The 6th China FMCG Channel Innovation Conference, hosted by New Distribution, the leading new media in the FMCG industry, was held grandly from April 1-3 at the Chengdu Jiale Hao Sheng Hotel. The event attracted 3,000 industry professionals including distributors, community e-commerce platforms, brand owners, and internet companies from across the country, with a full house and unprecedented scale.

Regarding the heat of community group buying, from the initial formation of the track in 2018, to the emergence of the 'old three groups' in 2019, and the 'new three groups' and a series of major players entering in 2020, followed by the introduction of national laws and regulations, and later the widespread acceptance by consumers, it has finally formed a common understanding today.

The popularity of community group buying has not only spread throughout the track but also attracted significant attention from the entire investor system in the secondary market. Therefore, New Distribution specially invited a distinguished speaker, Mr. Ding Zhechuan, a gold medal analyst for the retail industry at the Research and Development Center of China Merchants Securities, to view the development of community group buying from a higher dimension, different from the perspective of insiders.

On April 2, at the afternoon forum of the China FMCG Community E-commerce Conference, Mr. Ding Zhechuan from China Merchants Securities delivered a keynote speech titled "Looking at the Development Prospects of Community Group Buying from a Capital Perspective." New Distribution has carefully organized and excerpted the essence of the speech for publication to benefit readers.

This article is mainly divided into three parts:

First, why do giants believe this business model has a promising future? Analyze the community group buying business model and in which links it improves circulation efficiency.

Second, internet giants Alibaba, JD.com, Pinduoduo, and Meituan are all entering community group buying. What are their respective competitive advantages, and how do they consider community group buying?

Third, analyze what opportunities the transformation of community group buying channels can bring to brand owners.

-01- The Business Model of Community Group Buying

1. Compared to the entire fresh food e-commerce

We compared various fresh food e-commerce models in the industry, including fresh food front warehouses like Daily Youxian and Dingdong Maicai; then the warehouse-store integration represented by Hema and RT-Mart; and then community group buying platforms.

The biggest advantage of community group buying compared to previous fresh food e-commerce is saving the last-mile terminal delivery cost.

As shown in the figure above, the full-chain fulfillment cost of fresh food front warehouses, from the origin of the produce to the consumer, is about 25-30%. If further broken down to terminal delivery cost, the delivery cost from the front warehouse to the consumer accounts for about 10%. The warehouse-store integration model has a similar problem, with terminal delivery costs reaching 10%-11%.

The community group buying business model changes the previous 2C delivery to 2B, eliminating the last-mile terminal delivery link, significantly reducing the full-chain fulfillment cost from nearly 20%-30% to within 10%.

Therefore, community group buying solves the problem that fresh food e-commerce previously faced: difficulty in profitability due to low average order value and high fulfillment costs.

Community group buying is more profitable compared to fresh food e-commerce. This is a very prominent advantage compared to other new retail models, because currently, neither the front warehouse model nor the O2O model has proven to be profitable. However, community group buying has proven this, so various e-commerce giants have greater confidence in making huge investments in this area.

2. Compared to offline supermarkets

Compared to traditional offline supermarkets or other traditional offline formats, community group buying has three main advantages:

Advantage 1: Pre-sale significantly reduces loss.

In traditional offline supermarkets, due to inaccurate sales forecasts or natural loss from consumers picking and choosing, the loss rate at the terminal store is about 5%-7%.

However, because community group buying uses a pre-sale model, all sales are based on existing real demand, allowing for complete matching, thereby significantly reducing loss.

According to Pinduoduo, the current loss rate across the entire fresh food industry chain is about 25%-30%. They hope to reduce the overall loss rate to 5% through this community group buying model, along with significant investment in infrastructure, creating a 20%-25% profit margin that can be distributed among all participants in community group buying.

Advantage 2: Faster turnover.

Faster turnover is determined by the pre-sale and next-day delivery attributes. Traditional offline supermarkets have inventory turnover days of about 45-60 days, and the corresponding payment cycle to brand owners is at least 45-60 days. In contrast, all sales in community group buying are next-day delivery, so inventory turnover is much faster. From an investment perspective, the ROE (return on equity) is much higher, and for brand owners, the cash recovery cycle is also faster.

Advantage 3: Lighter model.

Traditional offline supermarkets require significant investment in stores and upfront capital expenditure, leading to slower expansion. However, community group buying, apart from some investment in warehousing, has very light front-end investment and can leverage many social resources for rapid expansion.

3. The role of group leaders

A very representative feature of community group buying is that in the early stage, it acquires a lot of traffic through group leaders. In the early stage, group leader customer acquisition is very cost-effective for the platform. Because the private domain traffic of group leaders can help acquire low-cost users, while the current customer acquisition cost for traditional e-commerce is basically 100-200 yuan. Therefore, using group leaders' private domain traffic for low-cost traffic generation is very cost-effective for community group buying platforms.

However, this is changing recently. When communicating with leading platforms, it is not difficult to find that they no longer call it community group buying but have renamed it community e-commerce, because these giants actually want to weaken the role of group leaders.

The function of group leaders is twofold: customer acquisition and fulfillment. Now, the customer acquisition role of group leaders is gradually declining. Especially for platforms like Pinduoduo, more than half of its traffic comes from natural traffic from its main site, so its dependence on group leaders is gradually decreasing. As a result, the commission given to group leaders by giants has gradually decreased from 10 points to 7-8 points or even 5-6 points.

Therefore, the role of group leaders in the future may be more focused on terminal fulfillment, and their customer acquisition role will become increasingly lower. This is our preliminary judgment for national community group buying platforms.

4. Future scale estimation

Taking Changsha as an example, we roughly estimated the scale of community group buying. Because the community group buying format is relatively mature in Changsha, we used Xing Sheng You Xuan as a benchmark and estimated a market space of 2 trillion yuan under neutral conditions.

In summary, this model can work, the market size is very large, and expansion is very fast. This is the reason why major e-commerce giants are flocking in.

-02- E-commerce Giants Each Have Advantages

1. Pinduoduo

Pinduoduo is the company that has invested the most in community group buying among all e-commerce platforms. On one hand, community group buying is an incremental market for Pinduoduo; on the other hand, Pinduoduo itself feels the potential threat of this business to its main site, especially in the Changsha area where community group buying has impacted users of Pinduoduo's main site. Therefore, it is something Pinduoduo must do.

Currently, Pinduoduo's advantages in community group buying are very obvious. First, front-end traffic, as mentioned above, can be naturally diverted from the main site. Second, based on the accumulation of the main site, it has a strong advantage in the supply chain. Therefore, Pinduoduo is also one of the most favored players.

2. Meituan

Meituan and Pinduoduo are the top two in the entire community group buying space. Meituan has also gone all-in on community group buying, and its overall losses this year may exceed 20 billion yuan.

An internet company investing more than 20 billion yuan in a single business platform is unprecedented in the history of Chinese retail and even the entire internet industry. This shows the strong optimism of various e-commerce giants for this market.

3. Alibaba

Alibaba recently established a new business unit for Maicai (MMC). Alibaba's business model is similar to Meituan and Pinduoduo, but the focus may be different. As mentioned earlier, Pinduoduo and Meituan are directly 2C, weakening the role of group leaders.

However, from information revealed by Alibaba, it seems more inclined to do a 2B business, aiming to empower offline stores, enhance their service capabilities, and then let them better serve consumers. This may be the most important difference between Alibaba, Meituan, and Pinduoduo.

4. Xingsheng

Xingsheng is an old player and should be considered the pioneer in the field of community group buying. Currently, Xingsheng has joined forces with JD.com, which is very good for both JD.com and Xingsheng.

We believe Xingsheng will definitely be one of the mainstream players. This year, it raised $3 billion, nearly 20 billion yuan, but it may all be spent within this year, which reflects the current fierce competition in the community group buying market.

The figure above shows the monthly active users of mini-programs for the leading giants. It can be seen that the highest mini-program activity is from Chengxin Youxian. Meituan and Pinduoduo's traffic mainly comes from their main sites, so their mini-program traffic advantage is not as obvious. Overall, the leading advantage of the top three (Pinduoduo, Meituan, and Chengxin) is still very clear.

-03- Channel Transformation Brings New Opportunities for Brand Owners

Currently, especially for national platforms, community group buying mainly emphasizes high cost-performance and low prices. Some regional community group buying platforms may emphasize high quality to differentiate from these national platforms.

For national platforms, since they emphasize high cost-performance, they will also prioritize selecting high cost-performance categories and brands in product selection. There are two approaches to product selection:

First, for products with brand premium, such as milk, they will still tend to choose well-known large brands. Of course, these large brands may be reluctant to cooperate with these national platforms due to considerations such as their price system. In this case, some second- and third-tier brands may have new opportunities.

Second, for categories with low brand awareness, such as tissue paper, it can be seen that in Xingsheng's sales proportion, second- and third-tier brands account for a much higher share. Because tissue paper is not a particularly strong brand category, choosing these second- and third-tier brands can better emphasize the high cost-performance attribute of community group buying.

From Xingsheng's category structure, besides fresh food which has the highest proportion, categories like leisure snacks, dairy products, and frozen foods have relatively high proportions. Based on existing data and previous market size estimates, it is expected that the entire community group buying track will likely achieve a market size of 400 billion to 500 billion yuan this year.

From this 400 billion to 500 billion yuan, and based on the proportion of these categories, we can estimate the proportion of each category in community group buying channels relative to the entire retail channel. We found that, for example, frozen food may be a very important channel for community group buying. According to our estimates, by the end of this year or next year, the single community group buying channel for frozen food may account for about 15% of all its retail channels, making it a very important category.

In addition, condiments, leisure snacks, and dairy products may also account for about 5% of the entire community group buying market size. Therefore, special attention should be paid to these categories.

To summarize the relationship between categories and channels: First, based on the logic of whether the community group buying channel accounts for a high or low proportion, if the community group buying channel remains at a low level in the future retail channels, then we believe it may not be a particularly important channel.

For the prediction that community group buying may become an important channel, it is divided into different situations. In summary, for markets with clear competitive patterns, such as dairy products where Mengniu and Yili are absolute market leaders, the competitive landscape may not change significantly. For these leading companies, they can completely use new SKUs to avoid impacting existing channels, if they do not want to cause disruption.

For new brands, it is certainly an opportunity, but once they gain volume through community group buying, they must further upgrade their products and brands, especially their brand. Otherwise, they may only harvest a wave of dividends.

We have seen that although the rise of Taobao cultivated many 'Taobao brands,' these Taobao brands eventually disappeared because they neglected the construction of long-term brand power when they rose. Therefore, if some new brands can truly rise through community group buying channels, I think they should focus more on brand power and product power.

Second, for categories with low market concentration, such as frozen food and leisure snacks, community group buying may be a very important channel. In the future, various brand owners will actively enter this channel, and community group buying may have a significant impact on the overall brand landscape.

Here, we also distinguish between first-tier brands and second- and third-tier brands. For high-end brands, because community group buying prices are relatively low, it may harm the interests of distributors. In this case, they can enter the community group buying market through product category differentiation, as seen with Coca-Cola, Jinmailang, and Xiangpiaopiao, which are all doing this now.

For second- and third-tier brands, overall, we believe community group buying is still a very good opportunity. In traditional distribution channels, the channel cost is very high because consumer awareness is low, and terminal channels do not have strong motivation to promote. However, through the new model of community group buying, it can significantly reduce the cost for these second- and third-tier brands to reach consumers in lower-tier cities.

Of course, even if you can gain a wave of volume through community group buying, you must still do a good job of upgrading your brand and tone afterwards; otherwise, it may be just a flash in the pan.

Tips will be paid 400-2000 yuan once adopted.