Economy

Basket Wars

The community group buying model has surged as internet giants pour in capital, further squeezing wet market and traditional grocers amid controversy over unfair competition and dumping. Now, regulators are stepping in

By Xu Ming , Zhao Yue Updated Mar.1

Li Ling, who runs a restaurant in Changsha, Hunan Province, found herself particularly busy this year with her second job - running a local grocery buying group on WeChat. Similar to a buyers’ club or other group buy programs, residents of the same community get together to buy in bulk on different e-commerce platforms to get discounts. Li is one of the millions of people across the country trying her hand at the booming business. She is the group’s coordinator, managing chat groups and orders that come via WeChat mini-apps or standalone shopping apps. Buyers place orders one day in advance and pick up deliveries the next day at a collection point. In Li’s case, her restaurant.　

First developed in China by Changsha-based e-commerce platform Xingsheng Selected in 2016, community group buying (CGB) found its true niche during the coronavirus lockdowns, especially in smaller cities and rural areas where people are more sensitive to price than same-day delivery. CGB took the spotlight in recent months as China’s internet giants in retail, food delivery and ride-hailing all threw their hats in the ring for a share of the market beyond first- and second-tier cities. 　

In June 2020, ride-hailing app Didi Chuxing launched its grocery e-commerce platform Chengxin Youxuan, saying it will not set an investment cap for the new project. A month later, food delivery platform Meituan set up a CGB department with the ambitious “1,000 cities” campaign to penetrate county-level markets nationwide by the end of 2020. In August, group buying app Pinduoduo launched its community-based shopping arm Duoduo Maicai. In late October, Alibaba launched its CGB project Hema Youxuan in Wuhan, Hubei Province. 　

Internet giants like Alibaba, JD and Tencent have invested in leading players to expand their presence. In November, Alibaba invested US$196 million in Shihuituan. A month later, JD invested 700 million yuan (US$106.9) in Xingsheng Selected. 　

The trend is reminiscent of 2018 when around 100 CGB platforms emerged in a few months as capital flooded the market. E-commerce giants like JD and Suning also jumped in. But the timing was not right: Most startups went bankrupt and the giants retreated after short tryouts. Xingsheng Selected and Shihuituan are the two biggest survivors from that initial boom and managed to rekindle enthusiasm for CGB after it found new purpose during the pandemic. 　

Community coordinators, who are usually local store owners or other residents, attract customers from their communities through WeChat and recommend products on different platforms for about a 10-percent commission. They play a crucial role in winning over customers and are highly valued. Major platforms scrambled to woo coordinators as they entered smaller markets. 　

In many places, Meituan, Pinduoduo and Didi Chuxing are poaching coordinators from early players like Xingsheng Selected by offering higher commissions. Coordinators often work with several platforms at once. Li Ling, now working for Xingsheng Selected, is also considering platforms with higher commissions. In November, a platform recruited 2,000 coordinators in a day in a small city in Shandong Province, news outlet The Paper reported. 　

Brick-and-mortar stores, parcel delivery lockers or even the coordinator's home can serve as collection points. In southern cities, where CGB is most popular, a single residential community sometimes has over 20 collection points.　

The scale of community group buying is estimated to have reached 72 billion yuan (US$10.99b) in 2020, double its 34 billion yuan (US$5.19b) in 2019. The market is expected to climb to 102 billion yuan (US$15.57b) by 2022, according to a September report from iiMedia Research, a market data provider.　

Zhang Meng, a brokerage analyst, told NewsChina that compared to the previous costly battles over fresh food e-commerce, CGB provides internet giants with a cheaper channel to attract customers, particularly in smaller cities as bigger markets become saturated. 　

Fresh food e-commerce, which was a major retail battlefield in 2013, expanded rapidly as investment rushed in to tap into the middle-class consumer market. Competition was fierce as platforms launched price wars to win over consumers. Starting in 2019, bankruptcies swept the industry. The high cost of storage, cold-chain transportation and instant delivery are cited as major reasons. 　

According to Zhang, fresh food e-commerce platforms had warehouses with a short delivery radius of around three kilometers to enable instant delivery. Burdened with high marketing costs and per customer transaction overheads, few platforms survived. 　

Community group buying is a different story, Zhang said. “The threshold and costs of running community group buying are lower. It involves presales, caters to the lifestyles of local consumers and mainly relies on local suppliers, which saves a lot on storage, shipping and spoilage. This makes it possible to attract consumers in lower tier markets,” Zhang noted. 　

Old Games, New Tricks

This new battle also involves the subsidy wars common during the heyday of ride-hailing and bike-sharing, where platforms would squeeze out less capable competitors by offering low prices or even operating at a loss. For now, price is the biggest selling point for CGB as its business model is neither innovative nor irreplaceable. Compared with traditional wet markets, supermarkets and stores, group buying prices are too enticing for customers to turn down, NewsChina found. 　

On Shihuituan, a kilogram of carrots is 1.38 yuan (US$0.21), while they cost up to four times as much at an average wet market or supermarket in Beijing. On Meituan’s platform, 1.5 kilograms of oranges costs 2.99 yuan (US$0.46). The lowest price for a similar variety of orange on Dmall, Wumart’s shopping platform, is around 10 yuan (US$1.53) per kilogram, three times higher. 　

Many of the fresh foods on CGB platforms come directly from local suppliers, cutting distributor costs. The presale model also saves on storage and logistics. This may partly explain the low prices on these platforms, Zhang said. 　

But the main reason is that internet giants including Meituan, Pinduoduo and Didi Chuxing are selling items at a loss to grab market share. On some platforms, many products are sold at a loss. 　

A frequent user of CGB platforms told NewsChina that prices are cheaper than at the wet market in his residential community. “Subsidies for customers on Xingsheng Selected used to be limited. But now there are more buying groups and as the subsidies flood in, prices are incredibly low.”　

This low-price strategy puts physical stores and wet markets on the chopping block, particularly for local retail grocers that currently supply all CGB platforms. Under the traditional supply chain, retailers buy from wholesalers who deal with farmers. Pricing is rather fixed, leaving little to no profit margins at CGB prices. 　

CGB could steal business from supermarkets of over 500 square meters within two years if it continues, Ye Guofu, founder and CEO of lifestyle product retailer Miniso, said at the China Entrepreneur Summit held in Beijing in early December 2020. The smaller and closer to customers the better, he said.　

Physical stores are adapting by doubling as delivery points. Li Yangguang, who for years has run a small produce store in a Changsha community, recently became a CGB coordinator for several platforms including Meituan, Shihuituan and Xingsheng Selected. Li told NewsChina that he did not like dealing with CGB at first, but it developed too quickly for him to ignore. “If I refuse, other people would do it anyway and take my customers,” Li said.　

For wet market vendors, who already started to lose appeal when fresh food e-commerce arrived, the blow could be more lethal. Li Ling said she knows many vegetable vendors from running her restaurant, and they are all at a loss for what to do. Two have decided to close shop and go back to their hometowns, Li Ling said. 　

Chen Chen, a vegetable vendor in Southwest China’s Chongqing, said business started to get tough a month after Meituan’s platform arrived. His revenue shrank 20 percent, Shanghai-based IT Times reported. He is now a coordinator and made room in his stall for a CGB delivery point. But not everyone in the market is as flexible. Li Yangguang said that vendors have a harder time adapting to the sudden changes.　

Long-term Questions

The low-price strategy sparked debate as the corporate-backed CGB platforms took business from local vendors and those who rely on wet markets. In an article from December, State-run People’s Daily called for tech companies to put more efforts in long-term innovation instead of focusing on short-term gains.　

Platforms that burn through money to attract customers are accused of disrupting traditional circulation of commodities and pricing systems, and have been criticized for unfair business practices and dumping. Besides resistance from store owners and vendors, the changes have created turmoil in the supply chain. On December 12, a grain and oil company from Cangzhou, Hebei Province issued a notice prohibiting distributors from selling products to CGB platforms without authorization and set a minimum retail price. Other suppliers followed suit and refused to sell to CGB platforms. 　

Regulators also stepped in. On December 9, market supervisors in Nanjing, eastern Jiangsu Province issued a notice demanding “orderly competition” among CGB platforms and restricting them from dumping goods for lower than cost. Alibaba, Meituan and Didi pledged to follow the notice. 　

A few days later, the State Administration for Market Regulation and the Ministry of Commerce held a conference on CGB that was attended by internet platforms including Alibaba, Tencent, JD, Meituan, Pinduoduo and Didi Chuxing. Authorities announced restrictions, prohibited dumping, unfair competition and any form of monopoly in pricing or production and sales, and ordered local market supervisors to keep an eye out for unhealthy developments in the sector.

While the subsidy war is expected to further squeeze vendors and stores, experts said CGB will not replace wet markets and supermarkets, something that fresh food e-commerce tried in vain.

Besides, there are also doubts as to whether CGB will prove a viable business model in the long run. As platforms mainly cater to price-sensitive customers, the question remains whether they will still choose to shop this way once the subsidy war ends. To keep prices low enough to retain customers while remaining profitable, CGB faces huge challenges such as controlling costs and building a strong supply chain, experts said. 　

According to Xu Yong from China Communication and Transportation Association, it is impossible for CGB to substantially reduce shipping and storage costs, despite its advantage of direct supply. “Besides, running this model [from goods and maintenance to employing community leaders] still costs money,” Xu said. “We won’t be able to say it’s a viable model until it sees long-term and steady profitability.”　

Product and service quality are crucial to retaining customers at a time when options abound. Amid the rapid expansion of CGB, however, problems surfaced: unstable supply, product quality, false advertising, deceptive pricing, imparity clauses and poor customer service. Many customers on CGB platforms complain of struggling with exchanges or refunds as community coordinators do not handle them. CGB’s future seems uncertain at best.　

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Basket Wars