Ep. 80: Community (Grocery) Group Buying: The Next Must-Win Market In China?
Transcript
[00:00]Remember at the beginning of the year, we did a Tech Buzz episode on grocery e-commerce? Episode 58? It was like half on new retail — meaning how a lot of offline retail solutions incorporated much more ecommerce in their DNA from the get go — and then half on just straight up ecommerce, like you buying from a website or through an app.
We talked about some of the challenges of this industry, like building up a cold chain, getting last mile delivery down, and quality control. We also talked about how we were inspired to write the episode because when we visited China in October of 2019 it was like all anyone focused on ecommerce could talk about. Because groceries represented such a large addressable market but such low ecommerce penetration. The analyst who presented to us pegged it at less than 5%, actually.
Well, now here we are, in the latest iteration of that sector, called community group buying, 社区团购, or CGB. It is literally the hottest thing in China right now, and you just can’t avoid hearing about it, because not only are the startups in the space raising crazy funds — one just raised $700mm — but all the internet giants, and we really do mean all of them, are going in with guns blazing. Pinduoduo, as you might have heard, announced recently that it wants to raise up to $5.6Bn to do this.
It’s also one of those rare topics that is also being discussed not just on a business level, but for its social impact. Yeah, people complain about Tencent’s games and Douyin’s addictive content, but the amount of attention being paid to CGB is something else altogether. It was criticized in People’s Daily, and the internet giants are just taking a pretty big beating in public opinion over it, even as the sector seems to be growing very quickly and investors are certainly bullish on the space.
[02:00]So what is CGB? It is, in my opinion, the most social ecommerce experience we have right now, because it’s actually based off of social networks — you know, not just people who you share interests with and follow online, but people you actually know, or at least run into, in real life.
It’s hyperlocal social ecommerce. It is new, well sort of new, and it is controversial. The controversy is much more recent. Get ready for our last episode of 2020, a deep dive on community group buying.
[02:58]Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network by SupChina! We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech. Tech Buzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Ying Lu.
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[04:19]So on December 12, the official commentary section of People’s Daily published an article that went viral pretty quickly, titled “Don’t be so fixated on a few bunches of cabbage, the stars and seas of scientific innovation should stir your hearts more.” Basically, a less confrontational, Chinese way of saying “we asked for flying cars, yo, but all we got were 140 characters,” you know, that old Peter Thiel quote.
The writer exhorted internet companies to not just focus on short term profits, but instead have a long term vision. Develop real, hardcore technologies, 硬核科技, sit on top of the value chain, expand the horizons of human knowledge, that’s worth striving for. Be more like Alibaba, who has a Damo Academy 达摩院 for innovative research, or Baidu, who’s poured so many resources into autonomous driving.
And come on, it’s not like China doesn’t have an actual crisis on its hands with the semiconductor industry sanctions. Yeah, remember Huawei? How it’s being decimated because not just US companies, but companies using US technologies cannot sell to them? They have been so screwed, and any other Chinese company, by the way, can be similarly screwed. How can you guys be here trying to “steal jobs from the local vegetable seller” when our entire technology sector is under existential threat?
[04:49]Well, is that really what these internet giants are doing? Trying to kick out the local veggie seller? I mean, why were Didi’s Cheng Wei 程维 Meituan’s Wang Xing 王兴 and JD’s Richard Liu all reported to have basically said “there is no end to our determination to win this war and come out on top”? For goodness’ sake, Richard Liu’s actual words were that he will “lead the forces personally” 亲自带领. That’s a lot of drama for delivering vegetables.
Why does everyone sound so nuts about it? Well, as always, there is more to the story. First, like we’ve been mentioning in several of our latest episodes, this is, actually, a fight for 私域流量, or private traffic. Private traffic just means users that are not currently proprietary to the large platforms, like an Amazon or something. It refers to users that once you acquire, you can tap again and again, like if you had your own domain or Shopify store. In China, the largest source of “private traffic” is WeChat, which allows you to build all sorts of things on top of it.
Second, it’s about fighting for the 1 billion or so customers in rural China where the large ecommerce platforms are not as strong. You remember this from our episodes on Pinduoduo and Kuaishou and the like. The 下沉市场. Remember how we have been roughly dividing China into two for a while now? The 2-400 million coastal urban citizens in developed China, and the 1 billion or so rural AKA developing China? Yeah, this is a ferocious fight for that second market. In fact, people have called CGB the 反一线 internet phenomenon, or the anti-first tier city trend.
[07:32]For the past few years though, that market seems to have become the only one really worth fighting over. The ecommerce giants really have most of developed China covered. JD.com’s latest annual active user count is now 441mm, but in Q2, 80% of new users came from lower-tier cities, a fact it highlighted on its corporate blog. Because that’s a good thing. Why? Look at Pinduoduo, whose latest MAU was 687mm.
That’s right, Pinduoduo’s monthly active user number is 56% higher than JD’s annual number, and analytics firm App Annie already said Pinduoduo exceeded Taobao’s active users back in Q1. So the lesson here is … if you want more users, especially if you are one of the “established ecommerce platforms” like JD and you’ve saturated urban China, then you have to go to rural China, and if you don’t go there very quickly, you’ll get eaten alive by the companies who already have a foodhold there. Beca use how long did it take Pinduoduo to get to nearly 700mm users again? Oh yeah. Five years. No wonder so many Chinese VCs I talk to say “the next China is China,” because rural China is just getting started.
[08:51]OK, so take two of the largest trends in recent Chinese internet history, mash them together, put a really large TAM on top of it all — we’re talking about $1Trn spent in China on groceries last year, although CGB itself is just going to be $10Bn this year — and you have community group buying. But what is community group buying? We spoke to Lillian Li of the Chinese Characteristics newsletter. She is based in Beijing now but grew up in the UK where she went to Cambridge and LSE and worked in VC for Salesforce and 8 Roads. Anyway, she just wrote two issues on the subject, and we thought how convenient! Let’s have Lillian chat with us a bit on the subject. So Lillian, describe for us how some of these community group buying programs currently work.
A self-designated community leader creates and maintains a WeChat group, these community leaders are generally residents living and working in the vicinity of their customers themselves.
Community leader sign-ups individuals from their local region (usually within their regular walking distance), each WeChat group is capped at 500 people but usually ends up being much smaller at 100ish for a typical group size. So the community leaders maintain a weekly or daily schedule of posting a selection of products to the group often through mini-apps. The products are links to mini-programs where residents click through to place their orders. Residents do not have to order the same products and will only need to pay when their collective demand exceeds a designated value threshold. The products are not limited to groceries but also include other life essentials like paper towels, cooking oil, rice, and face masks etc. So the basics that we need in 2020. Once the residents place their orders, the entire order is collated and then delivered in bulk to collection points the next day for the community leader to pick up.
Community leader unpacks the bulk order and then organises this into the resident’s orders individually. They will either deliver the order themselves, or the residents will come to this pick up their specific order later in the day. In case of issues, the community leader is the first point of contact for the residents. They will escalate the problem to the platforms themselves and handle the resolution on behalf of the residents as well. For their work, the community leaders typically get a 10% commission from their group orders. Given the hands-on nature of the work, a community leader can at max only manage three WeChat groups well at any one point. And often to maintain the group it often requires red packets sent through the day to make sure people are watching the group and are interacting and communicating on the group as well.
[12:05]Does that make sense, everyone? We read some comments on the internet where people were comparing community group buying with Groupons or something, and that doesn’t actually make any sense. Because this is a lot more heavy-handed than that, operationally. In a Groupon, you’re buying from the vendor directly, the logistics are either taken care of by you — say you buy a coupon for a massage and well, then, you drive yourself to the masseuse to redeem it — or the vendor mails it to you maybe, if it’s some kind of physical good. And because of that, you see, most Groupons are actually experiences or services, because the platform is really just for marketing, especially of local services. It does not take care of the logistics.
Right, whereas community group buying is not quite all logistics, but a good bit of it. You know how in logistics the hardest part is always the last mile? Well, what if you crowdsourced the last mile? That’s what’s happening here, and as Lillian pointed out in her article, you can greatly reduce the delivery cost by just, well, not doing it yourself. One of the unicorns in the space, 兴盛优选, claimed that community group buying can lower their delivery cost per order from 7-10 RMB to just 1.5RMB or less than $0.20.
Of course, that’s not all just savings the group buying platforms pocket for themselves as extra profit. As we mentioned, the companies have to pay the community leaders something like 10% right off the top. That sounds kind of high especially for a business that’s not high margin to begin with. But then think about what that community group leader does. They arrange for the logistics, surev, but they also acquire your customers for you right, because the more people they get to order, the more they make. So yeah, 10% is not small, but if you went direct, then maybe you’re looking at 30% at least in marketing and sales costs. Or more.
If you put it like that, it actually sounds like a good deal. The community leader, especially if they live in one of those dense highrises in downtown Shanghai or something … well, I imagine that’s a pretty good side hustle. But this is very confusing — I thought community group buying is one of those lower tier city things.
Yeah, I think it’s really important to tease out the nuance here, because I think that’s an easy mistake that many people make. If you just thought about it, like very superficially, sure, the denser and the more developed the city or neighborhood, the easier it is going to be for the community leader to deliver or the consumer pick up the goods. Like, I’m imagining someone just going up and down an elevator, right? But that’s actually precisely where you don’t really need this model, in the most developed neighborhoods, because the density and prosperity pretty much guarantees that you’ll have really convenient, well-stocked places to shop, a plethora of on-demand delivery options, and even from the perspective of logistics, the density makes it cheaper, not more expensive, to deliver, right?
[15:12]Right, so it’s like in our earlier episode on grocery e-commerce where we talked a lot about the experiments in China’s new retail, where all these offline storefronts already offered delivery, and some of the solutions like Meituan and Yonghui 永辉 had these very small local warehouses where perishables could be dropped off and then drivers delivered them within a small radius. So once you have very high density, you can come up with a bunch of solutions, probably, not just getting community group leaders. But you’re probably also facing very well built out offline competitors. And you’re looking at people who are more time sensitive than they are price sensitive.
Yeah, remember that offline competition looks very different in China versus the US, with a majority of the country, about 75%, still shopping at wet markets or 菜市场 pre-covid. And of this 75%, well, they’re generally not your 996 white collar working class. The markets don’t stay open that late, for one. So these markets are frequented either by your older retired grandparent types, or maybe your ayis AKA hourly workers who usually clean but also sometimes cook for more well-off families. But one common thread, as Ying said, they are generally more relaxed about time, but more sensitive about price.
So combining all of this together, it probably doesn’t surprise you to learn that this whole model actually started off not in Beijing or Shanghai, but in this decidedly average second-tier city called Changsha, the capital of Hunan, home of over 8 million people and the 12th largest city by GDP in China as of 2020. But don’t let that population number and ranking fool you, its economy is less than a third of first place Shanghai. So, not a small city, but not a top city in China.
[17:08]If the city does sound familiar to you though, it’s probably because it’s the home of HunanTV, one of the best known TV networks in China and quite a digital media powerhouse. But community group buying is hardly entertainment, which is why most people are surprised to learn that one of the first companies to do this was Changsha’s 你我您, or “you me you” in Chinese.
They basically started off selling off just excess inventory to people in these communities. Sometimes but not always, the communities were mainly divided into 小区 or like the apartment complex communities that many people live in in China. We’ll explain why that is important later. Anyway, in the process of building their business, they found this opportunity for fresh groceries, especially fruits and seafood, which we’ve mentioned before on Tech Buzz, are two of the most popular categories, because of their higher prices, margins, and ease of differentiation.
Those of you who shop a lot probably find this intuitive, but basically, those two products are often branded very finely, by origin, and are highly differentiated, say Xi’an persimmons, or Alaskan wild salmon, and they draw customers, whereas it’s much harder to say, market that you have some special celery or something, it’s just not branded that way.
Not a hard and fast rule, but you’ll just find this to be a common strategy, remember, Pinduoduo’s history also involved starting with fruit selling. Anyway, the company, and the entire sector really, was kind of overlooked until 2018, when all of a sudden interest exploded, and every VC was going to Changsha to look at businesses in this “homeland of community group buying.”
2018 was when we started Tech Buzz! But alas, this sector didn’t make it into our field of vision, because even though there really was a bit of a bubble and quite a lot of froth, none of the players were that big. I mean even 你我您 had just raised a Series A+ at this time. And people were super skeptical. You have to remember, 2018 was also the year when a ton of “new retail” concepts went under, especially all that cashier-less stuff. And while community group buying is hardly so high tech, it was kind of viewed as “untraditional e-commerce” and Jack Ma had basically said new retail was anything other than “traditional ecommerce” so they were often compared and also viewed with suspicion.
[20:00]And the field was still really young, so models were still pretty unstable. What we do know is that again, by the end of 2018, two years into community group buying, at least early leaders like 你我您 had figured out a few things. One, expand beyond groceries into daily essentials. Of the 90,000 SKUs the company was offering every month, fewer than 40% were fresh food. Two, build out their supply chain, especially in the form of in-city warehouses. By 2018, 你我您 was already at 50% self-built warehouses. Finally, three, have their own branded products for sale.
Basically it sounded like they were going to build a new type of supermarket, but without the emphasis on storefront. And at least at that time, before competition really kicked in, they had some decent statistics to share. Repeat purchase rates were 8 times per month, the average order volume was 50 RMB or $9, and each community was typically at least 500 people, with 40 orders a day, with a good group leader making $6-700 per month, which is a very respectable part-time salary, especially for a lower tier city.
To expand, the company thought the opportunity was to convert more of their part time group leads into full-time ones. About one-third of the leaders were full time. There was a lot of interest, actually. Over 150 of the group leaders had already been approved to open their own offline stores. So you could definitely be excused for thinking that this sector looks a lot more like “new retail” and was less “e-commerce.” Especially when you throw in those thoughts about “oh let’s make our own products too!”
Anyway, if you look for 你我您 today, you wouldn’t find it, because it merged with competitor Nice Tuan or 十荟团 in 2019. Good for them, because after massive amounts of closures, Nice Tuan has emerged as one of the leaders in the industry, actually just announcing a nearly $200mm Series C3 round led by Alibaba and Jeneration Capital. Why C3? Because so far in 2020, it’s closed not two, not three, but four rounds of funding for what looks like $450mm in total.
[22:27]And it was only founded in August 2018. Of course merging with 你我您 was helpful, but still, by April of this year, the combined entity’s monthly GMV was already at $100mm. And you got it, a lot of that growth was due to Covid. What can we say, timing is everything. After the bubble subsided a bit in 2019, after most of the big funds had placed their bets and the smaller guys hadn’t quite died off yet, Covid really kicked this industry into high gear. I mean, all delivery services benefited because you couldn’t step outside right?
Yeah leaving and entering your apartment complex or 小区 was strictly monitored. If you were in one of the older communities with established groceries downstairs, you could buy from there, but for lots of other people, WeChat groups were formed for buying from the local market, or they ended up joining one of these existing group buying WeChats. Even my very lazy gamer cousin found himself in one of them. He wasn’t ordering groceries, he was ordering Coca Cola, but it was just the most convenient method at the time.
That was certainly a tailwind, although hard to say how v rbig, because your cousin basically stopped buying from there after things returned to normal right? But for sure some people stayed. And if they did, they would have found that these group chats were often run pretty professionally. Because that’s the thing too, there was already a ready group of gig workers who were already selling on WeChat, they just had to switch to selling groceries and daily goods instead of whatever it was that they were selling before.
[24:11]That group is a group we haven’t talked about before, the 微商. I think you can translate them as WeChat salespeople. Basically, they’re using WeChat to do direct sales, like selling to people they already know, or add onto their WeChat, often through their WeChat Moments. If you do not have at least some of these people on your WeChat feed then you definitely do not have a representative feed. I mean, I checked my feed right before we started recording and sure enough, in the first 25 posts I see, there were 2 people selling stuff. Both of them were food items.
It’s one of the complaints people have about WeChat, but what can you do? It’s speculated that a majority of 微商 are 宝妈, or new mothers. This group is much more likely to stop working full-time for a few years and with an estimated population of something like 40 million people, a lot end up trying this out, and of course, some will stick with it. I mean, for the extra industrious and talented, it shouldn’t be too hard to make over $1500 a month, which again, is a significant salary for most people.
By the way, we’re not going to talk about it on this show, but 微商 has a controversial reputation in China, mainly because when it started getting popular, back in 2011 or so, a lot of the products people were hawking were really awful. But in the last few years, this industry has matured and even some of the major brands use this now as a channel, especially if they target women and mothers, so you’ll see that most of the bigger WeChat direct sales brands are cosmetics or lingerie or something female focused.
So if you were ever wondering how could these community group buying initiatives scale up sooo quickly, there’s your answer. Yes, Covid helped, but there was also just a group of people you could hire who already had the 朋友圈 AKA the WeChat contacts and sales skills to make it happen. 微商 and 宝妈 to the rescue!
[26:14]Of course, it’s not all good, because this is a population with low loyalty, and many of them sell for multiple platforms, so there is no real exclusivity. This of course results in the platforms trying to subsidize the group leaders as well. So give them a fixed minimum compensation so they don’t leave. But how long can that last? That’s an expensive way to pay for what was supposed to be a cheap customer acquisition channel!
Well now you know why the giants are interested and why there were some key enablers in place for growth. But like, what is the actual strategy required to win? Having a great selection of products, have a reliable supply chain, those all seem like givens. What are some of the factors that will determine success in this race? We asked Lillian what she thought.
So for me, the factors that determine success comes down to knowing the end users, owning the community leaders, establishing a secure logistics chain, ability to offer relevant SKUs and then last but not least it and customer support expertise, which is crucial for any ecommerce plans worth their salt today. So go through each of these in turn. For the winners in this game, they really need to understand the behaviors and characteristics of that and users deeply because this will impact the product SKUs and services offered by them through the community leader. So if they know the users are using this as the primary weekly shopping trip rather than a supplementary shopping channel, then that has enormous impact on the type of goods that they should be carrying and the type of services that they need to offer. Since the community leaders are the single source of contact between the customers and the platform owing them is really crucial to the success of this business. It requires the delivery of high quality goods on time so that the community leaders do not have to handle excess customer complaints and then again thinking about the conditions of business men and women themselves, they should move on to other offering such as offering metrics dashboard for their many businesses. In terms of establishing a secure logistics chain, this is bit of a no brainer, because often if we talk about groceries, um, the the consumer will be comparing the product relative to what they can buy the local markets and not just in terms of price, but also in terms of quality.
Users not often making spontaneous purchases in community group buying, you know that ordering one day in advance. So this has a huge potential to become even in my view, the decentralized Costco for loyalty to China and the similar to Costco, who does not carry a wide selection, but enough to make sure that the average family can get everything with one girl when they visit the player who understands how to put together, concentrated the high courage skill base for the user is really the player who can truly fulfill the end users needs and lastly but not least it and customer support expertise. So you know right now we are only seeing the tech players um moving in, but given that the offering is groceries and um perishables, the natural players in this game are really the supermarkets who already have the produce supply chains. Um already laid out and operational. So you know in the coming months, um I definitely expect them to come into the fray.
[29:24]I agree with those. And your point about the supermarkets is already shown by Xingsheng’s success, because it actually came out of 芙蓉兴盛, a convenience store chain. Anyway, most of these seem like problems that can be solved with data and capital. I mean, is that why all the internet giants are going into it? I saw you linked to an article about how besides the ones we mentioned at the beginning of the episode, but also ByteDance and Kuaishou are getting ready to enter as well. ByteDance is pretty new to e-commerce but Kuaishou is an old hand at rural e-commerce. Why do you think everyone’s getting involved?
So fundamentally, it’s just a huge market opportunity. So taking a step back in China, the retail grocery market is estimated by McKinsey to be worth about $794 billion in 2019, although only 10% of it online. It’s estimated that the online proportions will grow at a CAGR of 30 to 50% for the next two years. So in about two years, that’s a potential 1.6 trillion RMB or $244 billion market up for grams. And you know that is a huge, huge uh and very potentially lucrative market for the tech players. And no the rule of thumb in Chinese E commerce retail is that once a market can generate around 10 billion RMB or $1.5 billion GMV topline for for for particular year than that is when the big tech players get interested because to them, it indicates scalability. The question here for me is really one of who will win the next generation of Chinese E commerce and I think for big tech players like Meituan Didi bytedance and Ali, um getting into this market is very much an offensive play. All of these players do not have a strong position in lower tier markets today and for them community group buying is a strategic opportunity to capture a brand new custom days for a lot of them, and the scramble to own loyalty markets has been a central theme in China for the past few years, and as as a lot of the nation of Chinese consumers are actually residing in these lower tier markets.
These customers are expected to start a on a cycle of consumption of grades in the coming years. So you know, first of all, they are a very big market today and they are you know on on the press because of becoming an even bigger market in the next few years, and therefore is very crucial to start courting this segment of customers. And there’s also a competency that Alibaba and JD have not yet really developed.
[32:09]It really does feel pretty crazy how many players are competing. Do you have a favorite player? Like we talked a bit about Nice Tuan, but there’s also 兴盛优选 and a few others. Xingsheng, by the way, just confirmed their fundraise of $700mm from JD on the same day that scathing People’s Daily oped came out, making them one of the most well-funded in the space. Who are the ones you found most interesting, and what’s their strategy, is anyone doing anything super different?
To be honest with you, not so much currently, I think at the end of the day, grocery shopping is still quite a commodities process and I think with a new business model that does unlock some new opportunities. But as far as I can tell, most of the players are doing very, very similar stuff and especially the big tech players and we’ll. I’ve been seeing lately is a lot of race to the Boston behavior like subsidizing consumers as first purchase and giving community leaders very favorable terms.
You know Didi is the only one when I’m trying to make a purchased who actually prompts me to contact my community leader to do the picking up behavior, whereas which one and pin du du are both trying to move the consumer to bind directly on their own apps. So to your point earlier, they’re trying to privatize that traffic. Um, I’ve been hearing that you know everyone is trying to upgrade the cold chain capabilities in the background, whether that’s going out from school. Some players who are strong in the logistic space uh versus um individual who is really thinking about partnering as much as possible since they have a very asset light model. When I talk about race the bottom behavior, I wonder how sustainable that is in the long term, especially for a new economics perspective, because currently if you’re subsidizing users you are subsidizing the community leaders then the fantastic business model that you had begin to begin with that was very light on marketing is now all of a sudden pretty heavy on marketing and customer positions in in a lot of respects. So you know I I’m sure um it’s it’s it’s it’s not surprising that a lot of these big big tech players are having are are making losses in the short term. And again, that could mean that the business model is totally sustainable in this current incarnation of itself. It continues.
[34:26]Thanks Lillian! Super helpful. And now that we have talked about the market opportunity so extensively and what the players are doing and all that, let’s really hone in on why this industry is currently under so much heat and stress. Specifically, we want to talk about all the conflicts this new business model creates. Like, structural and social crises that arise because CGB is so disruptive.
Well first there are the group owners. As Lillian mentioned, while some of the original group owners were a lot of new moms, the other very large group of group leaders are a bunch of mom-and-pop shop owners who are doing this more professionally. They don’t want to, of course, they’d rather sell their own store’s inventory, but when everyone else is doing it, what can you do but join in? But many of them found that the platforms were offering the same goods but at lower prices — because, well, platform subsidies — and so some have quit in anger. They’re discovering that it’s not a complementary business, but a cannibalistic one.
This is kind of expected, of course, but they aren’t the ones worst hurt. The ones worst hurt are the 菜贩子 — which technically translates to greengrocers but in China specifically refer to those people who rent stalls at markets and sell vegetables they get from farmers or other suppliers wholesale. So if you go online these days, a lot of the outrage is over these internet giants with their billions crushing the livelihood of these small sellers who are often older individuals with not much education and don’t really have too many alternatives of making a living. Truly a David vs. Goliath story.
[36:13]But even though these sellers are the ones in the headlines and inspire a lot of outrage, they simply don’t have much economic power and are relatively voiceless in society. They can’t really do much. The folks who can though are the bigger suppliers and wholesalers, who are protesting the subsidies by refusing to sell to these community group buying platforms.
These wholesalers have these distribution networks that they’ve built up over the years, and if your Meituan or Pinduoduo comes in and starts selling at below cost, then all your other retailer buyers die, so that is definitely not behavior you can support. Plus, the retailers are already banding together in protest. For example, small shops in Urumqi, self organized and demanded that their supplier does not sell to Pinduoduo, who was listing items at below cost. If the supplier continues to work with Pinduoduo, well, then, all these retailers are going to quit buying from them.
Selling below cost is illegal, and emphasized as such in the new internet platform antitrust draft rules, but that is a whole legal process, and probably the fact that the government’s attention on curbing antitrust is so new, it seems that the giants are still being really aggressive. The more important consideration is that this could be an existential crisis for all of the suppliers and smaller retailers in China. This nationwide distribution web has been built up over decades and if the platforms come in with their billions of dollars, they could wipe out the entire ecosystem.
If I have a guess the retailers are probably going to be the first to go, since how can they compete with the tens of thousands of SKUs that the platforms have, and all the data as well? Even their physical locations aren’t really that secure, since every place has the potential to become a pickup point now, barbershops, restaurants, wherever there’s space. And it’s not just the small shop owners. The wholesalers are next, because after the small retailers die off, then they’ll be faced with what, just a few large internet companies as customers? What kind of price-setting power or negotiating leverage will they have? Nothing. They’ll be working for the platforms, not with them.
[38:31]And even the group leaders aren’t secure. Sure they’re one of the most coveted pieces of the puzzle now, but that’s at least in part because they’re a cheap customer acquisition channel! Once the giants have fully onboarded everyone, what’s to stop them from kicking the group leaders out?
So no one is feeling secure. And because this involves the livelihoods of millions of people, and because everyone has seen what the internet platforms have done in other industries — really abuse their monopoly market power — your regular citizen isn’t happy about it. Even the consumers, who are arguably benefitting from the newfound convenience and all the subsidies, are suspicious.
Everyone understands by now that their data, their transactions, and their preferences are being used by the internet companies to generate profit. So sure they’re getting good prices now, but they also know that they’re ceding control, and that more and more, every part of their lives will become a profit center for an internet company. And that just seems very distasteful. Big Tech is just making enemies everywhere, not just in the US and Europe, but definitely in China with Chinese citizens as well.
There’s more we could say, but I think we’ve hit the point of diminishing returns here, so this is a good place to end. Basically, in summary, community group buying, which primarily revolves around fresh food, but also includes other daily life items, is taking off like a rocket in China because it’s a good fit for the time-abundant but price-sensitive netizen in rural China.
It’s also all taking place on WeChat, through group chats, through mini programs, or through apps I guess, but it’s one of the few ecommerce verticals that isn’t dominated by Alibaba or JD. Although of course those two are not letting this opportunity go either, they are going in in full force. Add them to the long list of internet giants jumping into the fray, with Didi and Meituan being two of the earlier ones, Pinduoduo following them, and ByteDance and Kuaishou working on products but not yet released.
And that’s not counting the pureplay standalone companies like Nice Tuan or XingSheng Youxuan who have raised a ton of money this year — $1.2Bn just between the two of them — to compete in the space. The standalone players started popping up in 2016 and a bunch died in 2018, 19 only to have COVID really light this sector on fire this year. At this point, if you don’t have a couple of hundred million dollars to spend to build out supply chains I don’t think you have any chance whatsoever.
You don’t really. And now you need even more money because like we’ve seen many times before, with a relatively low-barrier product like this — I mean, Chinese companies are really good at building supply chains, and it’s not really that hard to hire group leaders, since the whole WeChat direct sales 微商 model has created so many such people, as well as the many small shop owners who feel like they must join in or lose their customers — people just end up throwing money at the problem, lure users in using subsidies and such. It’s the same old, same old stuff.
[41:53]Except this time the retailers and suppliers are fighting back. If you’re going to use subsidies and kill our retailer customers, then maybe we just won’t supply you. The city of Nanjing issued an official order asking platforms to not sell below cost. Some suppliers have put out internal memos refusing to sell to community group buying companies. Part of that is an answer to pressures from the retailers, who have banded together in protest and say, if you supply these platforms, we’re no longer buying from you.
I mean, I don’t know if that’s technically legal, but we do know that the new antitrust draft rules unveiled in early November do explicitly mention internet platforms abusing subsidies as a cause for complaint. So what do you think? Community group buying, after we looked into it, really seems a lot more disruptive than we initially thought. It’s understandable that many people are upset, I would be too, if I were a small shop owner.
But it is also clearly beneficial. In rural areas, for example, grocery e-commerce simply won’t deliver to your door. For villages, the nearest pickup point can be several miles away. So for these consumers and store owners, who are typically the group buying leaders, these platforms make a lot of sense. The shops can now offer way more SKUs and the consumers can just go to their nearest shop to pick up. It may not be life-changing but it is certainly an improvement.
[43:27]Right, and with the bigger trend of everything going digital, how does it make sense that your small, analog, no-software at all shop can compete with a digital platform that can optimize through the entire supply chain all the way up to the end consumer? Chinese VCs are basically of the opinion that this change is inevitable. The old way is just too inefficient.
Inevitable, if no government intervention. Will the government step in though and so something? Sure, the flagrant antitrust violations should probably be stopped, I’m on board with that, but to kill off the whole sector, just because it’s replacing the status quo? I’m not sure. Maybe slow it down, so it’s not so disruptive, but I’m kind of with the VCs here, something is going to happen in this sector, and hyperlocal group buying for high frequency goods seems like a pretty logical solution.
Well, as of September, 101mm monthly active users for this space agree with you, up nearly 70% from last year. We’ll see if the trend continues as Covid fears subside. What do you guys think? Is this business good for society or bad? Is all the public criticism justified? If you’re an investor in the internet platforms already, does their commitment to this business excite you or worry you? We know it’s still super early and unit economics as well as second order effects are very blurry, but it would be really interesting to get your feedback. Write to us and let us know!
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