest tech companies. 

Even those leading group-buy platforms, however, have questionable futures. Both Jiemian and Ran Caijing raise doubts about profitability for the tech giants, including Meituan, which offers community group buying in  90% of China’s cities and counties but continues to expect operating losses.

Mid-level players aren’t able to carry on, and the tech giants aren’t able to settle their accounts either. 

Jiemian, March 31

Ran Caijing reserves judgment about the overall direction of the industry, arguing that summer and the challenges it poses will provide a clearer picture of which companies will emerge as leaders. Jiemian, however, says that consolidation is already far along, with more successful companies already creating strategies and models to protect their businesses. Future Consumption argues that factors such as supply chain and customer ratings will also determine the future of the players.