Once a Lifeline, Group-Buying in China Gasps for Survival
After mushrooming rapidly from city to city amid COVID-19 lockdowns, China’s group buying platforms, which allowed isolated residential communities to buy groceries and daily essentials in bulk at cheaper prices, are slowly fizzling out.
The CEO of one group-buying startup says it comes as no surprise. The essential game plan of such companies is to compete with one another to see who can burn the most money and generate the greatest sales.
From start-ups to platforms backed by tech giants, the list of failed ventures is slowly growing.
In July 2021, the billion-dollar unicorn Tongcheng Shenghuo went under; in March this year, Chengxin Youxuan — the Chinese ride-hailing behemoth Didi’s group buying platform — and Nice Tuan, backed by Alibaba, both shut down.
Simultaneously, JD.com’s platform Jingxi Pinpin drastically scaled back operations. Since April, both Meituan Youxuan and Duoduo Maicai have closed or merged services in many of their less profitable locations.
The cutbacks point to a market rife with tension.
Who’ll be the next to pull out? Is there a future for residential group-buying? Such questions now dominate the group buying landscape even as tuanzhang (group coordinators), suppliers, warehouse logistics companies, and platform executives continue to stay focused on the immediate consequences of the shakeout.
Group coordinator Bi Lei was recently blindsided when one of the two platforms on which she operated suddenly pulled out.
On that day, she racked up sales over 1,000 yuan ($145) and netted more than 100 yuan on the other platform — not an easy task. But she allowed herself no joy. This pulling out not only halves her income, but also suggests that the commissions and incentives offered by the remaining platform will likely decrease.
In some regions, there are already only one or two players left in the market. In Beijing, for example, Xu Dong, an industry veteran and general manager of a start-up, surveyed the market in April. He discovered that, in terms of order volumes, Duoduo Maicai ranks first and Meituan Youxuan second.
But revenues for coordinators have continued to dwindle. Xu learned that there are approximately 15,000 coordinators in Beijing, the majority of whom make 1,000-3,000 yuan a month — only 10% or so earn more than 5,000 yuan.
The highest earners are in the upmarket Chaoyang District: 15,000 yuan a month so long as they can process 1,000 packages a day at a 6% commission. But this requires hiring an extra staffer.
In addition to commissions from sales, coordinators also get bonuses for recruiting new members. Recruiting, maintaining customer relations, receiving and forwarding deliveries, processing refunds, and giving feedback on product quality are just some of their daily tasks.
Most coordinators are individual business owners who use their small storefronts as the pick-up location for orders, or who live on a lower, easily accessible storey of an apartment building and do everything at home.
Those with some help and enough energy usually operate across multiple platforms and provide their group members with links to all of their profiles.
One coordinator in Foshan, in the southern Guangdong province, recalls that when she started out, she was working for Chaoxianchu, a subsidiary of logistics company Hive Box, whose commission rates were sometimes as high as 20%. As she branched out to other platforms, her bonuses multiplied.
But now, the group-buying bubble has burst. “The best commission rate I can get is 10%, but sometimes, they won’t even give me 5%,” she said.
Another coordinator witnessed a sudden pull-out. The day before, she noticed on the app that one service point after another started to disappear. The next morning, when she asked the delivery driver for information, he merely replied, “The products are held up at a COVID-19 testing point. It’ll be a few days before business goes back to normal.”
Meanwhile, orders could no longer be placed on the app. A little after 10 a.m., a moderator in a coordinator chat she was a part of announced that operations were shutting down and then deleted the chat altogether. Simultaneously, she received a WeChat public notification from the platform stating that “services in this region have temporarily been terminated.”
Over 1,000 kilometers away, in the northwestern city of Xi’an, Shaanxi province, Fang Na has become indifferent to the churn. When she started as a coordinator in the first half of 2020, she operated on virtually every single platform. Every time one pulled out, she had to spend the following few days dealing with refunds and post-sales problems.
Supply chain disruption
Though disorienting, individual coordinators can bounce back quickly. After all, it doesn’t necessarily take much to start such a business — sometimes, all that is needed is a big new fridge.
But warehouse logistics companies and suppliers aren’t as lucky: very often, supply chain issues can mean watching all their hard work and huge initial investments go up in smoke.
Usually, customers pick up their orders the day after making a purchase on an app. In that time, the products must make the journey from the central warehouse to a grid warehouse, and finally to a pick-up station run by a coordinator.
Platforms build one or two central warehouses for one business region, while grid warehouses are built or leased and operated by storage and logistics companies. Sorting and transportation are mostly completed overnight.
According to a liaison at a grid warehouse, before platforms pull out, they generally give warehouses a month’s notice and, depending on the circumstances, “provide a small compensation fee.”
“It’s pretty tragic,” said a logistics professional, who requested anonymity, adding that grid warehouses need to put in tens of thousands of yuan to start. But over the last couple of years, anywhere from 50% to 70% of them have incurred losses and have sought to reduce costs by whatever means possible.
Two coordinators underscore that they made the conscious decision to abandon certain platforms because of such cuts, which sometimes meant no temperature-controlled containers for frozen goods.
This year, owners of grid warehouses are looking to branch out. The logistics professional has noticed that some warehouse owners have abandoned the group-buying model in favor of collaborating with chain outlets or developing their own urban delivery network.
Suppliers have also been left scrambling. In the highly competitive market, they need to stock up for any and all platforms who offer to partner up. One platform operator says that most companies essentially depend on the same group of suppliers in the region.
A deal often depends on “who got there first.” A supplier offering a wide range of goods in large quantities is ideal.
And since group-buying apps offer cheap deals, platforms are constantly under pressure to lower prices, further incentivizing suppliers to stock up on whole-sale.
One supplier says that platforms don’t guarantee what products go up on any particular day — you need to sign up for spots. This makes it difficult to plan inventories.
Another supplier of fast-moving consumer goods says that, with platforms pulling out, inventories have become a problem. In the first half of this year, all they did was liquidate.
Stemming the tide
At the end of 2020, the State Administration for Market Regulation issued “Nine Don’ts” to curb group-buying platforms’ predatory pricing practices. The market almost immediately began to cool down.
But it’s widely believed that the main reason behind the prolonged crunch is that platforms have invested billions of yuan each year that have yet to translate into sizable profit margins.
Sales data of the “Three Newcomers” — Meituan Youxuan, Duoduo Maicai, and Chengxin Youxuan — for 2021 trailed far behind targets. According to a report by LatePost, Meituan Youxuan’s target GMV (gross merchandise volume) for last year was 200 billion yuan, but the company only achieved 120 billion yuan.
Duoduo Maicai hoped for 150 billion yuan, but reached 80 billion; Chengxin Youxuan hoped for 100 billion, but ceased operations before the year was out. Bottom of the bunch was Taocaicai, which had an objective of 120 billion yuan, but netted around 20 billion.
Why do the platforms bleed so much revenue? “Price subsidies,” says Xu Dong, explaining that platforms need to cultivate the customer base. Subsidies bring more orders, more traffic, and ultimately, more investments to burn.
According to one supplier, since the beginning of this year, not only have they had to share more profits with the platforms, but they’ve also been asked to subsidize customers too.
Virtually all coordinators interviewed complained that their profits had been “squeezed to chump change.” Three coordinator liaisons for group-buying platforms stated that, as commissions shrink and bonuses come few and far between, more and more have left.
Zuo Lin, product manager of a leading platform, says that platforms invest to go into untapped neighborhoods, whereas coordinators are supposed to expand on the existing presence. “But we’ve noticed that many just ‘lay down.’ Those who are a bit more proactive share photos of products on WeChat, but that’s about it,” says Zuo.
Fang Na is a typical example. In the past, she went out of her way to build a sense of community with buyers — establishing a loyalty point system and occasionally organizing promotional events.
But this year, she’s adopted a more passive approach, simply putting things out there, and waiting for orders to come in. One head-hunter who recruited for Meituan Youxuan and Duoduo Maicai says that the more shrewd coordinators establish relations directly with brands, and are able to bring in highly profitable goods, making them less dependent on platforms.
At the end of last year, Zuo oversaw a marketing tool that allows coordinators to share goods to their WeChat feeds with the click of a button, which has proven effective. But such subtle improvements did not make much of a difference for leading platforms.
Since the end of last year, having pinched every last penny elsewhere, platforms have finally begun trimming the fat in their own ranks. Traffic from community group-buying can be easily redirected toward the companies’ other ventures, allowing them to restructure their operations with manageable financial risk.
“However, the golden age has already passed and, as the economy struggles, large companies decided they can no longer afford colossal amounts of labor for the promise of miserly profits,” says Zuo.
In the first quarter, Zuo lost his job. “Anywhere from 60% to 80% of staff were made redundant — the only ones deemed essential are those who maintain basic operations,” he says.
So, after three tumultuous years, what comes next?
Industry insiders generally agree that Duoduo Maicai is currently on top, followed by Meituan Youxuan — but in certain regions, the competition is still fierce. Duoduo’s advantage is its presence in lower-tier cities as well as in the southwestern Yunnan, Guizhou, and Sichuan provinces. In the central and southern provinces as well as in certain northeastern cities, Meituan has the upper hand.
“The future belongs to platforms who can withstand losses, and at the same time, appear not very brazen in their tactics,” says Xu.
More than half of the community group-buying platforms have already gone bust. And by all indications, the worst is yet to come.
Fang Na and Zuo Lin are pseudonyms.
A version of this article originally appeared in Kaiboluo Caijing. It has been translated and edited for brevity and clarity, and published with permission.
Translator: Lewis Wright; editors: Zhi Yu and Apurva.
(Header image: VCG)