Does Community Group Buying Be Evil?

//社区团购很火

Community group buying, or CGB, is literally the hottest thing in China right now, because not only are the startups rasing crazy funds in this space, but also the internet giant, I really do mean all of them, are going in with guns blazing.

//什么是社区团购

So what is CGB? It is, in my opinion, the latest iteration of grocery e commerce with the real social networks. Not just people who you share interests with and follow online, but people you actually know, or at least run into, in real life. The acquistion and transaction will benefit a lot from the natural trust among these neighborsbe.

//为什么都在要做社区团购

Why does everyone sounds so nuts about it? Well, as always, there is more to the story.

First, it’s such a large addressable market but such low ecommerce penetration. 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 the players.

Second, it’s one of the few ecommerce verticals that isn’t dominated by Alibaba or JD. China can be roughly devided into two parts. One is the 2-400 million coastal urban citizens in Developed China, another one is 1 billion people living in rural or Developing China. The ecommerce giants really have most of developed China covered. JD.com’s latest annual active user count is now 441M, but in Q2, 80% of the new users came from lower-tier cities. Pinduoduo’s monthly active user number is 687M, which is 56% higher than JD’s annual number. And it just takes 5 years for Pin duo duo to get nearly 700M users. No wonder so many Chinses VCs say that “The next China is China”, cuz the rural China is just started.

Third, it’s fighting for private traffic and lower last-mile cost. Private traffic just means that users are not currently proprietary to the large platform. 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.

Whereas community group buying is not quite all logistics, but a good bit of it. The hardest part in logistics is always the last mile. You can greatly reduce the delivery cost by just, 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.

//发展历史

Innovated since 2018. 2018 is the year when a ton of “New retails” concepts went under, which is said by Jack Ma.

Started in second-tier city. The offline competition looks very different in China versus the US, with majority of the country, about 75%, still shopping at the wet market. and these markets are frequented either by your older retired grandparent types, or maybe hourly workers who usually clean but also sometimes cook for more well-off families. But one common thread, they are generally more relaxed about time, but more sensitive about price. So it doesn’t surprise you that the model actually started off not in Beijing or Shanghai, but in second-tier city like Chengdu or Changsha.

微商 or Wechat Salespeople get matured. Back in 2011, 微商 has a controversial reputation in China, since a lot of products that they are hawking are really awful. But in last few years, this industry get matured and some major brand use this as a channel. Those 微商 eventually become the group leaders with good commissions. For example, 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.

//举一个例子

Let me give you an insight about one standalone play named 你我您, though it’s emerged with another competitor, we can also learn some lessons from its development.

  • Expand beyond groceries into daily essentials.  Of the 90,000 SKUs the company was offering every month, fewer than 40% were fresh food.
  • Build out their supply chain. By 2018, they already got 50% self-built warehouse.
  • Have their own branded products for sale. To gain the user’s loyalty.

//影响-引起争议

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”.

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 Acadamy 达摩院 for innovative research, or Baidu, who’s poured so many resources into autonomous driving.

//影响-消极

The retailers are probably going to be the first to go, they cannot compete with the tons of thousands of SKUs that the platforms have. 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. They’re discovering that it’s not a complementary business, but a cannibalistic one.

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.

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?

//影响-积极

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.

//影响-不可避免

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.

//结语

Again, “Don’t be so fixated on a few bunches of cabbage, the stars and seas of scientific innovation should stir your hearts more.”

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