China’s first group buy tide culminated in the year of 2011 with a whopping more than 5000 players scrambling for a piece of the market. Since that peak, the market went on a rapid decline.
In September 2018, Meituan, one of the very few survivors, who changed its course to focus on food delivery and movie-ticketing, after an eight-year-startup-marathon, managed to get listed in the Hong Kong bourse and become the fourth largest Chinese internet companies by market cap.
Meituan’s public floatation wrapped up the Middle Kingdom’s first group buy tide. However, history never stops repeating itself, sometimes faithfully and sometimes, with a little variation.
In recent months, a new trend of community-based and fresh goods/groceries-focused group buy fad emerged again in China. The novel variation has attracted tens of millions US$ fundings from investors, including the big names such as Sequoia, GGV, and IDG, etc.
The table below shows some examples of the players in this space. It’s noteworthy that more than 80% started this year.
How it all got started
There are many things – from the technical ones to the macro market environments – that concertedly bolster up the current tide.
Essentially, it all began with the smartphone wave that swept across China, where mobile instant messaging and social networking app WeChat makes it easy for people to get connected and sets the stage for online word-of-mouth. WeChat also supports this group chat function that facilitates a virtual online community. Lots of those chat groups are created for varied topics and purposes, and in this case, for the online discussion and purchases of fresh goods.
And the idea of community group buy, actually, originated two years ago in 2016 in China’s southern Changsha city, the provincial capital of central Hunan province.
At that time, a slew of fresh goods B2B platform, including Niwonin (你我您), leveraging on their supply chain edges, was exploring selling to consumers directly. They started with some selected neighbourhoods in the city and organized group buy deals through online channels – such as WeChat groups among others – for the residents in those neighbourhoods. By then, the community group buy was just a small-scale pilot in a regional city, has yet to receive any outside attention like today.
There would always be a group leader in community group buy related online groups. He or she is usually either well known in the neighbourhood or the owner of a mom-and-pop shop that people have been visiting all their lives, and the main objective is to collate total demand and liaise with suppliers to deliver the goods/products to a centralised location where people can do self-collection. The leader collects 10% of the total purchase as commission usually.
Why focus on fresh goods and groceries
While the pioneering group buy services from the first tide usually provide a wide variety of deals ranging from restaurant discounts, movie tickets, to online goods and others, their community-based group buy counterparts, have a sharpened focus on fresh goods and groceries.
The choice of what products to offer reflects a pattern in Chinese people’s spending habits – even for the most spoiled and sophisticated online shoppers in the world, there are things they prefer to buy offline.
Just about a year ago, JD.com revealed an interesting statistic. While 40% of the purchase of items like clothes and electronic products are done online, the same cannot be said for fresh goods and groceries.
As a matter of fact, only 2% of grocery purchases are executed via the internet. This implies a huge potential for growth, and more importantly, it has been forecasted that China’s fresh food delivery market is set to even triple up to US$35.6 billion from 2017 to 2018.
In addition to the opportunity, community-based group buy has also inherent cost advantages when compared with bigger players, one way or other, participated in the same business, such as Alibaba’s Hema stores or JD.com’s 7Fresh.
Citi Research’s September 2018 report revealed Alibaba’s troubles at executing its new retail strategy successfully and that probably also includes the Hema stores. JD.com also admitted to the fact that its 7Fresh initiative is hard to turn a profit in the near future as there is a high cost involved in building the required infrastructure for fresh food delivery.
Perishable food delivery has two distinct features, unlike other products. They are the high maintenance costs to have proper storage and the unavoidable wastage cost when fresh food rots after long delivery processes. Veterans in this space have revealed that a typical batch of fresh food will see about 30-40% of wastage.
For Alibaba & JD.com, all of these additional operating costs are coming on top of their huge investments to build a robust delivery system and also the required subsidies to attract buyers rendering the fresh food delivery as a non-profitable business segment that eats into their profits.
On the other hand, the new concept of the community-based group buy, if executed well, might offer a low-cost, and reliable solution to the dilemma.
– The running cost is low as people will either go to centralized locations to pick up their purchases, or the distribution methods will be borne by the appointed leader, thereby making the overall costs lower.
– Community initiated demand is clear and can help to bring wastage costs down as the amount of fresh food is certain.
– Community-based groups know and trust the appointed leader, making this a more reliable solution as opposed to traditional internet platforms.
Same, old business strategy
That said, it can’t be all that smooth, and there will still be other challenges that these startups will have to face.
First, while on the surface it seems like a new solution, community-based group buy is nothing but simply another channel aiming to solve the same problem of an efficient and effective way of matching sellers of goods to buyers of the goods.
More or less, there are some similarities between the current offline group buy startups and their online counterpart, Pinduoduo.
Pinduoduo did not enter a new market, but a same, old e-commerce market that has proven to work with the examples of Alibaba and JD.com. It, however, chose to focus on the underserved part of the same market – China’s rural cities. It adopts an innovative approach of group-buy to bring down costs, and add the gamification element, thereby becoming a hit for best-deal-hunting housewives.
Community-based group buy is no different. Demand and market size is crystal clear. Same tactics such as buy together to get a discount are employed. And the untapped is the delivery of perishable items or grocery. The innovation, in this case, lies with the ‘community-based’ to build trust and make consumers responsible for finding a reliable source as the leader is in charge.
Already Pinduoduo has quickly got onto the game by investing in Shanghai-based Chongma Linli Group, a high-end groceries platform. The offline group buy could be a good complement to its current online pure play.
Pinduoduo, just like other VC capital funds, is jumping on a newly emerged and yet-to-be-proved trend. And the competition among community-based group buy players, with their focus on easily perishable goods and daily groceries would eventually boil down to, which one could greatly improve the logistics and operations efficiency to reduce wastage to maximize profits.
Editor: Ben Jiang