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Chinese Tech Giants Showdown Over Community Group Buying

Summary

China’s hottest tech trend in 2020 was collective online grocery shopping, also known as “community group buying.” This contact-free model for digital grocery retail took off during the pandemic as a convenient way to procure daily necessities in lockdown. Doubling in value over the course of the year, community group buying has all of China’s e-commerce giants, including tech companies outside the e-commerce space, aggressively pursuing a share of the pie.

While economies around the globe continue to struggle with the impact of COVID-19, China’s digital economy has taken off. This past year, e-commerce live streaming and community group buying have been the hot new trends in Chinese tech. In particular, the market value of community group buying more than doubled in 2020 to US$11.5 billion, as digitally-inclined consumers were quick to embrace the conveniences offered by the online grocery retail model during lockdown.

Community group buying (“CGB”) is a hyper-local group purchasing model that organizes people living within approximate locations to collectively bargain on grocery items through bulk purchase. Since the pandemic began, CGB has shown major potential to disrupt the traditional offline grocery retail sector in China’s relatively untapped less urbanized lower tier markets. This grocery retail market in China was valued at US$794 billion in 2019, with only 10% of this conducted online. As the eyes of China’s tech giants flash with dollar signs, the CGB market is considered tech’s next big driver of growth.

Despite the bullish outlook, CGB is a controversial trend in light of its social impact and increasing scrutiny from market regulators seeking to enforce China’s tightening antitrust regime. However, given the significant opportunity for profit at stake, it is unlikely that China’s tech titans would shy away from the budding market. The who’s-who of China tech all have a dog in this fight, and with none having an apparent upper hand, the competition over CGB will remain highly contentious in the years to come.

A Closer Look at the CGB Model

CGB is a form of social e-commerce, a purchasing model that utilizes a user’s social networks on messaging apps, for example, to promote and sell products and services. Within CGB, customers living in the same community convene through personal networks on Wechat to place individual orders that are then collated into group bulk purchases by a designated community group leader. Members click on links to Wechat mini apps, digital storefronts, within the group chat where the orders are placed. The range of products within a platform is limited, offering between 100 to 200 items, and largely consist of household necessities one would expect to get at a grocery store or wet market such as fresh produce, rice, oil, toilet paper, face masks, etc. The CGB model can be likened to a decentralized Costco, offering a concentrated range of bulk products at reduced cost that cover most basic needs.

After submitting the bulk order, it is delivered to a designated pick-up location, divided, and distributed by the community leader. The community leader is a critical piece of the CGB model as they act as the sole intermediary between the e-commerce platforms and community buyers. Community leaders are responsible for creating the group chat, gathering customers, placing and picking up the order, and distributing the items to the community. They typically receive a 10% commission on the value of each order—occasionally more—as tech companies subsidize community leaders’ services to build loyalty toward their platform.

The Economics Behind CGB

Grocery retail has long been prime for disruption via technology, particularly given the industry’s low online penetration and perceived growth opportunities. However, previous online models struggled with the economics of grocery retail due to the high costs of customer acquisition and retention, as well as the necessity of building out logistics networks. Due to its apparent scalability and rapid adoption during the pandemic, the CGB model has opened the door to grocery retail for tech companies to swing in.

The role of the community leader within CGB fundamentally changes the economics. As it is the leader who is incentivized to acquire customers and maintain them through their social network, the marketing costs for tech companies associated with these tasks is significantly reduced. Customer conversion rates via Wechat community groups are also higher, reaching up to 10% compared to 2-3% on dedicated e-commerce platforms.

Furthermore, the delivery of a single bulk order and distribution handled by the community leader significantly shortens logistical chains while allowing for wider margins. The promising unicorn start-up, Xingsheng Youxuan, reported that costs for home delivery grocery models runs from CN¥7 to 10 (US$1.08 to US$1.55) per order, while CGB greatly reduces the logistics cost to an average of approximately CN¥1.5 (US$0.15).

So far, CBG has been a big win for all those involved: customers can conveniently purchase groceries at a bargain through contact-free channels, online platforms reap wider margins with shorter logistics chains, and community leaders pick up a profitable side gig to supplement income.

Sprung from Necessity: CGB’s Enabling Factors

The rapid development of CGB has relied heavily on the adaptive behavior of consumers under the exceptional circumstances of COVID-19 lockdowns. The hop from offline to online modes of grocery purchasing was facilitated by various factors coalescing at the right time and place for this model to take off.

Although rapidly increased in 2020, the popularity of social e-commerce through Wechat buying groups had been on the rise for years preceding the pandemic. For example, e-commerce giant Pinduoduo excelled at this social e-commerce model, becoming a serious competitor to Alibaba in a matter of just five years since the company’s founding. Ultimately, Pinduoduo has made group buying an everyday affair within its users’ online chats. As of the end of the third quarter in 2020, Pinduoduo boasted more than 640 million monthly active users (“MAUs”).

At the same time, the Chinese government’s poverty-reduction efforts over the last decade have created a far reaching logistics network that connects China’s more remote areas to the digital economy. Since the announcement of the 13th five-year plan in 2016, China has paved more than 4.2 million kilometers of road in rural areas, which has helped to cultivate the roots for CGB’s growth. This infrastructure development has played a key role in establishing CGB in lower tier cities during and after pandemic-related lockdowns.

While CGB was quickly adopted due to quarantine measures, big tech has since swarmed in. Over the next two years through 2022, the market growth for online grocery retail is forecasted to see between a 30 to 50% compounded annual growth rate. Despite the apparent abundance of opportunities, tech companies instead are looking less at the bottom line and more towards the right to claim loyalty over the next wave of Chinese consumers.

Market Players and the Fight for the Last Billion

In 2020, all of China’s big tech companies had begun making headway into the CGB space. Alibaba, JD, Meituan and Pinduoduo are natural competitors given their prominence and experience in online food and grocery retail. However, Tencent, Didi Chuxing, Bytedance, Kuaishou, and a number of CGB start-ups have thrown their hat in the ring as well. In the years to come, the fight will be for the next billion consumers coming online in China’s lower tier cities and rural areas. These markets are relatively untapped by the digital economy and expected to be the main drivers of growth for big tech during the years to come.

So far in 2020, there has been heavy investment in CGB from Alibaba and JD specifically. Both of these e-commerce giants boast the most developed logistical networks, but their presence in China’s lower tier markets is limited. As it is still very early in the game, they have stuck to raising over US$1 billion between the two of them to place their bets on CGB’s most promising start-ups including Nice Tuan, Xingsheng Preference, and others.

Meanwhile, although not known for e-commerce, Tencent has been employing a similar strategy by investing in key related start-ups. The company recently participated in a US$800 million round of investment for Xingsheng Preference and US$495 million for Miss Fresh. As the main competitor of Alibaba in the tech space, it will be interesting how their market strategy evolves in parallel to Alibaba’s.

Pinduoduo is a bit of a different story. Unlike Alibaba, JD, and Tencent, China’s lower tier markets are Pinduoduo’s home turf. Additionally, Pinduoduo’s business was founded on the dealing of agricultural products, so comparatively, CGB is more in their wheelhouse. What Pinduoduo lacks, however, is the logistical networks of Alibaba and JD, who recently changed the game by announcing plans to raise US$6.1 billion to build out capabilities for next-day delivery of fresh produce.

Short and Long-Term Market View

Currently, there is no clear front-runner in the CGB market. Many competitors are employing race-to-the-bottom tactics by selling below market price, much to the chagrin of mom and pop shops, wholesalers, and market regulators. The bigger players will continue to invest, subsidize, and build out operations in the short-term to position themselves for the later market.

Given that competition is relatively even-keeled, every tech company in the CGB space feels they have a chance to come out with a big piece of the pie, even the creator of TikTok Bytedance and ride hailing app Didi Chuxing are eyeing the untapped potential of the CGB market in spite of worthy competitors. Alibaba and JD, who have catered to first-tier markets over the years, have yet to prove they can woo China’s lower tier cities.

One short-term move that tech companies are starting to make is to claim ownership over community leaders. Currently, community leaders work for themselves and often manage multiple chat groups with competing platforms. Locking the leaders down to a single platform by buying them out is a strategic move, as community leaders serve as the main channel for customer acquisition and distribution. Meituan, Didi, and Pinduoduo have begun to do this by signing community leaders to 6 month contracts.

Traditional Grocery Industry Disruptor

The remarkable success of CGB in 2020 has not been without pushback. Tech companies’ stunning foray into grocery retail has compounded losses of traditional offline channels incurred during COVID-19. Feeling the squeeze of big tech, traditional players like wet market stalls, suppliers, and food manufacturers are dissatisfied with the digital direction towards which the industry is moving. In the heat of competition, tech giants have been burning cash to subsidize their produce, which has led to price dumping. Traditional competitors simply cannot compete and have been reporting losses of up to half their revenue as more customers now prefer to order their groceries online.

Out of desperation, many small shops have adopted an ‘if you can’t beat them, join them’ mentality by becoming community group leaders and using their storefronts as delivery points – further . This is more of a ‘damned if you do, damned if you don’t’ business decision because they cannot compete with below market prices, but see no other choice but to promote the online model by working for the platforms that are squeezing them.

Aggressive Tactics Worry Market Regulators

Amidst the public outcry against unfair business practices, CGB and tech companies have been shamed by the media and attracted the scrutiny of market regulators. Communist Party affiliated newspaper, The People’s Daily, criticized tech companies for chasing profits over a few cabbages rather than directing their technology and resources towards more worthy causes such as making China’s tech sector more competitive in strategic technologies such as semiconductors.

Both local and central governments have fixed their attention on CGB in order to reign in offenders in violation of China’s new anti-trust laws promulgated in December 2020. The Nanjing city government, as of December 9th, began to enforce national rules under China’s 2020 Anti-Monopoly Law banning platforms from using ‘unfair competition methods,’ specifically the use of price dumping to divert competition from the market.

In 2020, China’s State Administration for Market Regulation (SAMR) has been more keen to regulate tech companies. Alibaba has caught the brunt of regulatory scrutiny, being fined US$77,145 for failing to notify authorities of acquiring Intime Retail Group as required in Article 21 of the Anti-Monopoly Law.

On December 22nd, 2020, SAMR summoned representatives from Alibaba, JD, Tencent, Meituan, Pinduoduo, and Didi Chuxing to unveil guidelines banning anti-competitive practices in CGB. This served more as a reminder to China’s tech giants that their over-aggressive tactics have social repercussions affecting livelihoods tied to traditional offline industries. Regulatory agencies do not see great value in CGB, only increased consumption levels. From regulators’ perspectives, online grocery shopping does more harm than good and they would rather people support their local wet market vendors to maintain social and market stability.

In spite of regulators’ overall opposition, the rise of online grocery retail is in line with Beijing’s overarching goals to connect lower tier cities and rural areas to the digital economy. Ultimately, CGB is consistent with the government’s larger aspirations to improve the livelihoods of Chinese citizens left out of China’s economic development. Wary of the aggressive subsidies by tech companies, regulators claim to want to return to a healthy, competitive balance in the grocery retail market rather than halt their move into CGB altogether.

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