It’s Group Buying, Jim, but not as we know it
Pinduoduo’s 200 billion yuan app you never heard of, and more
Sources
Things that caught our attention
In a rare interview, Alibaba’s Joseph Tsai is grilled about the company's challenges by Nicolai Tangen of Alibaba investor Norges Bank Investment Management. It's quite an open and candid interview, and between the lines, you can hear quite a bit of criticism about the replaced managers (e.g. not being able to admit to their own mistakes).
Tsai’s interview was followed by an internal Alibaba memo from Jack Ma. Like the one at the end of 2023, in which Ma congratulated Pinduoduo, this memo (was) leaked again. You can read Ma’s memo it in the Pekingnology newsletter.
Introduction
Over the years, Tech Buzz China has paid close attention to various forms of group buying. Back in the days of the TBC podcast, Rui and Ying Ying made episodes on how Meituan won against a thousand Groupon clones and another on community group buying.
Since transforming TBC into deep-dive reports, we have written two extensive articles on community group buying in April 2023 and February 2024. Even though community group buying remains a challenging business model, our exploration of the collapse of Alibaba’s New Retail in March showed how it has had a significant impact on projects like Lingshoutong and the struggling Alibaba acquired RT-Mart.
But there is more. Group buying has evolved into new business models that are worth looking at. This article examines two forms rarely written about in the Western press. Both depend heavily on the ‘private domain’ (e.g. followers in WeChat). First, ‘Group Stores’ is a form of community group buying that is relatively low-tech and easily overlooked. Second, ‘Social Group Buying’ is easily confused with community group buying. As such, it has remained largely under the radar but is another very successful model that Pinduoduo has also applied.
We hope to shed some light on these two models.
The information on Group Stores is available for all subscribers, but the information on Social Group Buying is only for paying subscribers.
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: Group Stores
A report from the Internet Economic Society predicted that the market size of community group buying will reach EMB 322.8 billion in 2023, a year-on-year increase of 53.71%. That’s higher than the overall growth in retail sales of consumer purchases and online retail sales (both lower than 10%). [1]
Community group buying has seen three phases: [2]
Version 1.0 - Group buying: Get a group of people to sell through a mini program. This model originated in Changsha (Xingsheng) and was picked up by large internet companies. It is currently dominated by Meituan Select and Duoduo Maicai (Pinduoduo). Tech Buzz China has primarily been writing about this form of community group buying.
Version 2.0 - Group batch: A low-tech variation: goods are supplied to group leaders without further support. It evolved from traditional wholesale and dealers and often services business customers. The gross margin is 20-30%, of which the group leader takes 15-20%. They have weak abilities in customer information but are professional in product selection. [3]
Version 3.0 - Group stores: Like 2.0 but with support to attract customers and supply of ‘hot products’. Because the same products are launched to all group leaders, the volume ordered can be enormous. There is a close cooperation between the group leader and the platform. [2]
While major platforms like Duoduo Maicai and Meituan Select fight over the platform community group buying (CGB) business (version 1.0) and have mostly been retracting in recent years, regional players plan to expand their territory and explore new forms of CGB. One such new form of community group buying concerns ‘group stores’ (团店 tuan dian). In 2023, group stores became the most active part of CGB. [1]
Unlike traditional CGB, where the group leader mainly serves as a pick-up point, the group store model's group leaders are basically platform franchisees. They no longer rely on commissions but on a gross margin between purchasing and selling goods to make money. This also reduces financial pressure on the platforms. [4] The process is simple: a group store is opened, nearby residents are gathered in a (WeChat) group, the shop owner posts products in the group, and residents place orders and come pick them up at the store.
Chain names like Xiaoxu Daojia (小许到家), Xiao Mifeng (小蜜蜂连锁大库), Zhihua Zhiguo (知花知果), Miaomeilin (妙美邻), Meilintao (美邻淘), Dingguo Xiansheng (丁果鲜生), Jiubaijie (九佰街) have largely been unnoticed by the international community. With these stores, CGB has started to move from purely online platforms to offline stores. [5]
The group store model is not entirely new. The idea is to divert traffic from online platforms to offline physical stores. Group store companies use a limited number of SKUs to attract customers to a store with low prices and then guide users to buy other products when they pick up those items. The group leader normally needs to join one single company. Variations of this model have actually existed for a long time. Think about a pop-and-mom shop that acts as a pick-up point for CGB, hoping customers will also buy other goods when they come to collect their orders.
Some physical retailers have started entering the CGB market through group stores. They use them as a marketing tool to acquire new customers and integrate them into their existing businesses. The group store model is also more suitable for developing counties and towns than traditional CGB. [1]
Group store chains can be categorised as follows: [6]
Chains with more than 100 stores: Mulanshan Group Buying Supermarket, Xiaoxu Daojia, Shaoxing Pinkang Fruit, etc. Early 2023, Xiaoxu Daojia had about 700 stores across the country. Mulanshan has 1,000.
Chains with 30-100 stores: Changsha Family Enjoyment (80), Guangzhou Dingdang Group (80), Jiajia Group (50), Yinchuan Xianxiyu, Luhuo Group, Xu Xian Group, and Daotao Group.
Chains with 10-30 stores: Xiaohugouyiyi, Kunming Haochihuaxiaohua, Wuhan Doudouyanxuan, Chengdu Chenjie Group Store, Guantao Suosuo Kuaipu, Qixia Zongyi Food, and Nanchang Duan Selection, Linquan Linlin Selection, Dengzhou Xinman Neighborhood, Yangcheng Xiaoqiang Cold Food. These chains are mostly active in counties in the ‘sinking market’. A mature store can service 15,000 customers. Many chains follow the logic of ‘small stores in big cities and big stores in small cities/towns’. [7]
Group stores can also be categorised by type: [60]
Pure group stores (direct-operated or franchised) are built based on physical stores and private traffic pools (e.g., Xiaoxu Daojia).
Fusion group store: a store that is actually a (small) supermarket or post station and does group buying as an activity on the side. (e.g. Meilitao, Shiliupu).
Category group store: a store that focuses on a specific product category (e.g., fruits and vegetables) and offers group buying as an activity on the side.
To determine how many stores can be opened in an area, the population is divided by 15,000. Stores can sell RMB 100,000 - 200,000 monthly to 2,000 - 3,000 customers. Gross profit is about 15%. Minus RMB 2,000 - 3,000 in rent, a store owner can earn RMB 12,000 per month. Compared to the commission of RMB 3,000 a community group leader that can earn in ‘version 1.0’ this is a lot more attractive now that the main CGB players have lowered their commissions. That’s why many 1.0 group leaders evolve into 3.0 group leaders with their own store. [2]
After opening, a store chain goes through the following phases: [6]
Launch stage: Single store, 2,000 customers, supply chain through local wholesale.
Replication stage: 1-20 stores, of which the first 1-5 are self-operated (to reserve talent and marketing training) and the others are franchises. Acquire the ability to purchase whole truckloads.
Fission stage: 20-100 stores, establishing a store fission copying model, expanding around model stores, investing in Douyin and other promotion channels, and achieving hot-selling products.
Expansion stage: > 100 stores. Replicate across cities through city associate partners or agents.
A light franchise model can open 100 stores in half a year in a city. The costs of setting up a store are very low, only RMB 20,000 - 30,000. [2]
Unlike the big players, which are still struggling to gain significant profits, some regional CGB platforms have already reached profitability by streamlining teams and reducing fulfilment costs. In some cases, a team of 10 people manages hundreds of group leaders.
Group stores are regional platforms and pay more attention to maintaining a reputation with their local market. They emphasise keeping group leaders loyal and understanding consumer behaviour in a small area. Group leaders and consumers also tend to be more loyal to those regional players. [8]
Let’s look at some of the players in this field.
Xiaoxu Daojia
A Xiaoxu Daojia store in Xi’an, summer 2023.
Xiaoxu Daojia was established in Shijiazhuang, Hebei province, in November 2018. [9] It is a group store chain aimed at middle-aged and elderly people, specifically housewives of 30-60 years. [4]
Xiaoxu Daojia is China's largest group store platform, active in 10 provinces. [9] By August 2023, it had opened more than 600 group stores across China in places like Shijiazhuang, Wuhan, Nanjing, Xi'an, etc. [10] Except for remote areas like Tibet and Xinjiang, Xiaoxu Daojia has basically nationwide coverage. When a region reaches 30 stores, a regional warehouse will be opened. [7] Goods go from the manufacturer to the main warehouse and then to the group stores.
Xiaoxu Daojia’s approach is characterised as ‘offline store opening’ and ‘fiercely attracting new customers’. The latter is crucial for the model's success and is, for instance done by offering eggs or milk for only 1 RMB if people join a group. Then, trust and purchase habits are developed by offering low-priced products for seven days. Next, there are daily activities to retain these consumer habits. If a store does not reach a certain critical mass within 20 days, it will be closed to prevent further losses. [11]
A new group leader pays a RMB 10,000 promotion fee, and headquarters sends staff to quickly build a private domain group (on WeChat) by distributing leaflets on the opening day. The group leader maintains the WeChat group and conducts discount activities to stimulate loyalty. Xiaoxu Daojia has also expanded to local services, from group tours to housekeeping. [4]
Stores are 20-60 square metres large, carry 50-100 SKUs and have average monthly sales of RMB 100,000 - 150,000. Most serve 2,000 - 3,000 customers in a community. [9] Sometimes, a store can gather 8,000 people (30-50 groups) in 40 days. A single product can sell 400-500 orders, like 2,000 kilograms of dumplings. [11]
The backbone of Xiaoxu Daojia is minimal. Only 4- 5 people can generate RMB 4 - 6 million in monthly sales. [2] The gross profit of Xiaoxu Daojia is 20-28%, of which the store gets 15-20%. [3]
Xiaoxu Daojia has solved the CGB problem of high loss rates of group leaders and difficulties in gaining traffic. However, because of its simple model with low barriers to entry, it attracted many copycats. These are normally small in scale, with the number of stores ranging from a few to dozens, but they add up to thousands together. [1]
A Xiaoxu Daojia store in Xi’an, summer 2023.
Zhihua Zhiguo
Zhihua Zhigou (知花知果) was launched in Hunan seven years ago. It plans to expand to neighbouring provinces Hubei and Jiangxi. [12]
In March 2023, Zhihua Zhiguo started a group store business and planned to open 1,000 stores nationwide. [4] Zhihua Zhiguo’s revenue grew 30%, from RMB 500 million in 2022 to more than RMB 650 million, but falling short of the expectation of RMB 1 billion. After it found management capabilities limited and training inadequate, it decided to halt expansion and focus on the existing market. [1]
Miaomeilin
Miaomeilin started by selling health products, supplemented with group products like tomatoes and eggs. Later, it dropped the health products. When the store had 3,000 customers, entrepreneurs in the area came to ask if they could cooperate. They became franchisees.
Miaomeilin created a methodology of gathering 3,000 - 4,000 people in groups in one day if the site selection was good. Still, initially recruiting 1,500 - 2,000 was recommended to keep things manageable.
In October 2022, Miameilin reached 80 stores. 80% of sales tend to be for online offers and 20% for additional offline products. [2]
Xiao Mifeng: the group warehouse model
The founder of Xiao Mifeng (小蜜蜂连锁大库, xiao mifeng liansuo daku, literally ‘Little Bee Chain Daku’) used RMB 10,000 starting capital to start selling eggs from a tricycle in the morning market. Because of his lower price, he gathered 1,000 people in a group within a month. It was community group buying in its simplest form. [13]
Xiao Mifeng, located in Shijiazhuang, Hebei province, grew from 1 to 198 stores in 2023. Its revenue went from RMB 10 million to nearly RMB 200 million. At present, Xiao Mifeng is also planning small stores to sell fresh food, snacks, fast food, books, life services, and other commodities. [1] The revenue of a single store can reach RMB 10 million.
Xiao Mifeng’s model is described as "group batch + private group purchase + discount warehouse (wholesale and retail integration)". [7]
In July 2023, when it had reached 30 stores, Xiao Mifeng offered more than 300 SKUs, such as fruits and vegetables, beverages, snacks, fresh meat, and daily necessities. As with mainstream CGB, most products are not first- or second-tier brands. The stores saw about 500 people daily, and the daily sales per store were RMB 40,000. 60% of sales took place online. It doesn’t only serve consumers but also the catering industry, pop-and-mom stores, group stores, and other community group buying platforms. The B2C gross profit can reach 20-24%, while the B2B gross profit is around 10%. The net profit is 8%, which is higher than most supermarkets. [13]
Most of Xiao Mifeng’s franchisees are also its suppliers, mainly traditional supermarkets or suppliers of CGB platforms. They sometimes have their warehouses turned into stores and add sales functions. Xiao Mifeng also cooperates with them to develop private labels. The fact that Xiao Mifeng can expand its suppliers’ business with little extra investment has won the favour of these suppliers. The company currently does not charge a franchise fee. [13]
There is a difference with conventional CGB, in which the offline aspect originally only consisted of pick-up locations. However, as online users' growth slowed, the platforms started using offline stores, mostly just 20 square metres big and acquired full-time, exclusive group leaders to continue growing. The offline store of Xiao Mifeng is more like a discount store of 300-2,000 square metres, with over 300 SKUs. Like other discount stores, Xiao Mifeng has greatly reduced operating costs: there is a lack of decoration and products are displayed in boxes, not on shelves. Each store has one manager and four employees working in two shifts. [13]
To get closer to the consumer, each store has ten group stores, and each group store has ten community leaders. The existing stores play more of a warehouse role and supply business customers, while group stores and group leaders take care of consumer-facing business. As such, the business model of Xiao Mifeng is considered an iteration of the ‘group store’ model into a ‘group warehouse’. Industry insiders have doubts about the feasibility of the model and are taking a wait-and-see approach.
Offline stores can meet consumers' immediate shopping needs. Franchisees own the stores, so Xiao Mifeng basically only has labour costs. Goods are often delivered in full vehicles and paid in cash. As a result, prices at Xiao Mifeng can be 10%-15% lower than the market price. [13]
Xiao Mifeng has launched a membership system that costs RMB 300 and allows members to buy 1.5 kg of vegetables daily for 10 cents. It increased user stickiness and solved the problem of the stores being rather remote. People were willing to go the extra distance for this daily deal. [13]
The original CGB customers of the eggs were mostly women. To get more men to buy at Xiao Mifeng, it started selling noodles, and office workers came to eat at the store. It grew the number of customers by 5,000 in a month. Even more male customers were drawn in with alcohol and beverages. [13]
The disadvantage of Xiao Mifeng’s model is that it is usually located in the suburbs, far away from consumers. It also needs a lot of store space, which could result in difficulties finding new locations or add extra costs. While its 300 SKUs might be more than what you find on regular CGB platforms, they are much less than those of other offline stores.
Challenges for the Group Store Model
By the end of 2022, there were about 500 group stores. In 2023, the success of Xiaoxu Daojia led to a craze in group store openings. Many new entrepreneurs entered the market with poor supply chain capabilities, leading to poor product selection and lack of ‘hot products’. Many stores were unprofitable. While stores in the south of China faced challenges with labour and rent costs, in the north, the stores opened in areas with low rent and labour costs. [6]
Many group store operators, including the founder of Xiaoxu Daojia, say the business got more challenging in 2023. Many closed their stores or went bankrupt. In Shijiazhuang, which seems to be a hotbed for group stores, four companies with 50 stores have already closed. [10] As penetration rates increase, growth potential slows, and with regional new entrants, the competition heats up.
The model has very low barriers to entry and is easy to replicate. A group store can be started with as little as RMB 100,000. With an ultra-low price offer, it can quickly gain many followers in a (WeChat) group; a store can build a community of one or two thousand followers within 2 or 3 days after opening. The number of SKUs is low, and the tactic is ‘small profits but quick turnover', aiming at price-sensitive consumers. Because of the low barriers to entry, price competition is never far away. Retaining customers is challenging as they often leave after the deals have been claimed. [10]
The low barriers to entry can be seen in 2023, when not just dedicated group store entrepreneurs but also regional community group buying platforms, convenience store chains, express delivery stations, etc., have started opening group stores. [10] Even Xingsheng Youxuan, the original ‘inventor’ of the community group buying model, has launched a group store business. It's one of its key strategies in the next three years, and it hopes to open 10,000 group stores by the end of 2024. [4]
The possibility of large platforms like Meituan Select entering the group store market can't be completely ruled out either. However, according to industry insiders, community group stores risk being a multi-level marketing scheme, better known as a pyramid scheme. These are forbidden in China, so large platforms usually do not use such models.
Only a few products are launched daily, but if the choice of product is wrong, a store's performance will immediately be affected. Next, group leaders face challenges in sufficient commodity supply chain capacity since they can't just rely on low-priced, traffic-generating items for sustainable operations. It all comes down to the enterprises' commodity supply chain and organisational and management capabilities. [10]
Daily offers at a Xiaoxu Daojia store in Xi’an, summer 2023.
The national expansion of group stores has also proven difficult. Xiaoxu Daojia, dominant in Shijiazhuang, has not performed well in Xi’an and other cities. It is believed the model is more suitable for regional distribution. [10]
The replicability of group stores tends to be poor. Fixed costs fluctuate greatly in different cities, communities and locations. Product richness tends to be low, and group stores need ‘explosive products’ to maintain high efficiency. Finally, the talent density in the sector is low. [7]
All in all, the profit model of group stores is still unclear, as it depends on subsidies for the traffic-generating products, which could lead to losses. Most players are regional, making national expansion difficult. When the group store subsidies decrease, or the model doesn’t turn out to be sustainable, users might return to the big internet players that provide an optimised user experience and stronger stickiness. Finding a sustainable operating model and reducing reliance on subsidies is essential for survival in fierce competition.
There are several ways the group store companies try to survive. [10]
Be more like a supermarket. The online sales ceiling of many stores could be about RMB 50,000. To increase sales, it can add more weight to the offline store, which usually is very small and would only generate 20% of total sales. If a store is expanded from its regular 20 square metres, it can put more products on display. A store can increase sales from RMB 100,000 to RMB 180,000 monthly if adding private-label products.
Expand the consumer offering with higher-margin goods and services. Group stores have also begun to sell many more products than just fresh food and even services like movie tickets, dinner vouchers, medical examination packages, housekeeping services, etc. [5] For independent CGB companies, it’s a way to make their business profitable, as just selling typical CGB goods is rarely a sustainable business, as we have shown. While the fresh products bring traffic, life services and white-label products can bring profitability. Through the endorsement of the group leader, consumers trust the platform and are willing to buy these other services. [8]
Local services have more growth potential than CGB. iResearch reported that the local services market was RMB 19.5 trillion in 2020 and will grow to RMB 35.3 trillion by 2025. CGB is at RMB 100 billion, and its growth is slowing down. Local services could become CGB’s ‘second growth curve’. The platforms are not just focussing on the CGB offering but consider themselves comprehensive platforms for community business, from groceries to eating, drinking and entertainment. [8]
Meituan’s platform is still based on ‘people looking for goods’ (shelf commerce), and it won’t suggest products like air conditioner cleaning sets or mite removal kits that the consumers don’t know they actually need. In a community group, the group leader can suggest such non-food products, group-buying deals and life services to the group members. On traditional e-commerce platforms, merchants must spend significant amounts of money to gain traffic without any guarantee of sales. If they promote through a CGB company, they only have to pay a commission when the product or service gets sold. Most of these smaller platforms also charge lower commissions, often lower than 10%, than Meituan (about 20%). Moreover, these smaller regional platforms often operate in county markets where the penetration of Meituan is limited. [8]
Xiaoxu Daojia WeChat mini program (front page, product page for washing machine cleaning service, livestream).
Expand the business scope. Xiao Mifeng expanded stores, cooperated with suppliers and created ‘group warehouses' that supplied group stores and B2B customers like supermarkets and restaurants. The coverage area of a group warehouse can reach 5 kilometres. Because of economies of scale, it can sell goods 10%-15% cheaper than other group stores. [10]
Expand sales channels. e.g. livestreaming. Some players are combining group stores with livestreams. Jiubaijie currently has livestream sales that exceed RMB 5 million and can reach a maximum of RMB 30 million. On January 15, 2024, the Jiubaijie New Year Shopping Festival was broadcast live. Sales exceeded RMB 30.2 million in 5 hours and 30 minutes, with more than 300,000 orders. After the New Year Festival live broadcast, Jiubaijie added more than 10,000 new users. [3]
Companies have different approaches; some stream in the private domain, others in the public domain. Some stream to promote goods, others to sell goods. [1]
At the end of the day, while market entry is easy, the group store model is not suitable for everyone. Some might have natural advantages because of physical locations (convenience stores, supermarkets), some because of product supply chains and user base (CGB internet platforms), and some might already have a large number of outlets (express companies). [10]
Beyond the Neighbourhood: Social Group Buying
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