China’s Community Group-Buying Players Are Facing a Reshuffle, Signaling the End of the Fast-Growth, Cash-Burning Bubble Blown by the Country’s Big Tech
A market shake-up is taking place
On Saturday night, after putting her five-year-old daughter to bed, Lin Hui reclined on the couch and started browsing Chengxin Youxuan on her phone, a community group-buying service owned by Chinese ride-hailing giant Didi Chuxing, as she usually did, with a shopping list to complete. However, this time, Lin found out that almost everything from pastured eggs to milk was out of stock on the platform, and the “place order” button had turned from Didi’s signature shade of tangerine to gray.
The 35-year-old working mother has grown accustomed to the new form of online grocery shopping since December last year, when Didi expanded its community purchasing business to Lin’s hometown Wuhu, a third-tier city in China’s eastern Anhui province. “Chengxin Youxuan provided a wide variety of products and some of them were sold at a very attractive price,” Lin told Pandaily in a recent interview. “I used to place orders via its WeChat mini-program and pick up the goods from a supermarket in my housing complex the next day. It was super convenient and time-saving.”
Community group-buying has been one of 2020s’ hottest e-commerce trends in China, allowing a coalition of people, often living in the same residential compound, to obtain discounts by purchasing groceries and other daily essentials in bulk. The practice is usually organized by a community leader such as a neighborhood administrator, social ringleader or convenience store owner. These leaders create and manage WeChat groups, where they coordinate orders and oversee logistics. The entire order will be delivered to a designated neighborhood spot the next day, where the community leader will sort it into individual residents’ orders for them to collect. Community leaders are recruited by platforms and can typically win a 10% commission of the total sale.
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The business model has gained momentum after the coronavirus pandemic sparked a months-long, nationwide lockdown earlier last year, a period during which millions of Chinese people relied on a group of community workers to purchase fresh produce and life essentials on their behalf. Didi was one of the first major Chinese internet companies to catch a whiff of the changes in consumers’ grocery shopping habits and hop on the trend with its own community group-buying platform.
Last June, Chengxin Youxuan made its debut in the southwestern city of Chengdu. Didi CEO Cheng Wei reportedly expressed his ambitions in a November internal meeting, saying that the company’s investment in Chengxin Youxuan “would not be capped” and it would support the platform to become number one in the market “with all its might.” As of February, the community retail unit of China’s answer to Uber has advanced into 27 of the 31 mainland provinces.
Fast forward four months and Cheng’s visions seemed to have faded away. According to domestic media outlet LatePost’s report, Chengxin Youxuan began to scale back its business this June, with about a third of staff laid off and operations in 22 provinces shut down.
Chengxin Youxuan is not an isolated disillusion. Nearly simultaneous with the platform’s downsizing, JD.com’s community group-buying arm Jingxi Pinpin, which went online on New Year’s Day under supervision of the e-commerce giant’s CEO Liu Qiangdong, suspended its business in seven provinces. Tongcheng Life, a start-up founded in 2018 with a total of more than $300 million venture capital funding, filed for bankruptcy in July. Alibaba-backed Nice Tuan in August dismissed staff without paying severance compensation, prompting many workers to complain on social media, Technode reported.
With several top players withdrawing from the competition, the bloated market is entering a new phase of consolidation.
Déjà vu all over again
The so-called “blitzscaling” growth model, which involves a high cash burn and temporary disregard for profitability in favor of scaling up business at fast speed, has been a strategy employed by many Chinese tech start-ups over the past decade, especially those in competitive sectors such as food delivery, ride hailing and bike sharing. Some of the biggest Chinese internet success stories, including Didi and Meituan, are built on this aggressive premise.
With capital pouring in and subsidized user growth accelerating, the boom in community buying has created a strong sense of déjà vu for many market watchers.
Community-based group-buying emerged in 2016 after the widespread adoption of mobile payment made online grocery shopping accessible to China’s general public. In 2018, the sector experienced rapid growth, with industry players completing a total of 23 financing rounds and raising as much as 4 billion yuan ($620.47 million) from venture capitalists.
The innovative model addresses an array of pain points which have haunted online grocers for years, as a research report by Tianfeng Securities suggests. Platforms pass on a large portion of their user acquisition costs to group leaders who work on a commission basis and often acquire new customers through their personal networks. Group leaders, many of whom run mom-and-pop shops, are also responsible for storing and distributing the products purchased by customers, helping platforms save on costs of operating an offline warehouse. Using self-collection as a last-mile delivery method is another budget-conscious consideration. What’s more, pre-ordering reduces the attrition rate for fresh produce compared with the wholesale storage.
Many Chinese Internet companies have attempted to enter the sector after pandemic-induced lockdowns posed challenges for residents in the country’s lower-tier cities to access life essentials in early 2020, generating enthusiasm for online grocery shopping across the broader population. According to data compiled by Kaiyuan Securities, 70% of group leaders recruited by community group-buying platforms are based in third- and fourth-tier cities.
Guo Decang, chief executive of domestic media outlet Cayman 4000, said in an interview with Pandaily that the temptation of China’s vast lower-tier markets has attracted the country’s internet giants, many of which are under “mounting pressure to expand their user bases,” to join the community group-buying melee.
E-commerce giant JD.com’s move may present Chinese tech companies’ increasing anxiety about the pace of growth. Founder and CEO Liu Qiangdong reportedly said in an internal letter which was issued to employees in January 2020 that “winning a larger share of the lower-tier markets” was one of the company’s yearly goals. According to the e-retailer’s 2020 financial results, it has achieved this target. As of the end of December, the company reached 471.9 million annual active customers, up 30% or 110 million from the year before. More than 80% of the new users came from China’s lower-tier cities, said CFO Sandy Xu.
After cash-rich internet giants went into the battle in the second half of 2020, a price war erupted immediately. According to domestic media reports, consumers received heavy subsidies while shopping for groceries and daily essentials on such community group-buying platforms. Shopping coupons worth 100 to 150 yuan were given to first-time buyers. Daily discounts could lower the price of 500 grams of oranges to just 0.99 yuan. Laundry liquid was sold for 1 yuan a liter – even cheaper than bottled water.
Such investor-subsidized services, coming with artificially low prices and generous incentives, are supposed to be effective, especially when it comes to price-sensitive shoppers in Chinese lower-tier cities. However, the once-tried-and-true method appears not to work in the present day.
An upheaval in China tech growth model
On December 11, a commentary in the state-run People’s Daily criticized the country’s internet companies for being short-sighted, as they “only think about the traffic driven by a couple pounds of cabbage and fruits.” It pressed them to develop cutting-edge technologies that could help the country win its rivalry with the U.S., such as semiconductors and self-driving vehicles. The opinion piece was a prelude to the government’s tightened regulations on the booming industry.
Less than two weeks later, China’s State Administration for Market Regulation (SAMR) issued a list of restrictions on community group-buying operations in a meeting with representatives from Alibaba Group, Tencent, JD.Com, Meituan, Pinduoduo and Didi Chuxing, warning them of illegal practices including predatory pricing.
The stellar rise of the industry coincidentally came at a time when Chinese regulators embarked on an unprecedented crackdown on the country’s technology sector, a campaign picking up steam since the abrupt halt of Ant Group’s IPO in November.
In March, the SAMR imposed fines totalling 6.5 million yuan on Tencent-backed Shixianghui, Alibaba-backed Nice Tuan, Chengxin Youxuan, Meituan Select and Pinduoduo’s Duo Duo Maicai, under allegations of price dumping and cheating. A maximum penalty of 1.5 million yuan was levied on Nice Tuan again in May, and the platform was ordered to suspend operations in Jiangsu province for three days after it failed to rectify product dumping and pricing fraud.
Starting in June, platforms including Meituan Select and Duo Duo Maicai took down products priced at 0.01 yuan off their mini-programs and stopped issuing extra-large coupons, in order to comply with instructions from the regulatory authorities. Both of the two platforms saw the number of orders fall by nearly a third at one point.
Beijing’s heightened resolve to “curb the disorderly expansion of capital” has made a shift in community group-buying players’ growth model a sure thing.
“The era of fast-growth cash-burning is over. These players are now faced with a painful transition,” Guo Decang from Cayman 4000 remarked. “The ultimate way for platforms to survive the regulatory storm and the cutthroat competition is to optimize supply chains and improve quality control.”