3/31/22 Digest New Format! The Death of Community Group Buying
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Insider Digest 3/31/22: The Death of Community Group Buying
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Repeat from last email: We are revamping our website and this newsletter too! I understand that it’s difficult to remember to log into the Circle community and read the posts as they come up, so we’ll be sending the full length posts as they are written, as well as do a better job of keeping you updated on what’s being discussed in the Discord. This is based on some feedback that we’ve received. Do reply and let me know what other changes you are interested in seeing.
3/22/22 The Death of Community Group Buying?
A slightly hyperbolic title, in that not everyone has abandoned CGB just yet, and Meituan, Pinduoduo and Alibaba still have a pretty substantial lead, but it's clear that the sector outlook in the beginning of 2022 is vastly different from a year ago. Night and day, you could even say.
Ideally, CGB was supposed to have two different paths depending on which tiered city the business is in, a fact that wasn’t as obvious two years ago, but is pretty evident now:
1) In more developed cities, it really is just a form of grocery e-commerce, but one that could potentially be profitable where other methods have really failed to yield margins. (See Dingdong and MissFresh's recent struggles.) How much you believe this kind of depends on if you really believe the business can work without heavy discounts, etc. which is as of yet unprove. And I personally see a lot of difficulties, because there is a plethora of options for city residents to get groceries, via both traditional offline and newer online channels.
2) As for rural China, the idea was always to become a comprehensive e-commerce channel instead of just for groceries. So for JD, it was to expand the full JD offering to rural China eventually, or so the logic went. Same for the other platforms, by the way, with the exception of Pinduoduo, who already had this user base locked in.
This should surprise no one ... it is simply a consequence of the two China’s (urban vs. rural) and their unequal development (if that fact hasn’t been hammered home to you already by Common Prosperity!).
It’s also obvious by now that #2 (rural ecommerce) makes much more sense. In fact, we can see this from Xingsheng’s data — that AOVs and buying frequencies are higher in lower tiered cities / villages. It’s also why many analysts, myself included, believe that this business is the best fit for Pinduoduo.
Anyway, the big news over the past week was that JD’s Jingxi Pinpin, which opened up for business in more than 20 different provinces and direct municipalities over a year ago, has cut down to just 4 remaining businesses: Beijing, Shandong, Henan and Hubei. (I do want to emphasize that the cutback has been gradual ... it already exited 7 provinces last summer.) It wasn’t that Jingxi was some leading player in the space, but that it was yet another company to essentially concede defeat in this newest iteration of the 1000 Groupon War, where money floods in, a bloodbath ensues, and only a few are left standing. Richard Liu probably didn’t think this would be his outcome when he made a very big deal out of CGB back in 2020.
China Merchant Securities had originally predicted a $2Trn RMB market size for CGB by 2025, but cut it down by half to just $1Trn RMB this January. Here is why:
CGB just doesn’t have that many categories. It’s still perishable groceries, nonperishable food items, and some basic CPG. The biggest ecommerce categories of electronics and apparel etc. aren’t moving much through the CGB channels, and will likely continue to be fulfilled by “traditional ecommerce.”
The cold chain is still underdeveloped, and that’s just something that’s both expensive and will take time to realize. Recall that China has a fraction of the cold chain it needs to catch up to developed country standards ... one year definitely won’t do it.
No one has figured out how to get to profitable unit economics, not even the most scaled up players, so investment in the sector has slowed, or as we can see now, is declining, with most of the second tier players struggling, shutting down and scaling back left and right ...
7/2021: Tongcheng Life and Shixianghui both effectively went out of business, with the latter shutting down all locations and claiming to pivot, but really
8/2021: Shihuituan (AKA Nice Tuan) closed some regions and merged them with Alibaba’s MMC group and began focusing on just 5 provinces. Recall this is a business that just half a year earlier had raised $750mm from DST and Alibaba. Actually, to continue the story, by November, they have laid off 80% of their staff and were only paying 70% of employees’ promised salaries. By January, they were in the news for planning to shut down completely, and owing suppliers money. Ouch. It had raised $1.3Bn total from investors ...
11/2021: Didi’s spun-off CGB business began contracting from 31 provinces to just 9 in September, and began testing a wholesale business in order to achieve profitability, which seems promising. But also, it completely removes them from consideration of this race.
And the leading players are doing that much better:
Meituan ended the year at about $120Bn RMB in GMV;
It was the fastest to expand, and had opened up locations in 90% of Chinese cities by the end of 2020. Now it claims to be more focused on a “better user experience” by focusing on improving its warehouse network, product selection, return purchases and user experience instead of focusing on growth. I mainly think that’s just because growth is way too expensive in this sector ...
Pinduoduo at about $80Bn RMB
As you’d expect, Pinduoduo is focused mostly on price. It tried to increase AOV by increasing the number of non-grocery items (at one point as high as 30% of the mix) but has scaled back.
Neither reached the $150Bn RMB they were hoping for.
As for Alibaba, they are in third place, and I’ve already written about the many restructurings last year. They spent most of last year trying to get internally coordinated and grow the team and only recently began focusing on unit economics.
Some reflections:
Back in October 2019, when I took a group of investors to China, the battlecry calling players to invest in grocery e-commerce was already beginning. The logic was simple — huge TAM and negligible ecommerce penetration, paired with offline alternatives that were subpar at best (lower tier cities rarely had great grocery experiences). We did an episode on e-grocery here, and another one more specifically on community group buying here. The reality has been a lot more complex, especially when large platforms committed billions of dollars to burn through. Sure enough, only one independent player (Xingsheng) is still holding on, and even most of Big Tech has dropped off. It's hard to see how good the opportunity was when irrational spending reigned supreme. It was hard to see anything, frankly.
CGB is not dead. But it’s certainly evolving. I do think the Thousand Groupon War analogy is very, very apt here. Remember that everyone and their mothers tossed their hat in the ring when the Groupon model was en vogue. Only a handful survived the brutal competition. Then the leader — Meituan, figured out that the actual winning business model wasn’t Groupon but food delivery. And became a behemoth based on that insight, starting a whole new industry that was also highly contested, but far less crazy than Groupon. I'm guessing a new, tangential, but actually better business model will also arise out of the ashes of CGB as we know it. But you have to be still in the game to take advantage, so kudos to Meituan, PDD and Alibaba for holding on and becoming much more conscious about how much cash they are bleeding these days.
Of course, there are some key differences between the opportunity then and the opportunity now.
The entire tech industry has upgraded. People aren't just figuring it out in the dark, they have a lot of playbooks to rely on now, the level of talent is much better, access to capital is also greatly improved. This is e-commerce of sorts after all ... and China is the world leader in e-commerce sophistication. But it's important to note that the Big Tech players are also much better at raising money so they have a much bigger advantage.
China's macro has changed. Well it has, and it hasn't. The country overall is no longer growing as it was in 2010, but rural China could. That's the point of common prosperity, no? It's just that could comes with it a lot of uncertainty, and this is out of the control of the players, no matter how cleverly they engineer their products. Think about it ... if there was no consumption upgrade and China is as poor as it was ten years ago ... the food delivery business just can't physically be as big as it is today. People just won't be able to afford it.
Platform businesses are subject to much greater scrutiny. Yes, the regulations are different now and many of the old growth tactics will be prohibited. If this doesn't have a negative impact on growth, I don't know what will.
What's the conclusion?
Well, CGB doesn't look like it's going to birth the next centacorn ($100Bn+ valuation) or even decacorn ($10Bn). It does not look to be a sustainable standalone business. It doesn't look to be sustainable, at all, actually, in the near term. This is where Pinduoduo's high overlap in customer acquisition and behavior really plays to its advantage, and I'd agree that it could do well here. It also plays into their focus on agriculture, which is itself highly aligned with the government's goals re: food security and also market needs (low income families spend the highest proportion of their income on food). So while Meituan has a GMV advantage right now, that looks to be at the expense of profitability -- Zhejiang Securities estimates its losses to be $1Bn+ per quarter, more than double Pinduoduo's, who has 2/3 of the GMV. So yeah ... I'd bet on Pinduoduo to win this race, and Alibaba to be a strong second place contender in the longer run. Whether or not you think this is a great business will really depend on if Pinduoduo can figure out other businesses to tack on top of the formidable distribution network that CGB requires. But let's not forget that even if we assume CGB GMV nearly doubles to $160Bn RMB or $25Bn in 2022, like Zhejiang Securities forecasts, that's still less than 10% of the overall platform GMV which was $383Bn last year. Nothing to write home about.
What are your thoughts?
Reply here on the Circle forum.
What You Missed on the TBCI Discord
Pinduoduo has been getting a lot of flack for their “Use First Pay Later” scheme:
I wrote about it on Twitter
Merchant pays 2% (discounted to 1% at present) of transaction fee (much higher than 0.6% typical payment fee) for users who fulfill a certain credit rating on WeChat Pay (score of 500) to one-click buy under-200 RMB items without paying for it first. Merchant gets paid when item is received by user, guaranteed by PDD. User is auto-debited fee from WeChat wallet after 15 days. All sorts of issues here including merchants being forced to turn on the function, users accidentally checking out items, high return rates / costs, etc.
Discussion of whether or not this could potentially result in regulatory action, as it is kind of “consumer financing but wrapped as "supplier financing" guaranteed by PDD.”
Faced with CATL battery dominance, U.S. trade experts mull a China-like tech transfer - by SupChina
Most of us are still wondering what is the current state of delisting risk
Bloomberg reported that SEC casts doubt on imminent deal
Gavekal’s Thomas Gatley apparently thinks the base case is that delistings will happen
Meituan looks to expand e-commerce: Barron’s article here
Do you think this is wise?
Have any comments or questions? See you on the Discord server!
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