Source: Jingyan Brand Lab (ID: JingyanLab) Author: Hong Zhixi
The development of community group buying has begun to slow down in recent years.
The transformation and lagging behind of companies such as Tongcheng Life, Shixianghui, Shi Huituan, and Orange Heart Preferred are pushing community group buying into the second half of the reshuffle.
As an article in LatePost put it:
These companies have invested tens of thousands of employees and tens of billions in losses; they have no way back. In the past, doing a hundred or a thousand things well corresponded to profits in the billions or tens of billions. Today, they must do a thousand or ten thousand things, trying to reduce costs by a dime or even a cent, to move closer to profitability—but that is the reality.
After community group buying faced the "Nine No's" regulation, slowing down to dig for profits has become the goal of all companies, but in the process, many industry insiders shake their heads and say they see no hope.
The fundamental reason behind this is that the original internet business has reverted to a retail business, and the original community group buying has encountered logic conflicts in its business model.
****Transaction Chain Relies Heavily on People But People Are the Biggest Uncertainty
Wei Zhe, former CEO of Alibaba, once said, "Don't be fooled by size and speed; the essence of business is still efficiency." Throughout business history, all major failures, apart from systemic risks, mostly stem from inefficient growth.
The first major efficiency leap in human business history was the first production line established at Ford's Highland Park plant in 1913.
Through assembly line operations, Ford standardized every production step, increasing the assembly efficiency of a Model T by 8 times. Before that, assembling one car took 728 man-hours, and annual production was only 12 cars.
In later business development, "standardization" became a hallmark of efficiency. When innovating business models or reengineering operating models, the only thing entrepreneurs need to remember in these top-level designs is: has every step achieved maximum standardization?
Community group buying clearly has not.
The transaction chain in this industry is simple: first, the platform recruits community leaders—leaders build groups and open stores—attract followers and guide users to place orders—aggregate order demands and purchase from the platform—the platform receives orders, purchases from upstream, and delivers to leaders—finally, leaders distribute goods to each user.
Throughout this process, the leader becomes the hub connecting demand and supply. Unfortunately, the leader is the biggest uncertainty.
For community group buying platforms, in terms of leader recruitment standards, it is best if they have certain operational capabilities and good influence in the community network.
Theoretically, the village head in our village would be very suitable for this.
But things do not go as planned. Looking at the current leaders on community group buying platforms, retired aunties and stay-at-home moms account for a significant proportion. Those of slightly better quality might be the owners of convenience stores downstairs or staff at Cainiao Post stations.
In Squirrel Pins' previous leader recruitment policy, one item was free tuition for learning community operations.
According to media reports, in these operational trainings, Che Haiyan, head of Squirrel Pins' national leader management center, personally shared frontline practical experience and discussed the development path of community new retail, traveling through dozens of cities.
In addition, most community group buying platforms also provide online training for leaders on operational skills, with a training period of about 7 days. After 7 days, the leader officially starts business, and the platform also helps the leader acquire customers through subsidies.
In short, for a platform to cultivate an excellent leader, it inevitably consumes a lot of time and energy.
The reality is that the platform has only one leader in this community, but this leader has more than one WeChat group in that community. Through platform subsidies and traffic, it is common for leaders to use the platform's empowerment to build other groups or mix in personal goods.
Moreover, the leader you have painstakingly cultivated may go to a competitor the next second.
Simply open a community group buying WeChat mini-program, and as long as the user switches communities, they can see the names, store addresses, and contact information of all leaders in the current city.
This also facilitates poaching by newly emerging platforms. Currently, monthly leader commissions are roughly 3,000-10,000 yuan, and the wide income gap gives competitors ample room to poach by raising prices.
How to prevent becoming a free leader training school? This is a challenge for community group buying.
****Market Entry Relies on High-Frequency, Rigid Demand But the More High-Frequency and Rigid, the Less Profitable
After the leader issue comes the product selection issue.
Under current internet business logic, the approach is to first create a hit product, attract social attention, and thereby enhance the platform's brand influence.
But if community group buying follows this approach, it is much harder. The industry currently offers no more than 100 SKUs, and most are high-frequency, rigid-demand products.
These products have low price elasticity of demand and low gross margins. If you insist on creating a hit product among these, it is difficult even to break even.
Take the fresh produce category, which community group buying currently focuses on, as an example. A reporter from Xi'an Daily once opened a community group buying app and found that the fruits and vegetables were relatively cheap, some even cheaper than at the wet market.
Why can the wet market offer fresh produce at the lowest prices? Those small vendors go to the outskirts at 2-3 a.m. to transport goods, purchasing in small to medium batches, and can control the loss rate to single digits.
The fundamental difficulty in the fresh produce industry is how to standardize non-standard products.
Under the trend of distributed resource management, vegetables and fruits still struggle to become relatively uniform commodities. They are difficult to control from production; even apples from the same tree differ. Storage, transportation, and quality control are also more difficult than for ordinary products, requiring significant customization costs at every step.
Running through this entire process, the industry average loss rate is around 30%.
In 2016, a statistic said that among more than 4,000 entrants in fresh produce e-commerce, 4% broke even, 88% lost money, 7% suffered huge losses, and only 1% achieved profitability.
By 2019, fresh produce brands like Dai Luobo, Xiansheng You, Mini Fresh, and Benlai Convenience Network all reported issues with capital chains, layoffs, or closures. This is inherently an unprofitable business.
When the fresh produce category on community group buying platforms is cheaper than at the wet market, it generally indicates that the platform is subsidizing at a loss. Without Pinduoduo's luck but with the disease of burning money, the ultimate competitiveness of community group buying is capital.
This has long been a To VC business.
A Shanghai entrepreneur said in May 2019 that a local app mainly selling vegetables, in order to secure the next round of financing, did not care about losses at all, only about metrics like platform GMV.
The platform also established a group buying department in Shanghai. After purchasing fresh produce upstream, they sold it to competing platforms at prices lower than cost.
The entrepreneur said, "This is not a retail business at all; it's an internet business."
Regarding this aspect, I actually had a discussion earlier when analyzing Qian Dama. After seizing inherent advantages in category and channel, what Qian Dama needs to solve is the biggest challenge in the fresh produce industry—loss.
Why is the loss rate in traditional fresh produce retail so high? We need to analyze the logistics chain of this industry.
Zhenghe Island's "Decision Reference" once published an internal speech by Xu Zheng, founder of Miss Fresh. The article stated that the logistics chain of fresh produce e-commerce generally uses three cold chains:
First, cold source cold chain, i.e., the company builds large cold storage in hub cities.
Second, cold medium cold chain, i.e., the process of using ice packs, ice boards, foam boxes, and other cold preservation measures for delivery.
Third, time cold chain, i.e., the time limit from order placement to delivery to the user to ensure the product does not spoil.
Without these three cold chains, the loss rate is bound to increase. However, Peng Zhijian of Yuansheng Capital once said that the logistics cost of running all three cold chains is about 30 yuan, accounting for 30%-40% of the company's total sales cost.
The front-warehouse model launched by Miss Fresh eliminates the cold medium cold chain by building warehouses directly in communities, ensuring delivery to users within 1 hour. This method allows Miss Fresh to reduce the average fulfillment cost to just over 10 yuan.
As a result, with an average order value of around 100 yuan, it can easily achieve profitability.
In response, after experimenting with more than 90 front warehouses, Hou Yi, CEO of Hema Fresh, publicly stated at the China Entrepreneur annual meeting: "Front warehouse is a false proposition."
Through experiments, Hou Yi concluded that the front warehouse model cannot increase average order value, cannot reduce loss rates, and has uncertain gross margins.
Retail is Detail. Fresh produce loss needs to be controlled from the details of the entire supply chain. Liu Baohong, executive director of SIS International, mentioned in his book "Supply Chain Management" a 12-character mantra: prevent complexity at the front end, reduce weight at the back end, and manage chaos in the middle.
To summarize Qian Dama's loss problem, we can start from this.
First, prevent complexity at the front end.
There are many Chinese restaurants in Silicon Valley with large portions, cheap prices, and bad taste. The result is that the owner changes after a while. The reason is too many menu items: over 120 stir-fry options, any 3 for $18.
Due to excessive SKU complexity, merchants need to purchase small batches of different ingredients to prepare for customer choices. Consequently, the procurement scale for each category is small, leading to low bargaining power; too many SKUs increase inventory pressure and loss rates.
These small restaurants are not as profitable as a stall that only sells steamed buns.
The same applies to the fresh produce industry: too many SKUs drive losses and costs. Currently, Qian Dama has only about 500 SKUs, and stores typically display 200-300 products.
Second, reduce weight at the back end.
There are two ways for enterprises to obtain resources: one is to outsource to suppliers, the other is to do it themselves.
Liu Baohong said that when a company lacks the ability to select and manage suppliers, it has to adopt a vertical integration model, leading to asset-heavy operations and low return on investment.
There are examples in the fresh produce industry. At the end of 2015, Jinxiu Fresh, which built its own vegetable bases, launched, but after 2016, there was no news.
Looking at Tianyancha, we can see a legal lawsuit document from May 2018, where its legal representative, Li Wenliang, was listed as a "dishonest judgment debtor" for failing to repay 120,000 yuan in goods and interest.
Qian Dama, on the other hand, directly cooperates with suppliers. According to the self-media "Third Eye Retail Observation," Qian Dama's stores submit orders for the next day to headquarters before 15:00 daily. After orders are aggregated, they are placed with suppliers and delivered to Qian Dama's own distribution center in the early morning.
After that, Qian Dama sorts, packs, and delivers internally, arriving at each store before 5:30.
In this process, Qian Dama can directly control supplier losses. If the loss rate exceeds 4% during picking, the supplier faces penalties.
After filtering out the 4% loss, if there is any further loss on products placed on shelves before 5:30, stores can return them directly to Qian Dama headquarters, ensuring zero loss on store purchases.
Third, manage chaos in the middle.
After reducing losses at both the front and back ends, the ultimate test is the store's own planning and forecasting. When placing orders at 15:00 daily, how to ensure that the order quantity is not too high (causing inventory) or too low (causing stockouts)?
First, understand consumption characteristics. Qian Dama can understand the consumption characteristics of the community within 2 months and estimate the daily consumption volume of each store.
A thousand stores have a thousand faces; each store has different consumption characteristics. Qian Dama requires each store manager to make statistical forecasts and report to headquarters.
Second, ensure no overnight meat is sold, and promote inventory the same day. Even if Qian Dama has remaining inventory, it starts a big promotion at 19:00 daily. At 19:00, 10% off; at 19:30, 20% off; and after operating until 23:30, all products in the store are given away for free.
Data shows that Qian Dama's current loss rate is 5%-10%. The best in loss reduction in the fresh produce industry is Yonghui Superstores with a loss rate of 4%, Hema Fresh at 10%, and traditional supermarkets at 20%-30%.
****Scale Growth Relies on Community Operations But Retail Most Tests the Backend Supply Chain
Forget community group buying, forget home delivery or store visits. The essence wrapped in these fancy internet plays is still a retail business.
What forms of retail has the internet changed with community group buying?
First, the pre-sale model of selling before purchasing. Based on leader feedback on orders, the community group buying platform purchases from upstream and then delivers directly to the leader.
This transaction process can reduce product loss to a certain extent and even achieve zero inventory.
Second, leveraging the fission of social networks to accelerate market growth. Neighbors group buying in WeChat relationship networks is itself an imitation of Pinduoduo's group-buying model, which can reduce customer acquisition costs and quickly open the market.
However, these clever social operations often make platforms lose sight of the essence—this is still a retail business. When all the novel and curious tricks are played out, the biggest test in the market is the supply chain.
As early as September 2019, JD.com's community group buying project Youjia Puzi experienced issues with login, registration, and forwarding, suspected of malfunction. Later, AI Finance and Economics reported that JD.com began adjusting its business direction, focusing more on the supply chain, including warehousing and products.
Blindly pursuing scale becomes meaningless. Community group buying is more importantly about finding a path to reach consumers directly from the supply chain side.
From this perspective, Yonghui Superstores' community group buying business, relying on the Yonghui Life app, seems more confident.
Its B2B platform Caishixian had revenue exceeding 1 billion yuan in 2017, having established fresh produce central factories in Chongqing, Beijing, Fujian, Sichuan, Anhui, and other places, expanding to 300 enterprise bulk businesses in catering, pharmaceuticals, prisons, education, banking, etc.
Through a professional buyer system, Yonghui Superstores excels in the fresh produce supply chain; these people are the true retailers. Previously, Lin Zhongbo of Yonghui Agriculture proposed: when exactly should vegetables be harvested to maintain freshness for a longer time?
After years of trial and error by Yonghui buyers, they found:
- In April and May, harvest vegetables in the early morning;
- In June and July, harvest before dawn;
- In August and September, harvest the night before;
- Different vegetables and different regions require different harvest times.
These are the real retail business, a business of bending down to pick up coins.
Unfortunately, traditional retailers are not sensitive to internet competition. The Yonghui Life app can excel in the supply chain, but in internet marketing, it is not as good as Meituan Select or Taocaicai.
Of course, including Meituan Select and Taocaicai, they have done a lot of work on backend supply chain assurance, with better product selection, packaging, and quality than competitors.
In terms of overall operational rhythm, Xingsheng Youxuan is considered the most stable company. By validating the market sinking model in Hunan, it has run through an optimal path through years of refinement.
But still, as the saying goes: Internet people do not understand retail, and retail people do not love the internet—the new rise after the reshuffle of community group buying returns to "people."
People are the biggest non-standard product; people are also your best business model.
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