Chinese group shopping market re-accommodates

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China’s once-buzzing group-buying market is quieting down after turning into a battleground where all the spoils go to the victors, with fierce competition and ever-increasing regulatory scrutiny.

Group shopping services have seen an explosion in popularity in China since 2020, as millions of Chinese consumers began shopping for their groceries online during the pandemic lockdowns. The business model allowed purchasing groups to purchase food and essentials wholesale at lower prices than would have been the case if members had purchased individually. Tech giants such as Alibaba Group Holdings, Pinduoduo and Meituan have plunged headlong into the sector, waging price wars that have resulted in a crackdown by regulatory authorities.

“The entire market was burning at least 10 billion yuan ($1.57 billion) a month” at its peak, said an executive at Chengxin Youxuan, the group-buying division of Chinese personal transport giant Didi. Chuxing.

But the industry boom lasted less than many people expected. The total value of goods sold through group purchasing services rose by 65% ​​to 54.8 billion yuan in the second quarter of 2021 from the previous quarter, but fell to 43.8 billion yuan in the following quarter. , according to a report by consultancy Bain in December.

Depletion of cash reserves and tougher regulation forced many of the competitors out of the market. On Monday, Ali Baba-backed grocery shopping service platform Nice Tuan shut down all of its operations after months of difficulties and a downturn in its business, according to online news service Jiemian News. The company created four years ago, which once employed nearly 10,000 people, is now just taking care of settling its accounts with suppliers and employees, reported Jiemian.

Nice Tuan decided to end operations after rival Tongcheng Life declared bankruptcy in July. With a market valuation of US$1 billion, Tongcheng Life was the first major online group shopping service to go bust.

Nice Tuan, Tongcheng Life and Xingsheng Preference, backed by Tencent Holdings, were in the past described as market pioneers, under the moniker “the veterans”. But as competition intensified, the first-to-market startups began to be supplanted by tech giants with ample resources.

the rookie race

Duo Duo Grocery, the groceries app from the e-commerce platform Pinduoduo; Meituan Select; and Chengxin Youxuan — known as “the three newcomers — entered the market for group buying services at about the same time, and embarked on a fierce price war.

After its parent company Didi Chuxing began to be investigated by the government, Chengxin Youxuan scaled back its business in June last year and by the end of the year was operating in just ten Chinese provinces. Loss of growth momentum and lower-than-expected customer retention and repurchase volume were the main reasons for Didi Chuxing’s pullback, according to an executive at Chengxin Youxuan. The strong growth momentum in the group buying market lasted just six months, until April 2021, according to the executive.

Didi Chuxing also found it difficult to standardize and reproduce products on a national scale in its operations, unlike its car service.

“Each region has a different supply chain structure,” said the executive. “And there may be a more dominant local platform in each region.”

The duopoly of Pinduoduo and Meituan accounted for more than 30% of the market in terms of gross product value in November, according to a survey by Guojin Securities. Wang Xing, chairman of Meituan’s board, once stated that group shopping would bring 300 million to 400 million new users to the company in the next few years, a segment it would not be able to reach through its delivery services. .

Meituan entered the market in the third quarter of 2020, spending heavily. In the fourth quarter of that year, the loss-to-revenue ratio of the company’s new unit, which included the group purchasing service, rose from 25% to 64.9%, and then rose again, reaching 75% in subsequent quarters.

In the third quarter of 2021, Meituan reported an operating loss of 10.1 billion yuan. The combined deficit of the new business division totaled 10.9 billion yuan, five times the amount of the previous year, and this totally consumed the profits generated by the company’s businesses – deliveries, travel and withdrawals.

The mounting losses reflect the company’s heavy investment in building a supply chain infrastructure to support its grocery trading service. By the end of September 2021, Meituan’s fixed assets, including real estate, warehouses and equipment, had risen to 22.5 billion yuan from 8.6 billion yuan a year earlier, according to the company’s financial records. company.

Meituan is the only company in the group purchasing sector that has undertaken such an effort, said a market analyst.

Compared to Meituan, Pinduoduo has more competitive advantages in the market, more experience in e-commerce and an extensive business network, said a source close to the company. With an active user base of 867 million consumers per year, Duo Duo Grocery aims to reach a transaction value of between 400 billion and 500 billion yuan in 2021, about a fifth of the total transactions on Pinduoduo’s main website. in 2020, the person said.

The Incursion of the Giants

E-commerce giants Alibaba and JD.com hit the market late.

Alibaba joined the latest Chinese online shopping trend in late 2020, creating a business-to-business (B2B) transaction platform called Lingshoutong and a grocery sales service called Freshippo, while investing in Nice Tuan. It wasn’t until March 2021 that the company consolidated its diverse grocery retail businesses under a team called MMC, led by Dai Shan, who runs Alibaba’s B2B transactions. The decision merged Lingshoutong into the grocery retail unit Hema Jishi. However, Alibaba executives told Caixin they were unable to distinguish the company’s different grocery retail units. Alibaba officially established Taocaicai in September 2021, combining Hema Jishi and Taobao Grocery.

Instead of relying on external wholesalers and distributors, the company now uses Alibaba’s suppliers, taking advantage of its ecosystem’s immense internal traffic, according to the Bain report.

Taocaicai did not yet exist in the period of greatest expansion of the group purchasing market, promoted through product subsidies and dumping; soon after, the government tightened market regulation, said the same analyst. The State Administration of Market Regulation and the Ministry of Commerce held a meeting in December with internet companies — including Alibaba, Tencent, JD.com, Meituan, Pinduoduo and Didi Chuxing — and then promulgated a list of restrictions for purchasing group services. Regulators ruled that platforms could not sell products below cost for the purpose of monopolizing the market, and that a price war had “created pressure on employment”.

With regulation tightening, JD.com quickly shifted focus and shifted resources it had been dedicating to group shopping services to its grocery delivery service, which focuses on high-income customers in big cities. . The group purchasing business progressively lost importance in the company.

“The business suffers heavy losses and customer loyalty is low,” said a JD.com executive.

The company has less incentive to create a group shopping service because consumers in this segment are very different from its existing users, according to the Meituan executive. “JD.com didn’t really invest in this segment,” he said.

The Fall of Veterans

As tech giants redoubled their efforts in the group-buying segment, startups struggled. The business model based on heavy subsidies could not be sustained in the case of smaller competitors such as Nice Tuan, which had Alibaba as an investor. past.

“At the peak of our subsidies, we lost five to six yuan by selling every 10 yuan worth of products,” a former Nice Tuan employee told Caixin. “The basic strategy now is to reduce this loss to two yuan. The so-called reform was to cut the workforce from 10,000 to 1,000 workers.”

Nice Tuan came out of the red in 2020, two years after its founding, but fierce competition based on subsidies has forced the company to burn more money to gain market share, according to Chen Ying, the group’s founder and chief executive.

Whenever subsidies were lifted, daily orders dropped significantly, said a former procurement group leader at Nice Tuan in Changsha City, which used to receive an average of 40 orders a day.

Amid tightening enforcement, China’s market regulator imposed a 1.5 million yuan fine on Nice Tuan in May 2021, citing violations such as dumping and deceptive pricing practices, two months after imposing a similar penalty. , in March. The company also had to suspend its operations in east China’s Jiangsu province for three days.

As the company scaled back its business, the results of Nice Tuan’s efforts to raise capital also fell short. In July, the company announced the completion of a $300 million capitalization round with the participation of investors such as Alibaba. But the amount raised was far below the expectation of US$ 1 billion.

The reduction in capital raised “directly led to mass layoffs and further downsizing of the business,” said a former employee of the company.

For startups like Nice Tuan, independent development is becoming more and more difficult because the industry has stopped growing, in the case of startups, the former employee said.

With Nice Tuan’s business downsizing, many of its former employees and operations have been absorbed into Alibaba, a Nice Tuan executive said.

While Alibaba describes itself as just a financial investor in Nice Tuan, which operated independently, employees say the cuts in staff and operations were in part a reflection of pressure from Alibaba.

“To some extent, Alibaba acquired the businesses that Nice Tuan gave up,” said the former employee.

Xingsheng Preference, which has investment from Tencent, is the only one of the early competitors to have sustained its business. While most group-buying platforms operate at a loss, Xingsheng Preference posted a 2% net profit margin in January, according to a widely circulated stockbroker survey.

The profit came at the cost of slowing the company’s expansion pace. It suspended a national expansion campaign in mid-2021 and focused on key regional markets like Hunan Province, where the company started.

Xingsheng stopped subsidizing buyers through low prices and decided to focus on improving its administrative and management skills, a company official said.

Xingsheng, the only one of the three initial competitors in the segment to remain competitive, now matches Taocaicai in the second tier of the market for services to group purchasing. As of January 2022, it has registered a monthly total of 180 million active users, still well below market leaders Meituan and Pinduoduo.

Translation by Paulo Migliacci

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