Community Group Buying: the ‘US military vs the Red Army’
The battle continues
Things that caught our attention
Meituan has launched its most significant reorganisation in six years. The home delivery and in-store (group buying) businesses are combined into one unit. The merger is supposed to offer synergies on the supply side. It is interpreted as a defensive move against the continued attack on the in-store business by Douyin (see our recent update on Douyin local services) and the rumoured intention of Bytedance to buy Ele.me from Alibaba. (source)
Alibaba is considering selling some of its offline retail assets. According to Reuters, these include InTimes, Sun Art retail (RT-Mart) and even Hema (Freshippo). During last week's earnings call, Alibaba chairman Joseph Tsai commented: "We have a number of traditional physical retail businesses on our balance sheet, and these are not our core focus. It makes sense for us to exit these businesses, but this will take time given the challenging market conditions, but we'll continue to work on it.” (source) Together with the sudden departure of Daniel Zhang and the rumoured negotiations of a sale of Ele.me to Bytedance, this points to a very deliberate rolling-back of Zhang's New Retail strategy. In August, we already shared some of our on-the-ground observations of how that strategy didn't perform as promised.
Last week, Latepost published its annual summary of the developments at China's most important internet companies. Their recap is worth reading if you don't have time to constantly read about what's happening in this field. The latest edition included three charts we found interesting enough to translate for you.
The first chart shows the number of daily active users of the leading apps of these 14 companies. This tells you a lot about their reach, stickiness and monetisation ability through advertising, e-commerce, local services, etc.
The second chart shows the changes in the market valuation of these companies in the past three years. Pinduoduo has been killing it, while its e-commerce competitors have lost much value. No wonder they are now all trying to be more like Pinduoduo to win back consumers. You can also see a few other companies recovering from the limitations during the zero-covid policy (Ctrip) and government scrutiny (Didi).
The third chart shows the market valuation developments during 2023. Besides Pinduoduo, Meituan stands out now that it is being attacked by Douyin in its core business of in-store and hotel & travel local services (read out recent update). A rumoured take-over of Alibaba's Ele.me by Bytedance could make things even worse…
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Introduction
Last year, we published an extensive report on the rise, fall and stabilisation of the community group buying (CGB) market. The conclusion was that the market was divided between Meituan Select and Pinduoduo’s Duoduo Maicai. One of the original players, Xingsheng, was also trying to hold on to some of the local markets.
We thought this would be the end of a familiar story: start-ups launching new forms of e-commerce, the big boys jumping in and pushing the smaller guys out until there is a consolidation and two players remain.
While this has indeed played out, 2023 also saw renewed interest in CGB because of the increased focus on low prices that became last year’s survival strategy at JD and Alibaba. So, we decided to give you an update on the recent developments. Besides cross-border e-commerce, community group buying has been the topic we’ve been approached about most by investors in emerging markets and even a US start-up.
But there is more. Other forms of group buying remain under the radar but have sometimes built up a significant scale, like community group stores and social group buying. In a later article, we will explain the differences with community group buying and discuss the most important platforms and companies.
But first, an update on community group buying itself. The update on market leader Duoduo Maicai is free to read for all subscribers. The developments at the other important players, Meituan, Xingsheng, Alibaba and JD, are available for paid subscribers only, as are the general conclusions on the difficulties of CGB.
Freya Zhang and Ed Sander, Research Editors
Rui Ma, Consulting Editor
(click on the images above for information on the Tech Buzz China team)
Community Group Buying - An Update
Follow-up to: Reports about the death of community group buying are greatly exaggerated … - Apr 29 2023
At the height of the community group buying (社区团购, shèqū tuángòu) battle, the founder of a local community group buying (CGB) business described the players as follows: “Xingsheng Youxuan is the local warlord, firmly holding its ground. Chengxin Youxuan [the former community group-buy unit of Chinese ride-hailing giant Did] is like the Qing Dynasty’s army: highly confident and self-righteous. JD.com is like a pseudo-army, scattered and easily defeated. Alibaba’s Taocaicai resembles the Nationalist Army, organised but lacking combat power. Meituan Select, on the other hand, is like the US military: well-equipped and armed to the teeth, with on-the-ground teams and a supply chain, and supported by business data. Duoduo Maicai is likened to the Chinese Red Army [the military wing of the Chinese Communist Party from 1928 to 1936], which, despite not having many resources, has a resourceful and methodical team.” [1]
As we’ve described in our April article on community group buying, the battle has largely become a two-party fight between Meituan and Pinduoduo. Between the ‘US Army’ and the ‘Red Army’.
But neither faired as hoped. In 2022, Meituan Select and Duoduo Maicai had both set themselves a GMV target of RMB 250 billion. Duoduo Maicai only saw an actual volume of RMB 180 billion. Meituan Select did even worse at about half its target. The gap between the two widened further. [2] Duoduo Maicai was more flexible, overtook Meituan and became the market leader.
Together, Meituan and Duoduo Maicai have attracted 800 million people participating in community group buying but have yet to make a profit. [3] CGB will likely try the same supply chain integration we have seen with Dingdong Maicai in the front-end warehouse segment to further bring down costs: direct sourcing and private labels. Currently, Meituan uses few white-label products, leading to higher prices. Duoduo Maicai uses many white-label products and bulky goods.
The demand for community group buying has not declined after the end of the pandemic but has actually grown 30-40%. The reason is that the average unit price of the platforms is relatively low and, therefore, matches the trend of consumption downgrade. With the end of zero-Covid measures, the fulfilment chain also became smoother, allowing for further growth. Overall, GMV of fresh food e-commerce has shown slight growth, and CGB is the primary growth driver. The YoY growth rate is expected to remain at 10-15%.
According to data by Kantar Worldpanel, CGB sales continued to grow at double digits in the second quarter of 2023. In that quarter, 26% of urban households purchased FMCG through CGB platforms. [4]
Duoduo Maicai continues to lead
Since Duoduo Maicai, Pinduoduo’s CGB business, launched, it has always had an advantage in traffic volume. As a matter of fact, PDD did not even create a separate app for Duoduo Maicai because the user profile of the main app matched that of CGB. [5] Duoduo’s users are basically Pinduoduo users.
Left: Duoduo Maicai on the Pinduoduo home screen with Duoduo Maicai icon. Middle: Duoduo Maicai home screen. Right: product page.
Because PDD has a high traffic volume on its main app, it doesn’t depend on community group leaders as much to recruit customers and create traffic. Their role is more limited to being a pick-up point, and therefore the requirements to become a group leader are lower, as is the commission. [6]
The Pinduoduo main app had 250 million users in 2020, while Meituan's main app had 50 million. Meituan’s daily active users have doubled, but they are still only one-third of Pinduoduo’s. In their mini-programs, the daily users of Duoduo Maicai (approximately 12.5 million) are also more than twice those of Meituan Select (approximately 6 million). [5]
While Meituan focuses on high-quality products, Duoduo Maicai has taken the ‘extremely cost-efficient products’ route. It can use Pinduoduo’s largest agricultural sales platform in China (GMV of RMB 270 billion in 2020) to get more and cheaper goods. Duoduo offers no less than 26.000 SKUs, 60% of which are cheaper than on Meituan Select. [5] The prices of some daily necessities on Duoduo Maicai can also be 20-30% (or even more) lower than in regular supermarkets. [1]
The overall product quality at Duoduo has been inferior to Meituan’s, with some fruits and vegetables even wilting when they are sold. However, Duoduo has started learning from Meituan’s approach and has improved product quality since 2022. [5]
Another difference with Meituan is that, from the beginning, Duoduo Maicai has fully delegated authority to the regions, which only have to meet GMV and the number of users as targets. Regional leaders might first be inexperienced, but they dared to make decisions, dealt with daily problems, and learned from their mistakes faster than their competitors. Unlike at Meituan, regional front-line procurement decides what products to offer and only needs approval from the provincial manager. New products can be put on the shelves in as fast as one day, making quickly copying the competitor possible. [5] Managers can also easily reward well-performing front-line staff with bonuses and get reimbursed by headquarters. [6]
Duoduo Maicai has also gone through a fair share of reorganisation. In June 2023, it dismantled the former 20 provinces and regions and divided the country into 81 regional business units. Many of Duoduo Maicai's first-level executives have been transferred to Temu to fight the cross-border war. Duoduo Maicai no longer reports to the COO but to the co-CEO, the second in command. [5]
By mid-2023, Duoduo Maicai had achieved gross profit in all regions except Sichuan, Chongqing, Guangdong, Xiangbei (Hunan), and Hangzhou. In some regions, its market share exceeded Meituan’s by 10%. Duoduo Maicai has been gearing up to attack in Guangdong province, one of Meituan’s strongholds. [5]
The earlier commercialisation of its platform has also helped Duoduo’s profitability. In 2022, it already started selling promotional space on its app to merchants. Meituan has not started such commercialisation yet. [5]
In 2023, at its peak, the gap between daily orders of the two market leaders grew to 6 million; Meituan had 32 million, and Duoduo Maicai had 38 million. [5]
In these days of frugal consumer spending, PDD has seen substantial growth, especially compared to JD and Alibaba. This also applies to Duoduo Maicai, and thanks to its cost-control approach, Duoduo is not negatively affected by the so-called ‘consumption downgrade’. [6]
As we reported last month, Duoduo Maicai was also preparing to launch local services on its platform (see What’s up with…? - Part 4: Douyin Local Services for details).
Duoduo Maicai’s current loss rate is in the single digits. [3] Some conservative estimates see Duoduo Maicai contributing at least RMB 14 billion in profit to PDD by 2025. This, together with the income from the main app, will help PDD build new initiatives like Temu abroad. [7]
But there are also sceptics. An industry insider believes Duoduo has already reached bottlenecks regarding orders, unit prices and merchants. [3] Insiders who don’t believe Duoduo can make a profit this year point out the fact that its gross profit isn’t sufficient. But if it raises its prices, Meituan will take market share away, and suppliers could leave if Duoduo can’t bring them the same volume. [8]
The rest of this article is available for paid subscribers only.