The Big Sell | China’s grocery delivery fever is cooling down

If you have been looking at China’s grocery delivery market over the past two years, you’ve had a pretty wild ride. It’s been crazy out there. Before the pandemic, it was a startup fad—but once people across China locked down, tech giants and venture capitalists pumped billions into the field.

The turnover of China’s community group-buy market surged by 120% year on year to reach RMB 75 billion ($12 billion) in 2020, according to data from research agency 100EC. The figure is expected to increase 38% year on year to RMB 104 billion in 2021. Despite the growth, the market is getting tougher for the smaller players.

While sales are rising, the investment fervor surrounding China’s grocery delivery market is quickly cooling down. A new round of consolidation is wiping out all but the largest players. 

Collapse of startups: In July, two major online grocery startups withdrew from the market. Both are regional market leaders that have received multiple funding rounds from tech giants and renowned VCs.

• July 8: Tongcheng Life, a Chinese grocery delivery startup, announced that it has filed for bankruptcy. The company reportedly owed a combined RMB 200 million ($31 million) debt to over 1,000 suppliers. As one of the earliest entrants to the market, the firm was once valued at more than $1 billion, after receiving more than $306 million financing since its establishment in 2018.
• July 28: Tencent-backed Shixianghui ended its community group-buy service amid fierce competition in the market and regulatory pressure. The service’s website and mini-app are no longer functioning. 
• Aug. 13: Baoneng Shengxian, a grocery delivery startup in Western China’s Xi’an city, was reported to be facing insolvency issues amid layoffs, storefront shutdowns, and rumored delays to salary payments.

All three of these companies use the “community group buy” model, which relies on once a day deliveries to central locations to offer ultra-low prices. In the more high-end on-demand delivery market, two non-giants Dingdong and MissFresh made it to IPO in late June.

Venture capital continues to flow into community group-buy, but it’s been winner-takes-all for the top platforms. In the first five months of this year, Tencent-backed community group-buy platform Xingsheng Youxuan received $3.1 billion in funding, and Alibaba-backed Nice Tuan secured $750 million. Their combined fundraise represents over 95% of funding for the market during the period, a report from corporate intelligence database Qichacha shows.

Profits in view for grocery delivery leaders?

Chinese tech giants only began to make direct plays in the grocery delivery businesses during the most recent boom, starting in 2019. Before then, China’s biggest tech companies tapped the sector only through investments in startup leaders, a lean approach that sought to stay abreast with the latest tech trends without expanding heavily.

Tech titans including Alibaba, Pinduoduo, Meituan entered the grocery market about two years ago, intensifying competition in the already crowded sector. Rivalry in the area turned into a cash-burning subsidy war that not even the deepest-pocketed players could sustain. Tech giants, now operating their homegrown business, not only compete with each other, but also startups they previously invested in.

Chaotic, cash-fueled expansion prompted regulators to issue a list of restrictions on group-buy businesses, forbidding predatory pricing to beat out competition, as well as cracking down on falsely advertising discounted prices and posting misleading product information.

Under this financial and regulatory pressure, tech giants started to pivot their grocery business strategy from loss-making expansion, to monetizing existing businesses. The biggest players in the field are seeing results.

• Duoduo Maicai expected to record positive gross profits from July. Meituan Youxuan expects to record gross profit in some regions, local media reported.
• Ride-hailing giant Didi scaled back a community group-buy grocery unit Chengxin Youxuan. The unit laid off about a third of its staff, began an all-staff pay cut, and relocated its head office from Chengdu to Beijing and Hangzhou. 

Report: nearly 45% of beauty brand sales take place during two shopping festivals

China’s two major online shopping festivals—Singles Day in November and 618 in June—account for nearly 45% of total annual cosmetics sales, according to data from thirty beauty brands on Alibaba’s marketplace Tmall. Digital agency DLG surveyed the brands in July for a report on shopping festivals.

While sales figures on the platform throughout the rest of the year are somewhat consistent, months with a local celebration or festival, including Chinese New Year and Chinese Valentine’s Day, also known as Qixi, account for a slightly higher percentage of sales, according to the report.

Luxury brands may not have to give major discounts to win shopping festival traffic, DLG wrote. Brands have also taken advantage of the consumption deluge by launching new collections and limited editions at full price during shopping festivals, and boosted sales through buy now, pay later schemes like installment plans.

“Unlike discount driven holidays in the West, these festivals are critical occasions for brands to launch new products, introduce innovative shopping experiences and create touchpoints with loyal and new customers alike,” said James Lin, head of Fashion and Luxury for North America Alibaba Group, in the report.

Also in the news: 

China helps merchants after Amazon bans: Since May, Amazon has blocked up to 50,000 Chinese sellers on its platform, citing “improper use of the review function” as the reason.

• Shenzhen, China’s cross-border e-commerce hub, is offering RMB 2 million subsidies to cross-border sellers for each “independent store” or website they build to diversify online sales channels.
• Li Xingqian, director of China’s Foreign Trade Department at the Ministry of Commerce, said in July that the state would help companies to comply with international standards while protecting their “legitimate rights and interests.” Li called the problems “growing pains” in China’s cross-border e-commerce industry.

Tech investors set sights on consumer retail: Chinese venture capitalists, typically backers behind technology startups, are chasing after nascent consumer brands selling everything from foods and beverages to cosmetics. It normally takes decades to build brand awareness, but some emerging brands are scaling at tech-like speeds by leveraging logistics, social media, and e-commerce.

• Charles Lu, the Luckin founder who fell from grace after the 2020 financial fraud scandal, is back in the retail game with noodle restaurant Qu Xiaomian. TechNode visited one of its first locations in Beijing and had a very ordinary bowl of noodles.
• Nayuki, the Luckin-like bubble tea chain that raised $656 million in its Hong Kong debut this June, came under scrutiny Aug. 2 after state news agency Xinhua reported on hygiene issues in two Beijing stores. The news sent the company’s share down 10%. A later statement from the company said inspectors found no evidence of food safety violations.