500 Days of Community Group Buying

Source: Ran Dimension (ID: chaintruth) Ran Finance After more than 500 days of rapid growth, community group buying has entered a new phase. "I won't work for community group buying companies again, just because I'm afraid of being laid off," said a laid-off employee of Shihui Tuan in Xiangyang, Hubei. In July 2021, more than a dozen BD (business development) staff in Xiangyang united to fight for their rights. The above employee was laid off less than two months after joining, but the company refused to compensate him. After arbitration and court mediation, he received double compensation. Notably, these BDs signed dispatch contracts with third-party labor companies, such as 58 Mofang and a labor company in Liaoning. Contract dispatch workers are becoming the main way for community group buying companies to avoid disputes. According to Ran Finance, Xingsheng Youxuan is cautious about expanding its formal employee count. A former employee said, "Many of Xingsheng Youxuan's BDs are labor dispatch." According to him, most of Xingsheng Youxuan's peripheral employees are dispatched through third-party labor contracts, keeping the company lean. During the 2021 Spring Festival, Shihui Tuan issued a call to "not close during the Spring Festival" and held a mobilization meeting. Chen Ying, chairman of Shihui Tuan, formally proposed the concept of "365 days, anytime, anywhere" operation, saying, "This is a long march, and its result will be a moment of change for the era." According to Tech Planet, Shihui Tuan set an annual GMV target of 80 billion yuan for 2021. Unfortunately, not only has the target not been achieved, but Shihui Tuan is already in jeopardy. "The main issue is losses and high logistics costs. After Shihui Tuan's contraction, it became a free-shipping e-commerce, and logistics costs are too high," said the above employee. Lin Qiang, a senior executive at another fallen startup, Shihuihui, directly said, "Retail actually earns money from distribution. If distribution is not solved well, retail cannot be done well. Supply chain levels are similar among everyone." In Lin Qiang's view, none of the current players have solved the logistics problem. They are using e-commerce logistics to solve community group buying, leading to persistently high costs. More than a year ago, Lin Qiang told Ran Finance during a business trip that they were about to make a big push, competing with giants like Meituan and Pinduoduo in Chengdu, Chongqing, and other places. "Money is not a problem; this will be the last battle of the e-commerce war." But reality was harsher than imagined, and the ammunition crisis soon arrived. After the giants entered, competition intensified, causing capital to wait and see, unwilling to continue supporting Shihuihui's development. Although Shihuihui told investors that they were profitable in many cities, it didn't help. The reshuffle continues. If we count from June 2020 when Didi, Meituan, and Pinduoduo each established their community group buying businesses, it has been about 500 days. During this period, the old company Tongcheng Life went bankrupt, and Shihuihui and Shihui Tuan transformed. In September 2021, Orange Heart Youxuan contracted. Even Dingdong Maicai and Miss Fresh, which have listed on the US stock market, cannot escape the dilemma of "huge losses." On November 15, Dingdong Maicai released its third-quarter financial report, showing revenue of 6.19 billion yuan (RMB, unless otherwise noted), a year-on-year increase of 111%; but losses continued, with a net loss of 2.011 billion yuan in the third quarter, compared to a net loss of 829 million yuan in the same period last year. Liang Changlin, founder and CEO of Dingdong Maicai, said at the earnings call, "In the third quarter, we proactively adjusted our strategic focus to 'efficiency first, with appropriate consideration for scale.'" Previously, Dingdong Maicai's store expansion was aggressive. In the second quarter, he said that expansion in 16 city clusters could bring significant scale growth. Community group buying seems to be heading toward the same outcome as bike-sharing and the group-buying wars: startups are acquired by big capital and become part of the system. Or some companies break out and gain recognition from the capital market, listing independently. But now, these listed companies are also struggling, as they have not achieved profitability. Starting from 2019, Dingdong Maicai's net losses in 2019 and 2020 were 1.87 billion yuan and 3.18 billion yuan, respectively; in the first two quarters of 2021, losses were 1.38 billion yuan and 1.73 billion yuan. Miss Fresh lost 2.91 billion yuan and 1.65 billion yuan in 2019 and 2020, and in the first three quarters of 2021, losses were 610 million yuan, 1.43 billion yuan, and 970 million yuan. Image source / @E-commerce News The market environment has changed. Stricter regulation means giants are restraining themselves, which gives startups opportunities, but the premise is to persist and cultivate patiently. The future direction of community group buying is unknown; the only certainty is that the road will not be easy. ****Retreat and Replacement Wang Cheng, the last person left in Orange Heart Youxuan's Shanxi operations before closure, faced the fate of stopping business and leaving. The headquarters told him that operations in Shanxi and western Inner Mongolia would be completely shut down by the end of November, and mini-program services had already been closed at the end of October. Wang Cheng was responsible for procurement. In some categories, he could even get lower purchase prices than competitors, but when placed on the platform, the prices were higher than competitors' selling prices. "Previously, we could set prices independently, but later pricing power shifted to the operations department, and we didn't participate," Wang Cheng said. This made them lose their price advantage. Previously, Wang Cheng was surrounded by more than 200 people from big companies like Pinduoduo, Meituan, and Alibaba, who had gathered from Shanghai, Shandong, Hunan, and other places. They had fought through the night but did not achieve victory. Orange Heart Youxuan's contraction may be larger than expected. Previously, 36Kr reported that Orange Heart Youxuan reduced from 9 major regions and 31 provinces to 3 major regions and 9 provinces. But according to information obtained by Ran Finance, Orange Heart Youxuan may end up with only four or five provinces, seeking a virtuous cycle or even profitability. In mid-2021, Orange Heart Youxuan shifted to seeking profitability, with each war zone responsible for its own profits and losses, and canceled wartime subsidies for employees. Wang Cheng told Ran Finance that external platform prices and user numbers did not drop significantly because everyone canceled subsidies, but the collapse came quickly. First, product prices were raised. The Shanxi and western Inner Mongolia zones raised prices to improve gross margins, leading to a rapid loss of customers and starting a vicious cycle. "A business that wasn't profitable was forced to become profitable, which simply doesn't work," Wang Cheng said. Second, employees' income decreased, they refused to work overtime, and their enthusiasm waned. Employees began to be pessimistic about the company's business. He said that to do well in order volume and GMV, not only the procurement department but also operations and BD need to cooperate well, but all departments were no longer willing to fight. Wang Cheng attributed Orange Heart Youxuan's failure to frequent internal organizational adjustments. After joining in December 2020, he changed five or six leaders. For example, colleagues were suddenly transferred from grain and oil to fresh produce, and he himself was repeatedly adjusted between standard products and fresh produce. "There was a leader who came from a business background, from operations, and also managed procurement, so it was definitely a bit chaotic," he said. Filling the market gap left by Orange Heart Youxuan are players like Hema Market and Jingxi Pinpin. "Family and friends, good evening! Due to Orange Heart Youxuan's exit from the Shaodong market in Hunan, we apologize for the inconvenience! In addition, Alibaba's Hema Market is about to enter Shaodong, so please continue to follow us." On September 14, a veteran who had been a group leader for Orange Heart Youxuan for over six months sent a message in the group, but until mid-November, he had not yet posted a Hema Market mini-program link in the group. According to Ran Finance's observation, Hema Market has launched a mini-program and supports WeChat Pay. In the Taobao app, Taocaicai not only supports Alipay but also allows "saving images for WeChat friends to pay." He told Ran Finance that the commission points of Hema Market and Jingxi Pinpin are not advantageous; most are now 4-5 points, but they offer various cash subsidies, such as rewards for new users. From April to June 2021, Alibaba's community e-commerce GMV grew about 200% quarter-on-quarter, becoming one of the fastest-growing businesses among all Alibaba business lines. But the time window has passed, and there is little opportunity left for Alibaba. The market gap left by startups' retreat was quickly filled by Meituan Youxuan and Duoduo Maicai. According to PaiDong Research Institute data, Meituan Youxuan and Duoduo Maicai have basically achieved full coverage of 1-5 tier cities nationwide, with coverage in 5-tier cities close to 80%, firmly in the first tier. A large number of suppliers have changed, mainly because they are not making money. An employee of a daily chemical laundry detergent company said that the products they supply to the platform do not meet the national standard of 15% active content, only 4-5. The cost of 10 jin of laundry detergent is 7 yuan, and the supply price to the platform is 7.99 yuan, leaving about 1 yuan profit, but transportation costs, manual sorting, and express delivery fees reduce profit by 0.5 yuan, leaving only 0.5 yuan profit. "In the Tangshan warehouse, laundry detergent shipments are about 1,800 to 2,000 orders, meaning your gross profit is about 1,000 yuan, but after-sales costs are also relatively high," he said. Retreat and replacement continue. Ran Finance learned that Duoduo Maicai has recently adopted a "platform e-commerce" approach to manage suppliers, implementing Pinduoduo's 100% return policy, which puts pressure on suppliers. Mainly, Pinduoduo merchants are assessed weekly, and the after-sales rate must not exceed 2% within a week. In Jinan, if it exceeds 2%, a fine of 2,000 yuan is imposed; over 3% is 5,000 yuan; over 5% is 10,000 yuan. Meituan Youxuan has appeared several times in Meituan's financial reports, always with the same phrase: "It is our most important investment area this quarter." According to the third-quarter report, the operating loss for new businesses including Meituan Youxuan was 10.9 billion yuan, compared to 8 billion yuan and 9.2 billion yuan in the first and second quarters. Meituan continues to invest heavily in the Youxuan business. According to Wang Xing, community group buying is a once-in-a-decade opportunity that could bring 300-400 million new customers to Meituan. According to Meituan's financial report, in the first quarter of 2021, Meituan's transaction users reached 570 million, a net increase of 58.7 million, nearly 50% of which came from Meituan Youxuan. In the third quarter, Meituan's transaction users reached 667 million, an increase of nearly 40 million from 630 million in the second quarter. Notably, Meituan is testing a "1 yuan delivery fee, please transfer to the group leader" model in some regions, showing the cost pressure of expansion in prefecture-level markets. Additionally, a former Meituan Maicai employee said that the fresh produce business is turbulent, with frequent personnel adjustments, and strategies change every half month. Previously, Ran Finance had contacted different former Meituan Maicai employees who said that Meituan's senior management had discussed integrating the fresh produce and group buying businesses. At the end of 2020, Meituan's community group buying business expanded in Beijing, which may affect the fresh produce business in the future. As a star startup, Xingsheng Youxuan has contracted in scale. For example, in Shandong, one of the largest markets for community group buying, Xingsheng Youxuan has reduced its investment and layout, and many suppliers in Shandong have withdrawn from Xingsheng Youxuan. According to Guosen Securities estimates, the first tier of the community group buying industry currently includes Duoduo Maicai and Meituan Youxuan, each with daily orders close to 30 million; the second tier includes Xingsheng Youxuan and Shihui Tuan, with Xingsheng's orders at about 12 million; other competitors include Hema Market, Orange Heart Youxuan, and Jingxi Pinpin. JD.com's community group buying platform Jingxi Pinpin has even withdrawn from Fujian, Gansu, Guizhou, Jilin, Ningxia, and Qinghai provinces. After the management change in the MMC business group, Hema Market's national daily orders have risen from about 2 million in April to about 6 million. Old players already think it's a huge pit, but new suppliers continue to enter. A supplier who has stopped doing community group buying said that peppers costing 0.3 yuan per jin at the source can sell for 1.99 yuan in some supermarkets, but it's unlikely on community group buying platforms. "It depends on how much you want to earn and how much the platform allows you to earn." In other words, pricing power is in the hands of the platform. ****User Loyalty Has Been Tested However, users remain loyal to community group buying. "Duoduo Maicai's cabbage is 0.92 yuan per jin, carrots 0.98 yuan per jin, green peppers 3.68 yuan per jin; while the supermarket prices are 1.79 yuan, 1.89 yuan, and 3.99 yuan respectively. Why should I go to the supermarket to buy vegetables?" Li Ying calculated that if she buys all vegetables, eggs, and milk from community group buying, she can save several hundred yuan a month. Li Ying's pickup point is at a nearby supermarket. Recommended by the supermarket lady, she started using community group buying. According to her understanding, about 20 housewives in her building use Duoduo Maicai. However, they also found that although community group buying platforms maintain a price advantage over offline, quality has become uneven. A fruit and vegetable supplier in Shandong told Ran Finance that vegetable prices have risen sharply, and it's hard to get goods at the supply price on community group buying. "Platforms add more markup to daily necessities, up to 1-2 yuan, while fruit and vegetables have less, only about 0.5-1 yuan," he said. This effectively means the platform uses profits from daily chemicals to subsidize fruit and vegetable prices, using high to compensate for low. But this supplier also said he can only control costs by selecting fruit and vegetable products. He has several principles for community group buying: first, don't do a single product; second, don't supply premium goods; third, learn to control transportation costs, labor costs, and losses. "Even if you use premium goods, the platform's prices will eliminate you. The low-price mechanism determines that there will be no premium goods here," he said. This makes the vegetable category in community group buying sometimes uncontrollable in quality due to lack of cold-chain transportation and storage, resulting in very poor user experience. Therefore, Meituan Youxuan has started building cold-chain logistics and refrigeration, while Pinduoduo uses fines to improve fulfillment. For example, the platform requires 85% of sales to be fulfilled by 6 o'clock; if not, a fine of 500 yuan is imposed; if 85% of sales are not achieved by 9 o'clock, the fine is 800 yuan; if all goods are not replenished by the final pickup time at midnight, a fine of 1,000 yuan is imposed. But low prices remain the core attraction. A report by Guosen Securities shows that the history of US retail can be summarized as low prices being the core competitiveness of retailers. Consumers can compromise on "more" and "fast" for "savings," and full-category retailers have strong anti-risk capabilities. For example, Costco in the US, relying on membership systems and super SKU strategy, can sell products in large quantities at a low gross margin of 13%, lowering expense ratios, achieving net margins close to Walmart and higher turnover, ultimately achieving higher ROE than Walmart. User consumption habits are still what community group buying players most want to cultivate. Compared to the initial wool-shearing behavior, platforms are undoubtedly improving fulfillment and quality, hoping to retain users. Vegetables, meat, eggs, milk, and fruits remain the highest-frequency consumables on community group buying platforms, and the platform's deposits are also the highest. For example, Pinduoduo's regular category deposit is 10,000 yuan, while fruit and vegetable categories are 20,000 yuan; Meituan's regular category is 5,000 yuan, and fruit and vegetables are 8,000 yuan. Although these categories generate low transaction amounts, they are essential and high-frequency, which is the biggest driving force for the development of community group buying. A Meituan insider said that the platform subsidizes fruit and vegetable categories the most, generally reaching 50-60%. This still has a strong appeal to users, as for users, low prices represent advantages. ****Is This the End? The transformation and clearing of startups have accelerated industry concentration and efficiency, with order volumes on major platforms remaining high. Pinduoduo claims to have launched Duoduo Maicai in 300 cities; Meituan is striving to go down-market, reaching tens of thousands of townships beyond first- and second-tier cities. Alibaba is gearing up, seemingly ready to reposition. Guosen Securities even predicts that if Meituan Youxuan can maintain its current order volume and price level throughout 2021 (30 million pieces/day, 7 yuan per piece), its annual GMV could reach 76.6 billion yuan, close to the 90 billion yuan revenue of leading retailers Gaoxin Retail and Yonghui Superstores. However, Meituan Youxuan's SKU count is only about 1,000, far less than supermarkets' 15,000, suggesting that average sales per SKU are much higher than Yonghui. It seems people see a bright future. But the market is not that optimistic. The internet has successfully transformed many industries, such as standard products like clothing and cosmetics, but in the fresh e-commerce field, after more than 10 years of evolution, it has always been about bankruptcies, losses, and exits. In 2020 and 2021, the community group buying model represented by Xingsheng Youxuan and the front-warehouse model led by Dingdong Maicai had their highlight moments. The former attracted investment from giants and was sought after by investment institutions, raising over $4 billion in two years, while Dingdong Maicai listed in the US. If listing is the criterion for success, then the front-warehouse model has basically been proven, but community group buying is still suffering from losses, contraction, and bankruptcy. If stricter profitability standards are applied, except for Xingsheng Youxuan achieving profitability in some regions, most regions, including Duoduo Maicai and Meituan Youxuan, have not yet overcome the profitability challenge. Losses and profitability are becoming a curse for community group buying platforms. A survey by CICC showed that in June and July this year, Duoduo Maicai and Meituan Youxuan stopped subsidies in some regions, resulting in a nearly 20% drop in order volume, while other regional small platforms saw declines as high as 60%. "Although some companies have exited the community group buying industry, big companies have not completely given up and exited. There are still many small local community group buying companies. Whether big companies do it or not, this industry will not disappear from the stage; they are still evolving and developing," said an industry insider. In November 2018, Xu Zheng, founder of Miss Fresh, said that when they split their business and received $200 million in financing, they planned to fight a battle in the fresh produce industry. "But luckily, after raising funds, almost no one was running on this track anymore. In fact, the war on this track was over." But the rise of Dingdong Maicai later shattered this illusion, relying on operational optimization and supply chain control to gain competitive advantage. This shows that the internet's transformation of fresh produce is only in its early stages. Undoubtedly, this is a trillion-yuan market, but including front-warehouse and community group buying models, they may only create 10% of the market share, with most still created by offline supermarkets and wet markets. As Lin Feng, the senior executive at Shihuihui mentioned at the beginning, the current approach of using e-commerce logistics to solve community group buying is flawed. He believes that unless a new logistics method is found, losses are inevitable, and every link in the logistics chain is bleeding. According to a survey of 200 grid warehouse owners for Meituan, Orange Heart Youxuan, and Duoduo in January 2021 by "Grid Warehouse Owner Circle," the loss rate of grid warehouses reached 63%, with another 13% closing or transferring, and 37% breaking even or profitable. At this stage, grid warehouse franchisees are sharing part of the losses of the entire business model. According to Guosen Securities estimates, the revenue model for grid warehouses varies by platform. For example, Meituan is 0.35 yuan per piece + 3 yuan per group point, multiplied by a factor of 1-1.2 depending on the region, with a minimum of 3,000-5,000 pieces; Duoduo Maicai is 0.3 yuan per piece + 3 yuan per group point, with a minimum of 3,000-7,000 pieces. These grid warehouses bear the responsibility of distributing from central warehouses and delivering to pickup points. A single grid warehouse covers about 300-500 group leaders. A grid warehouse franchisee in Shijiazhuang said that hiring truck drivers and building cold storage are huge investments, but the platform provides very little subsidy. As long as order volume decreases, losses are inevitable. There is also a model called "cloud warehouse," where merchants store goods directly in local warehouses based on order volume, and after negotiating with platform procurement, goods can be sent to grid warehouses in single pieces, with a cost of 100 yuan per ton for distribution. This allows suppliers to expand categories. The above fruit and vegetable supplier said, "When doing community group buying, never consider doing only one product; you might not be able to fill a truck." "Profit margins are too thin, and the platform is strict, so there is no profit at all," said a supplier who has exited. He judged that if community group buying could achieve full local procurement instead of centralized procurement, it might succeed. For example, the Duoduo Maicai model, because fresh produce standardization is difficult, should first pursue localization. Of course, some community group buying companies have broken out. In July 2021, Miss Fresh and Dingdong Maicai completed their listings, and the hard work of transforming fresh produce supply finally gained market recognition. However, listing does not mean that community group buying has truly proven this business model, because even though these companies are listed, their market performance is not satisfactory. This can be seen from the market performance of Dingdong Maicai and Miss Fresh. As of November 26, Dingdong Maicai's stock price was $23.21, with a market value of $5.479 billion, still below the issue price of $28 at the end of June. Miss Fresh's stock price was $5.04, with a market value of $1.187 billion. Everyone is waiting for this industry, hyped to high levels by giants and investors, to hit bottom and then rebound, although they don't know when the rebound will start. *The title image and in-text images are from Visual China. Lin Qiang, Wang Cheng, and Li Ying in the text are pseudonyms.*Disclaimer: Under no circumstances does the information or opinions expressed in this article constitute investment advice to anyone. Are you "watching" me?