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China’s tech companies are greengrocers now

Written by AJ Cortese, Song Jingli Published on     5 mins read

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The grocery group-buying business has come under fire from state media as a cheap means of monetization, but how real is the threat posed to conventional retailers?
PHOTO: THOMAS PETER/REUTERS

With lockdowns beginning in late January 2020, many residents of Chinese cities had to, for the first time, rely on online, on-demand services offered by e-commerce and food delivery platforms.

The pandemic’s persistence introduced the wider population to the versatile use of couriers for a range of tasks, with community-based, bulk grocery purchases gaining the most traction among China’s tech giants. But the reality was that even before the pandemic, Chinese consumers have been increasingly paying other people to run errands for them via digital platforms.

Ms. Chen, a 26-year-old group leader in Longhu, a town near Henan provincial capital Zhengzhou, works at a local parcel depot. She recently became a group leader on JD.com’s group-buying app Jingxi Pinin, for which she organizes the distribution of fresh produce and other groceries for a set of customers who live nearby. She is optimistic because of the extra income.

Chen told KrASIA she chose JD.com’s platform in part because she hoped that eventually, they would offer more than just groceries, including big-ticket items like consumer electronics. Although there is no sign of group-buying extending to these product categories yet, she intends to be in this for the long run—and she isn’t alone.

Enter the giants

At the height of the lockdowns, countless sacks of rice and piles of vegetables were delivered by government volunteers. Chinese internet giants realized that they could use a similar bulk delivery model to generate a new revenue stream, mobilizing their extensive user bases to buy groceries through newly developed platforms that pull consumers away from their habit of sourcing food from their neighborhoods’ supermarkets and vendors.

It is no wonder that China’s top tech giants are all fighting for a slice of the country’s massive grocery market, which was already worth USD 770 billion in 2020, according to a report from S&P Global. Community-buying initiatives from players like Meituan, JD.com, Pinduoduo, and Alibaba have stolen many headlines, but the sector was only worth a paltry RMB 130 billion (USD 20.1 billion) last year, illustrating the potential room for growth.

Many initial forays for consolidated grocery purchases were outside of China’s largest cities, as JD.com poured USD 700 million into Changsha-based Xinsheng Youxuan in December 2020, emphasizing the partnership’s potential to enhance grocery delivery in lower-tier cities.

It would be unwise to underestimate the market potential of China’s lower-tier cities, as around 67% of China’s 1.4 billion live outside of tier-one and tier-two cities. 

Meituan Youxuan, the delivery leader’s group-buying business, initially expanded to 1,000 lower-tier cities and towns in China along with notable second-tier cities Wuhan, Foshan, and Jinan.

Social e-commerce giant Pinduoduo’s Duoduo Maicai group-buying segment started in Hubei province in August 2020, before entering first-tier cities like Guangzhou and more recently Shanghai.

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Population density is key

China’s urban population density is more than seven times that of the US, according to an iResearch report cited in Meituan’s IPO prospectus. The country has more than 160 cities containing over 1 million people.

Meanwhile, low-wage labor from China’s increasingly automated agriculture sector is being repurposed in the urban services industry, as millions of delivery and ride-hailing drivers flock from their hometowns to the nearest big city in search of higher wages.

Tech giants finally decided to leverage the urban population density during pandemic lockdowns, as families, often living in large apartment communities containing many thousands of residents, needed to procure food and other necessities while limiting time spent in public with strangers.

This amplifies the order density and frequency cultivated by community-buying platforms, laying the foundation for a feasible line of business.

This means in many vertically scaled Chinese cities, delivery trucks filled with tons of produce and other foodstuffs can serve tens of thousands of customers all within a square kilometer, while order density of that scale isn’t even possible in New York’s most crowded neighborhoods.

Many residential areas in Chinese cities are organized into large apartment communities, or superblocks, which provides clusters of clients for tech giants’ recent community-buying craze. Photo by Wang Zihoo on Unsplash.

Can group-buying last?

As the group-buying model spread like wildfire across China’s numerous urban clusters, it grabbed the attention of regulators. State media criticized internet giants’ investment in the space as a lazy method of monetizing user traffic. Commentators suggested companies should focus on core technological innovation.

Soon after, regulators came up with a set of guidelines for the sector to rein in the abusive use of subsidies and price-cutting by cash-rich internet entrants. Traditional retailers needed protection from tech firms that were undercutting their prices too.

Within the group-buying business, the role of group leaders is key. Often local shop owners, these leaders are responsible for organizing their communities’ grocery orders through social apps like WeChat. Taking a small commission from each order, group leaders are encouraged by the growth of the sector, as it provides them with supplemental income, while also protecting their core business from being trampled by the group-buying expansion.

However, little support or infrastructure is in place for group leaders to utilize.

With little backing from JD.com, Ms. Chen adopts a self-starter, proactive marketing approach, “I plan to promote this among my friends and my current clients,” she said. The word of group leaders pulls in new users for these platforms, and they are also the point of contact when consumers encounter problems.

Another group leader who works for multiple players in the space—including Meituan, Pinduduo, and JD.com—runs a flower shop in Tangshan in Hebei province. They explained how after-sales services are far inferior to that of conventional e-commerce transactions. There are no immediate refunds for incorrect orders, and customers often come to the leader with their grievances, who is powerless to compensate the customer for quality or quantity issues.

Additionally, the locations chosen as pick-up depots are often not ideal for storing food, a problem that is exacerbated if items go unclaimed. Some users have complained of unsanitary conditions in pharmacies and post offices.

“A pharmacy should be very clean, but how could they mix medicines and vegetables inside one room?” a Meituan Youxuan user in Tangshan said to KrASIA.

For some group leaders, it’s the fear of missing out that drives them to get in on group-buying.

“I need to do this as there are too many similar services and I have to be into one of them so that earnings in this spree will not be all taken by others,” Mr. Chen, a Duoduo Maicai group leader located in Longhu, Henan, told KrASIA.

Regardless of the motivation, the group-buying segments of internet giants show little sign of slowing after new regulations were released. As a new wave of infections has prompted lockdowns in places like Shijiazhuang, which is home to more than 10 million people, grocery group-buying may indeed ride another pandemic-induced wave of opportunity.

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