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.
Meituan Select reorganises and decentralises
In Q1 2023, Duoduo Maicai launched price reductions specifically targeting Meituan Select categories. It forced Meituan to follow and slowed down its development towards gross profit. [2]
In the same quarter, Meituan implemented a bidding system where suppliers needed to quote prices lower than Duoduo Maicai, but management called it off in April. This cancellation seems logical for Meituan since it has, unlike Duoduo, always focussed on ‘high-quality fresh groceries’, hoping quality would result in customer loyalty. The proportion of fresh groceries among its SKUs has always been more than 30% and contributed 40-50% of GMV. But to guarantee quality, Meituan has had to invest more in warehouse construction and cold chain investment than any other CGB player. [5]
The delivery efficiency of Meituan outperforms Duoduo Maicai. In Shanghai, Meituan can normally deliver at pick-up points early in the morning, while Duoduo often takes until the afternoon. As a result, some frozen products might have thawed and could be returned. [6]
Still, the market share of Meituan declined in some provinces, and in some provinces, it was even overtaken by Duoduo Maicai. For instance, in Chongqing, Duoduo Maicai used to be 70-80% of Meituan Select, but it became the market leader there in Q1 2023. Meituan headquarters told regional leaders it would suspend market share assessment as a KPI. [2]
The recent developments at Meituan’s community group buying division seem to have been primarily aimed at reorganising it into a potentially profitable business. In April 2023, Meituan Select underwent its first reorganisation. Four department managers were replaced, two of them by managers from Meituan’s B2B unit, Kuailü. Kuailü had reached profitability in 2022, and the transfer was clearly done out of the hope that these managers would be able to turn the losses of Meituan Select around. [2] Employees have also been receiving more demanding goals, which were often already impossible to achieve before the staff reductions. [5]
Meituan Select main page, product page and order confirmation with pick-up point.
Your Tech Buzz China researcher picking up a Meituan Youxuan order in Datong, February 2024.
As we have described in our April 2023 article, Meituan tends to respond much slower to market developments than the highly decentralised Duoduo Maicai. Meituan is so analytics- and data-driven that it can take up to a month to prepare a rational report on necessary closure or mergers of warehouses. Once, a study about relocating a central warehouse in Guangzhou took over half a year, after which a final decision was still shelved. [2]
Deciding what products to sell could also involve various central and regional departments, resulting in weeks or months passing before staff finally coming to a decision. Departments in Meituan tend to care most about their own goals and not so much about the overall business (not uncommon in other companies anywhere in the world, by the way). When Meituan wanted to reduce costs in 2022, each department received more detailed KPIs linked to the individual performance of employees. This only made collaboration across departments and launching new products and categories even more difficult. [5]
Internal proposals to move towards a more decentralised organisation like Duoduo Maicai have been rejected by management. Or were they?
On May 15th, Meituan announced that it would begin a new round of adjustments for Meituan Select. The regional management system of five regions (North China, South China, East China, Central China, and West China) system would be replaced by a provincial management system with 17 new regions. Regional departments would be closed, and more decision-making power would be delegated from the central business departments to the provincial management, who will have P&L responsibility. In the old system, regional departments would support the central business units, which led to unclear division of responsibilities between business departments. There was also duplication of resources, which led to Meituan Select being a large contributor to the losses of the new initiative group it is part of. [9]
Over the past three years, Meituan has invested RMB 70 billion in new initiatives, most of which went into Metuan Select. The company remains dedicated to Meituan Select and, despite financial pressure, will continue to invest until it wins. At least, that was the stance of Meituan Select’s manager (Guo Wanhuai) at a meeting last summer. Meituan Select started a three-month summer campaign, with signs stating ‘Summer War’ hanging in the offices and a large display showing real-time business results. [5]
While still loss-making, Meituan Select did reduce its losses significantly by 85% in 2022 and by 41% (YoY) in Q1 2023. But the new initiatives division still made RMB 5 billion in losses in Q1, and most, if not all, can be attributed to Meituan Select. [5]
In the second quarter of 2023, the average order value remained RMB 11.6, and each order contained three items on average. Meituan Select did see higher order volumes, though. It started adding larger packaged SKUs and stimulated door-to-door delivery of such bulky items by group leaders by having consumers pay an additional fee with their orders.
Commissions for group leaders were lowered from 6.4% to 6.3%. In May and June, the gross profit decreased slightly to 14.9%. Consumer subsidies were 4% of revenue, and fulfilment was 10%.
After trying to optimise the supply chain and not reaching a significant effect, Meituan Select shifted its focus to improving customer experience in the second half of 2023, especially in the areas of fulfilment and delivery. Fulfilment time was shortened so customers could get their orders faster. In August, Meituan increased the pick-up time window from 7 PM the next day to 11 AM the next day. [10] This may push the entire CGB industry to shorten delivery times.
Besides speed, Meituan Select also leads in the lowest damage rate of goods. This once again means that Meituan Select, while it might not be able to offer prices as low as Duoduo Maicai, has the best customer satisfaction on quality and service.
Faster delivery has increased the number of products ordered and, thereby, the average order value by 10-15%. Thanks to changes in user behaviour and service improvements, gross profit increased by 1-1.5%.
In Q3 2023, Meituan Select’s AOV increased from RMB 10 a year earlier and RMB 11.6 in the previous quarter to RMB 12.2. The quantity of goods increased by 1 - 2 million to 39 million in Q3. User acquisition costs decreased significantly from 2022. Gross profit was close to 15%, and fulfilment costs had been brought down to 9.5 - 9.7%. Meituan ultimately aims for a gross margin of 18% in its CGB business. Meituan has already increased its share of non-fresh products to improve its gross margin.
In Q4 2023, Meituan Selects’s average daily GMV was between RMB 470 million and RMB 480 million, not significantly different from Q3. The average number of daily orders was about 40 million, a 1 million increase compared to Q3. The AOV was between RMB 11 and RMB 11.6 and decreased compared to Q3, probably due to changes in seasonal products and consumer price sensitivity. The repurchase rate also dropped slightly.
Gamification in Meituan Select.
While Meituan has been reducing costs and increasing efficiency since 2022, its costs remain significantly higher than Duoduo Maicai's. Meituan uses more automation and stricter sorting procedures. There are even regulations for the designs of signboards, warehouse routing, the brightness of indoor lighting, floor paint and even the music played in the warehouses. Duoduo Maicai doesn’t have the same strictness and only pursues operations at the lowest cost. Meituan Select has 10,000 employees, three times that of market leader Duoduo Maicai. [5] Duoduo Maicai focuses on efficiency. Some of its warehouses are actually placed inside a more giant Jitu warehouse. Where Meituan Select might have 40 employees, Duoduo might only need eight managers. [11]
Meituan does not want to expand in new towns and villages, which would require investment in more central warehouses or expansion of the capacity of existing warehouses, but to gain a higher share in existing markets. Entering a new city would come with substantial costs, especially subsidies. Entering the sinking market requires lots of costs to acquire group leaders. It’s also unclear if newly acquired users would have synergy effects with the rest of the Meituan ecosystem and, hence, what the added value will be. Moreover, brand awareness is normally low in sinking markets, so entry would require investments in consumer awareness.
Meituan instead wants to focus its resources on provinces with large numbers of CGB buyers and high GMV, such as Guangdong, Shandong, Hunan and Hubei. In provinces where the competition is fierce or they are at a disadvantage, such as Yunnan, Guizhou, Sichuan and Guangxi, they need to invest to improve their position. They will avoid focusing on provinces with small market sizes, like Anhui.
Meituan Select was expected to become profitable in Guangdong province in Q3 2023, and other provinces would follow in the next quarter. [2] National profitability is now expected in 2024, and profitability after allocating headquarters overhead costs in 2025. [5]
Meituan Select's current loss is still 5% to 6%. To achieve profitability, gross margins need to increase to about 17%. There is little room left to reduce subsidies for group leaders, so profitability should come from operational efficiencies and mobilising traffic more effectively. While consumer subsidies have already shrunk, there is still room for another 1% decrease. The budgets could, for instance, be used to reactivate churned users instead of acquiring new users, which has become very difficult under current market conditions.
In the first three quarters of 2023, the loss of the new businesses that Meituan Select is part of was RMB 15.39 billion. Most of this loss came from Meituan Select. People close to Meituan doubt it will be able to break even in 2024. Meituan will have to decide if it keeps investing in CGB. [3] Some insiders believe that Meituan has no choice. If Duoduo Maicai wins the CGB market, it could extend its reach to local merchants and invade Meituan’s local services territory. But if Meituan wins the market, it could extend its reach into the fresh produce supply chain, get involved in production and enter Pinduoduo’s territory. [8]
However, Meituan Select will have to continue the fight with fewer resources. In 2023, Meituan started shifting its budget away from new initiatives like Meituan Select to support the main businesses, possibly as a reaction to intensified competition with Douyin (see our recent article on Douyin local services).
Xingsheng retracts
Xingsheng originated from Furong Xingsheng, Hunan province’s largest convenience store chain, which was founded in 2013. When the business started suffering under the success of Taobao and JD, founder Yue Lihua looked for a way to grow the business without investments. This resulted in Xingsheng Youxuan. [4]
Xingsheng was the CGB start-up that made all the big players curious about CGB. It had Meituan, Alibaba, JD and Pinduoduo managers travelling to Changsha, Hunan to see what Xingsheng was up to. And how it had managed to bring the internet to the ‘sinking market’. According to someone close to Yue Linhua, Meituan actually offered to buy the company for $10 billion, an offer Yue refused because he considered copycat Meituan unworthy of his innovative company. So, Meituan had no choice but to start Meituan Select. [11] When Pinduoduo noticed a significant market share loss to Xingsheng in Hunan, they hurriedly set up Duoduo Maicai in 2020.
Yue also refused offers from JD several times until competitive pressure made him succumb and take $700 million in investments from JD. This is one reason why JD has continued investing in Xingsheng; it has already invested too much money. [11]
In 2019, before the competitive pressure started, Xingsheng made a net profit of 2% - 3%. But as competition intensified and the big internet companies stepped in, all players became unprofitable.
At its peak in 2020, Xingsheng’s transaction volume reached RMB 40 billion. [4] But then the big boys entered the market, and the government stepped in with regulation against price dumping. While many of the original start-ups went broke, and players like Didi pulled out from the CGB market. We’ve discussed the faith of Xingsheng in our 2023 piece. By the end 2023, it has barely survived by retreating from loss-making provinces.
Xingsheng added a "Yuanben Mall" (源本商城 , Yuánběn shāngchéng) to its app. It’s an e-commerce platform comparable to Taobao that sells inexpensive clothing, electrical appliances, jewellery and other categories. It is a cooperation between Xingsheng and external companies and aimed at increasing its revenue. It was introduced when Xingsheng’s order volume declined because of the competition. [7]
Xingsheng's gross profit is only 20% (still higher than Meituan’s or Duoduo’s). After deducting store commissions and fulfilment costs, the profit margin per order (before overhead) is only 2-3%. Because the average consumer order is only RMB 10, that is very little per order. Their full chain for CGB is actually very long: supplier - warehouse - delivery network - community group leader - consumer. As a result, the loss rate is high. [7] Xingsheng also uses many third-party service providers in its warehouses, at least 70-80. Of every RMB 1 in logistics costs, 20-30 cents are earned by these outsourcing partners. [11]
A Xingsheng pick-up point in Xi’an, August 2023.
In November 2023, Xingsheng’s COO, Xiong Wei, resigned after 1.5 years in the company (he had previously worked as Vice President for Dingdong Maicai). Many other managers who joined in 2022 from companies like JD, Meituan, and Baidu also left Xingsheng. [4] The story goes that investors had pressured founder Yue Lihua to hire experienced internet company managers. Still, he didn’t think these outsiders were down-to-earth enough and only knew ‘management’. Meanwhile, these managers had difficulties understanding the Hunan dialect during meetings. [11]
Around the same time, news broke that Xingsheng had withdrawn from Guangdong province, where it once had a GMV of RMB 2 billion per day. [11] This brought the 18 provinces where Xingsheng was once active down to just Hunan, Hubei and Jiangxi provinces. [4] After raising $5 billion in investments through 8 financing rounds between 2018 and 2021, Xingsheng was forced to change from a nationally operating player back to a regional one. [11]
On a more positive note, Xingsheng Youxuan is said to be close to breaking even. It is expected to reach a GMV of RMB 20 billion in 2023, almost halved from its peak in 2021. [11]
Alibaba changed CGB unit names … again
Throughout the last four years, Alibaba has been all over the place with community group buying concepts.
When the community group buying craze started, Hema launched Hema Select (盒马优选, Hema Youxuan) at the end of 2020, but later renamed it Hema Country Fair (盒马集市, Hema Jishi). Besides Hema, Lingshoutong (Alibaba’s cooperation with convenience stores), Cainiao and Ele.me all dabbled in community group buying. After half a year, Hema Country Fair couldn’t keep up with the CGB initiatives of Meituan and Pinduoduo and was only active in 4 provinces, while its competitors operated in 20.
In early 2021, Alibaba changed course and set up the MMC Business Group, which included Hema Caishi (盒马菜市, a sort of upgraded wet market), B2B platform Lingshoutong and community group buying.
A Hema Caishi in Shanghai, 2019.
Never being one to leave the chess pieces in place too long, in September 2021, Alibaba created Taocaicai by combining the CGB unit Hema Jishi and Taobao Maicai. By then, the government had tightened regulations on CGB, and Alibaba couldn’t quickly expand its market share through discounted prices.
According to sources, the Hema division wasn’t happy with the handover of Hema Caishi and tried to prove its own potential for CGB. Shortly after the Hema Caishi transfer to MMC, Hema Neighbourhood (盒马邻里, Hema Linli) opened its first store in Shanghai. Hema Neighbourhood is a strategic approach to penetrate the so-called ‘sinking market’. It looked a lot like Hema Caishi but combined that concept with the CGB model of consumers placing an order online (mainly for fresh products) and picking it up the next day. [12]
Inside a Hema Neighbourhood, Shanghai, July 2023.
The Hema Neighbourhood format was launched in early 2021 and said it would open 5,000 stores by the end of that year. It only reached 2,000. Former Alibaba CEO Daniel Zhang often questioned the concept, but Hema CEO Hou Yi convinced him not to shut it down entirely and keep the Shanghai stores. Not counting HQ overhead, the operating result of Hema Neighbourhood was -10 %, and it aimed to break even in 2023. [12]
Last month, Hema opened a ‘Hema NB Outlet’ (盒马NB奥莱) store in Pinghu, Zhejiang province. Hema CEO Hou Yi claimed that more Hema NB Outlet stores will open in Jiangsu, Zhejiang and Beijing, and he plans to open 500 in 2024. His dream is to open 10,000 Hema stores (but Hou Yi’s dreams don’t always come true). It seems like the Hema NB Outlet stores are basically like the existing Hema Outlet stores but with a more prominent display of the NB private label. This isn't all that strange since Hema Outlet already had a lot of NB SKUs in its offering. [13] More interesting from the perspective of CGB is that Hema also opened 15 Hema Neighbourhood self-pickup stores in Pinghu.
The average daily sales of 400 Hema NB stores in Shanghai have reached RMB 8,000 and peaked at RMB 26,0000. More than 60% of the franchised Hema NB stores have reached profitability. With the concept of ‘hard discount (Hema Outlet) + community group buying (Hema NB)’ proven in Shanghai, the time for a rollout seems right. It also seems to be a response to Sam's Club's ‘store + frontend warehouse’ model, which we discussed in last year's report on front-end warehouses. [13]
Together with Meituan Select and Duoduo Maicai, Taocaicai is considered one of the three new CGB players. In mid-2022, Taocaicai had 12 million daily orders, far behind Duoduo (35 million) and Meituan Select (32 million). [14]
Alibaba wouldn’t be Alibaba if it hadn’t been reorganised since our last article on community group buying. And no, we’re not talking about the 1-6-N split up (which became 1-5-N after Alibaba Cloud returned to the Group). We specifically mean the community group buying business.
As part of the 1-6-N reorganisation, Tmall Supermarket, Taocaicai, Taoxianda, Shipin Shengxian (食品生鲜) and other local retail businesses under the Taobao-Tmall group were grouped into the ‘Supermarket Business Development Center’. The Community E-Commerce Business Group (MMC), which included Lingshoutong and Hema Jishi, was disbanded by this reorganisation. [15]
But wait, there’s more. Less than two years after Hema Jishi became Taocaicai, it merged with Taoxianda (Alibaba’s Instant Retail service) and became Taobao Maicai on May 24th. Ironically, Taobao Maicai had been the name of a CGB initiative before it merged with Hema Jishi to become Taocaicai. [15] Are you still with us?
The merger is meant to enhance business synergies, reduce costs and improve efficiency. Alibaba hopes the combined gross margin after the merger would increase 1 or 2 percent. Taoxianda and Taocaicai streamlined some staff in the supply chain but maintained their own distribution systems.
Message in the Taobao app that appears when searching for Taocaicao. “Taocaicai supermarket upgraded to Taobao Maicai".
It remains to be seen if Taobao Maicai can really gain supply chain synergies from merging Taocaicai and Taoxianda. Until now, no internet company with different service models (front-end warehouse, CGB, next-day delivery, etc.) has been able to combine the supply chains of their initiatives effectively since their characteristics tend to be very different. For instance, Hema sources many products directly from the primary source, which is unsuitable for a third-party marketplace like Taobao or Tmall. Meituan has also not been able to successfully combine supply chains because product grading, supply points, sorting and selection requirements, etc., of various business units all have their unique characteristics. User demands, product quality, origins, business logic and efficiency in logistics also differ per model.
While the Taobao Maicai organisation can use a supply chain together with Alibaba-invested RT-Mart and Lianhua supermarkets and can offer more SKUs, the volume isn’t enough to be more competitive than the top 2 players (Meituan Select and Duoduo Maicai). Since CGB players won’t start another subsidy war after the government implemented new rules, it’s hard for Taobao Maicai to gain new terrain.
Unless stated otherwise, we will refer to the community group business when we mention Taobao Maicai below.
Left: Taobao Maicai main menu. Middle: Choose a pick-up point near you. Right: product page mentioning ‘Order placed before 21:59, delivered on 12:00'.
Taobao Maicai mainly serves second and third-tier cities. It claims to rank 3rd in the CGB market. It is gradually expanding to the ‘sinking markets’, using the popular Taobao app as an entry point. After previously shutting down in provinces like Guizhou and Shanxi, Taobao Maicai started a new round of expansions in 2023, entering cities like Hangzhou and Shanghai. [16] It shows greater penetration in East China, especially Zhejiang and Jiangsu, close to Alibaba’s home base. Meanwhile, it is shutting down elsewhere, like in Guizhou province. It may focus on expanding into Guangdong and the Pearl River Delta in 2025.
The average order value at Taobao Maicai has not increased significantly and remains around RMB 13. There has been a significant increase in volume, though, reaching 1 - 2 million, and losses have been controlled within 10%. Taobao Maicai's product quality is said to be high, even surpassing Meituan Select in some aspects.
Like Meituan, Taobao Maicai uses coupons and red packages to attract and retain customers. It also includes a lot of gamification, including daily free goods, raising virtual chickens to get free eggs, rewards for sharing, etc. In the case of the chickens, users get hen food when signing in, shopping for popular products, inviting friends, etc. Yes, just like those games on Pinduoduo. [15]
Taobao Maicai plans to ‘refine operations’ to reduce commissions to group leaders and subsidies to consumers (the latter from 5% to 2.5% through increased loyalty). Commission to group leaders will decrease when they rely on more than one platform (as many do).
Posters of different community group buying platforms on the wall of a pick-up point.
Platform economics compared.
Taobao Maicai hopes to break even in 2024. However, increasing the gross margin of CGB will be difficult now that it is approaching 16%. CGB orders have a high share of low-margin fresh produce and a low share of high-margin products like alcoholic drinks.
The return of Jingxi Pinpin
At the end of 2020, JD.com merged all its initiatives aimed at the ‘sinking market’ into the Jingxi business group consisting of:
Jingxi (social commerce comparable to Pinduoduo) – initially launched in January 2019
Jingxi Pinpin (community group buying) – initially launched in January 2021
Jingxida (express delivery)
Jingxitong (wholesale for pop and mom shops)
The group was personally led by founder Richard Liu and received a lot of resources and traffic. It was seen as an entry strategy into the lower-tier cities and rural areas. JD hoped to eventually migrate users to JD’s main app to buy other products. Jingxi Pinpin especially received Liu’s attention, and he promised the team of any province that would lead the market in CGB an RMB 20 million cash reward. [17]
But Jingxi Pinpin, which was relatively late to the market, wasn’t a success. Despite some attempts to rig the system by ‘brushing’ pop-and-mom shop orders as consumer orders and adding high-priced items like iPhones, none of the provincial teams ever received the RMB 20 million reward. Lack of volume prevented economies of scale with centralised procurement, meaning goods had to be purchased regionally at higher prices. A high logistical service level in which 95% of orders were delivered before noon, better than its competitors, could not compensate for these limitations. [18]
Q4 2021 results [17]
By the first quarter of 2022, Jingxi Pinpin’s daily order volume had dropped to 2 million. [18]
Source: [19]
According to CITIC Securities, Jingxi lost RMB 3.5 billion in the second half of 2021. [17] It ran at a -20 % net profit margin, while Didi Chengxin saw -30 % and Duoduo Maicai and Meituan Select were around -20%. [18] Liu admitted defeat, and after cost reductions in December 2021, Jingxi was largely dismantled in March and June 2022, with only the main Jingxi platform seeing continuation. Jingxi Pinpin pulled out of most of the 20 provinces it operated in and only remained in Beijing and Langfang (Hebei). Without Jingxi, JD’s overall profit rose, but its growth in new active customers dwindled.
JD’s attention shifted to instant retail, and CGB was marginalised.
But then, in October 2022, Richard Liu criticised his team for the ‘shocking’ high prices of JD and the lack of crisis awareness. "Low price is the most important weapon for our success in the past, and it will be the only basic weapon in the future!"
So, JD once again aimed at the ‘sinking market’, the only place where JD can find large numbers of new customers. Besides a drastic campaign to subsidise price differences (’10 billion subsidies’, mirroring the same campaigns Pinduoduo has been using for years), a relaunch of Jingxi was part of the strategic plan that followed. Jingxi is opening to more types of merchants and offering free trial operations and platform usage.
In June 2023, JD grouped some initiatives into a new Innovative Retail Department, including Jingxi Pinpin, supermarket chain 7Fresh (七鲜 Qixian) and JD’s new front-end warehouses. Then, on July 27th 2023, JD announced that Jingxi Pinpin would change its name to Jingdong Pinpin (京东拼拼). In addition to the rebranding, Jingdong Pinpin started recruiting business development staff again in second and third-tier cities, including Hefei. [20]
“Comprehensive brand upgrade. Jingdong Pinpin is here!” (source: JD)
Jingdong Pinpin WeChat mini-program.
Changing from ‘Jingxi’ to ‘Jingdong’ will give the CGB platform more brand power. In Hefei, JD business developers have been reported to offer generous rewards to community group leaders but have also struggled with transportation capacity and out-of-stock products. JD’s strong warehouse-network distribution centre built for 3C categories is unsuitable for CGB's required ‘short-chain logistics’. [7]
Despite its return to CGB, industry insiders don’t expect JD’s CGB market share to change much in the short term. JD Pinpin is still in the testing phase, is slow to develop in new cities, and the certainty of the business is not high. JD Pinpin’s business volume is small and mostly focused on the Beijing-Tianjin-Hebei region. JD’s primary traffic and supply chain also don’t have an optimal match with the CGB business. If JD wants to expand its position, it must bear high costs.
Community Group Buying remains a tough business
Back in 2021, at the height of the war for the community group buying market among the big internet companies (see our April 2023 report), Momentum Works already concluded how difficult a business CGB is. [21]
Fulfilling grocery demand as a self-operating platform requires enormous capital, strong execution, and perseverance.
A very optimised supply chain and logistical network must be built to become competitive and profitable. To break even, you need volume, density and operational efficiency.
Even if you are successful, you will only make a tiny net margin. Therefore you need to monetize the customers you gained through CGB in other business areas (this is what all the big internet players were hoping for).
As we’ve seen, you will perish unless you are able and willing to burn a lot of money in acquiring and retaining customers in the competitive battle.
Development of CGB has been slower than the industry originally expected because it’s not easy to sell goods cheaper, and CGB failed to truly challenge offline retail in scale. Regional preferences for products and brands can also make it challenging to achieve volume in any single SKU. Accepting a loss in fresh food to make a profit by selling other products no longer seems all that feasible, and players are trying to make a gross profit in the fresh produce category. As such, Meituan Select and Duoduo Maicai have shifted away from money-burning growth to attempting to achieve profitability. [5]
The number of daily group points sold to doesn’t fluctuate much, but shows an upward trend. Compared to the average daily group points sold to of the Top 3 players, Xingsheng’s number is much smaller.
In first and new first-tier cities, CGB faces high competitive pressure and high operational costs such as warehousing and fulfilment. Combined with the low product prices, this results in losses. Therefore, CGB is more suitable for lower-tier cities. [22]
The leading players have not shown significant expansion in new cities, with some, like Xingsheng, even pulling out of several regions. Taobao Maicai has expanded into county-level and townships, though progress is moderate. Meanwhile, Meituan Select has not made significant gains in the sinking market. Duoduo Maicai already has the largest number of cities, towns and villages, so sees no need for further geographical expansion.
As with other forms of fresh produce e-commerce, the challenge of CGB is that the profitability is relatively low, product prices are usually lower, and the competition is fierce. The gross margin is low, around 15%, compared to 30% that some front-end warehouses like Dingdong Maicai and Meituan Maicai have reached. The challenges are largely caused by the multi-level structure of China’s supply chain, which is difficult to solve for the platforms without their own substantial investments.
The small startups have left the market, and the big players that tried and failed have pulled out (except for JD, which will try again). The barriers to entry to the CGB market have become relatively high, so no heavyweight player can easily enter the market. The current competitive landscape is relatively stable, dominated by Duoduo Maicai, Meituan Select, Taobao Maicai and Xingsheng Youxuan.
All of the leading players have budget constraints, so - as far as government regulation would even allow it - there is little chance of a new subsidies war. The hotspots for CGB are in Hunan, Hubei and Jiangxi provinces, while Fujian and Guangdong are relatively fragile.
There is little growth in the CGB market, and competition is focused on existing markets and refining operations. Overall business losses in CGB remain in the range of 8-9%. With limited room to expand to new cities and slow growth in the volume of goods, companies need to improve their gross profit. Each platform is also working hard on reducing costs and increasing efficiency. Some platforms have hereby shrunk their losses to 1 - 2%. This indicates that CGB might become profitable soon.
Further cost reductions can be achieved in:
Optimization of warehouse networks through better layout and route planning of grid stations
Reducing the group leaders' commission while ensuring their absolute income remains stable or improves
Reducing consumer subsidies from 3-4% to 2.5% as user stickiness increases since the subsidies do not have a significant impact on user loyalty
On a more positive note, CGB has not shown a substantial decrease in demand after the pandemic, unlike other forms of grocery delivery like front-end warehouses. As the pandemic ended and some people started shopping offline again, the growth rate in fresh food e-commerce has slowed down to 10% - 15% in 2023, and is now mainly driven by community group buying and instant retail.
This is probably explained by the lower pricing, which caters to the current frugal spending by consumers. Platforms like Meituan Select and Taobao Maicai were even expected to grow 30% - 40% in 2023 and maintain a growth rate of 25% - 30% in 2024, according to the former Pinduoduo product manager.
In 2024, CGB players are not expected to pursue scale expansion excessively but instead focus on refining operations, reducing losses and increasing user stickiness. They will also try adding extra product categories like parent-child and infant products.
To increase gross margins while maintaining price competitiveness, a company has to adjust the product structure and supply chain. Other forms of grocery delivery, like Hema’s home delivery and Dingdong Maicai, have improved gross profit by offering private labels and prepared dishes. However, that’s not the type of products that community group buying normally offers.
The ideal target is to increase gross profit by 0.5% each quarter. Gross margin growth should not be obtained by increasing product prices but by cost advantages and scale effects. Meituan plans to increase profit by 2-3% in 2024 by adjusting product specifications and structure; adding products or merchants with high gross margins.
One or two companies might reach profitability by the end of 2024 or at least not have big losses anymore. It is still doubtful if Meituan will reach this goal.
Things aren’t just hard for the platforms. Recently a community group leader shared his thoughts in a WeChat Post. [23] He complained about how the big platforms quickly occupied the market with low consumer pricing and high subsidies for group leaders. As a vegetable seller, he was happy to share links to the platform and get commissions. But then traditional stores slowly turned into ‘warehouses for the capital market’. Merchants pay rent and labour but become a cheap storage room for the e-commerce platforms. And then the commissions are actually very meagre.
To get the lowest price from suppliers, the platforms also squeeze the margins in the supply chain. Suppliers and delivery drivers must bear most of the problems with product quality and returns and losses during transport. Consumers are moving away from physical stores because of the convenience and low prices. This affects the wages and employment of store staff. All of this ultimately leads to ‘involution’, compressing the profit margins of the whole industry and making sustainable development difficult. Prices are lowering, sales are increasing, and product quality and supply chain health are neglected.
The involution impact of CGB has also been present in retail chains. Listed retail companies such as Yonghui and BBK have repeatedly mentioned in their financial reports that community group buying is the main reason for their decline in financial performance. [24]
A senior executive of an early CGB start-up, Shixianghui, once said that CGB is a ‘fake business’. The distribution method was wrong because e-commerce was used to solve community group buying, and e-commerce has high warehouse costs. CGB can, therefore, not work as an independent business, only as a supplementary business for larger companies. For instance, Meituan is losing money on CGB but it has allowed it to acquire 200 million new customers. If this is true, there is no bright future for stand-alone business Xinghsheng. [11]
Key takeaways
The demand for community group buying has not declined after the end of the pandemic but has actually grown 30-40%. The current competitive landscape is relatively stable, dominated by Duoduo Maicai, Meituan Select, Taobao Maicai and Xingsheng Youxuan.
Daily users of Duoduo Maicai (approximately 12.5 million) are more than twice those of Meituan Select (approximately 6 million). In 2023, at its peak, the gap between daily orders grew to 6 million; Meituan had 32 million, and Duoduo Maicai had 38 million.
Duoduo Maicai has fully delegated authority to the regions, which only have to meet GMV and the number of users as targets. Meituan Select has learned from Duoduo and has started delegating responsibilities to provinces.
Meituan Select outperforms Duoduo Maicai in product quality and delivery speed, but Duoduo offers lower prices and has better overall efficiency.
Xingsheng has retracted from 15 provinces, is now only active in 3 and has seen an exodus of high-level managers that had joined from other internet companies.
After a fragmented approach to CGB, Alibaba now has Hema Neighbourhood and Taobao Maicai. The latter is a merger of Taocaicai and the instant retail platform Taoxianda. These businesses are very different, but Alibaba is hoping for (unlikely?) supply chain synergies.
JD has resurrected its failed Jingxi CGB business and rebranded it to Jingdong Pinpin. It is not expected to substantially grow its market share.
The AOV of CGB orders is relatively low, between 10 and 15 RMB.
Overall business losses in CGB remain in the range of 8-9%. The challenges are largely caused by the multi-level structure of China’s supply chain, which is difficult to solve for the platforms without their own substantial investments.
Duoduo Maicai, Meituan Select, Xingsheng and Taobao Maicai's CGB platforms all hope to break even or become profitable in 2024. Most have a gross profit margin of around 15% and would need a few more percent.
In 2024, CGB players are not expected to pursue scale expansion excessively but instead focus on refining operations, reducing losses and increasing user stickiness.
CGB will likely try the same supply chain integration we have seen with front-end warehouses to bring down costs: direct sourcing and private labels.
CGB remains a difficult business with tiny net margins and is not considered to be a very profitable stand-alone business. It only makes sense as a traffic driver for other businesses in a larger ecosystem.
Sources
Six Degrees Intelligence, a leading global expert network/quantitative research firm that operates in China. Augmented with information from the articles below:
[1] Momentum Works 2023-10-10 [2] 晚点LatePost 2023-04-25 [3] 晚点LatePost 2024-01-03 [4] 联商网 2023-12-27 [5] 晚点LatePost 2023-06-28 [6] 第三只眼看零售 2023-09-18 [7] Tech星球 2023-08-09 [8] 商业观察家 2023-12-18 [9] Pandaily 2023-05-15 [10] 镜观台 2023-11-22 [11] 中国企业家杂志 2023-12-26 [12] Latepost, 2023-02-17 [13] 潘多拉 2024-01-06 [14] LatePost, 2022-09-08 [15] 零售商业财经 2023-05-26 [16] 第三只眼看零售 2024-02-02 [17] 联商网编辑部, 2023-03-07 [18] LatePost, 2022-03-22 [20] 联商网 2023-07-25 [21] Momentum Works 2021-11-22 [22] Six Degrees Intelligence Expert Interview [23] 界 互联网视界678 2024-01-29 [24] 第三只眼看零售 2023-07-28
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