The Battlefield Has Shifted: Early community group buying relied on group leaders' private domain traffic and physical stores to achieve low-cost customer acquisition in an era of increasingly precious traffic. However, under the dominance of a 'traffic-centric' mindset, platforms over-relied on group leaders and missed the golden opportunity to build supply chains. The black swan event has brought a new spring to the fresh produce industry—can players seize the opportunity?

If you had asked a VC a year ago to predict the hottest investment track in China in 2020, community group buying would not have been their answer.

But now, the seemingly impossible has happened.

In the past six months, capital has begun to intensively 'attack' this long-silent track. Tianyancha data shows that Tongcheng Life completed a $200 million financing in June, while an insider at Xingyou Preferred told Zinc Finance that in June, Xingyou Preferred secured two rounds of financing totaling $600 million. Shihuituan received $81.4 million in financing. Going back six months, 'Pork-selling' Qian Dama also secured 1 billion yuan in financing.

In just six months, the community track welcomed at least 6.4 billion yuan in capital.

Two years ago, the same track saw over 2 billion yuan pour in within two months. But the result was that the capital-fueled startup star Squirrel Pinduoduo laid off 2,000 people, a cut of 80%; Dailuobo, after burning 1.8 billion yuan, officially filed for bankruptcy reorganization in March this year.

Will the bubble burst again? This is a question on many people's minds now.

From the current perspective, the answer is no.

As early as 2016, when e-commerce was exploring lower customer acquisition costs, community group buying leveraged group leaders' private domain traffic to reduce acquisition costs to 20 yuan, just one-tenth of the front-warehouse model. But with the frenzy of capital influx, acquisition costs began to rise, and the 'traffic is king' mindset gradually severed the relationship between platforms and group leaders. Companies lacking supply chain capabilities began to be eliminated. Even if the pandemic saved some companies, the battlefield has not dispersed; it has merely shifted from traffic to supply chain.

After four years of struggle, almost all companies understand one truth:

Community group buying starts with group leaders but will end with supply chain.

-01-

It Starts with Group Leaders Everything begins with traffic.

In 2016, at an internal Alibaba meeting, 'content e-commerce' was mentioned for the first time. The background is that in 2014, Alibaba's marketing spend was 7.3 billion yuan; a year later, it became 10 billion yuan, an increase of 25%, with the additional costs mainly used for increasingly expensive traffic.

In other words, traffic is becoming a rare commodity.

Also in 2016, in various WeChat groups and private messages, a large number of 'cut a knife' links suddenly appeared. Somewhat annoying, but it also symbolized the official debut of Pinduoduo. Trustdata data shows that in 2016, Pinduoduo's monthly active users (MAU) reached 2.87 million, a year-on-year increase of 9398.0%, nearly tenfold.

Community group buying model group leader side (Image source: Internet)

Finding new traffic depressions—Pinduoduo and community group buying essentially solve the same problem.

In September 2016, after fierce battles among Chinese food delivery platforms, the red, yellow, and blue三家 divided the market; under the front-warehouse model, Miss Fresh gradually showed the most likely trend for fresh e-commerce. Meanwhile, in Changsha, Hunan, thousands of miles away from Hangzhou, Shanghai, and Beijing, an unknown team, starting from selling fruits in QQ groups, established a company called 'Ni Wo Nin'.

Ni Wo Nin's model was relatively simple: recruit group leaders by residential community, create WeChat groups for community owners controlled by the company; group leaders post and promote group-buying products in the groups, and consumers order via mini-programs. Ni Wo Nin then delivers goods to the group leaders. Consumers pick up their orders at the group leader's store the next day.

In Ni Wo Nin's model, the platform is responsible for supply chain and delivery; group leaders aggregate traffic and receive commissions after sales. This model truly defined community group buying for the first time.

Looking back four years, no one denies that group leaders played the most important role. They connected with the platform on one hand and maintained customer relationships on the other, completing the last-mile delivery. More importantly, on the traffic side, group leaders achieved the low-cost customer acquisition that Alibaba and JD.com dreamed of.

Mingming (pseudonym), a former employee at Dailuobo, calculated for Zinc Finance that Dailuobo's actual customer acquisition cost using group leaders' private domain traffic was less than 20 yuan. In contrast, looking at the front-warehouse model of Dingdong Maicai, targeted new customer acquisition costs exceeded 200 yuan, with a second-month retention rate of less than 5%.

Regarding the role of group leaders, Chen Ying, founder of Shihuituan, calculated more precisely: in an e-commerce company, the combined costs of new customer acquisition, marketing, and fulfillment typically account for 20% to 40% of sales, which directly makes it difficult for fresh e-commerce companies to profit. In community group buying, group leaders handle all three: acquisition, marketing, and fulfillment.

In other words, the cost that originally accounted for 20% to 40% of sales is fully solved by group leaders at a cost of 8% to 10%.

The ability to be profitable without capital is the fundamental reason for community group buying's rapid spread. In Chen Ying's words, community group buying is so grassroots that it had been running quietly for two or three years before capital truly noticed it.

With the private domain traffic of group leaders, community group buying replicated quickly.

Qian Dama, originating from Guangzhou, is a typical example. According to previous media reports, media people who contacted Qian Dama wondered if its model was too heavy. But in 2018 alone, Qian Dama opened nearly 600 stores in Guangzhou, almost the total of the previous five years.

However, the low traffic brought by group leaders also cast a shadow over community group buying. To this day, 'a pure traffic game' remains an inescapable cloud over community group buying.

-02-

WeChat E-commerce Ecosystem Rises, Capital Floods In At the second NetEase Future Technology Summit in 2015, Xu Xin of Capital Today made a statement that sparked years of VC frenzy over fresh produce.

'Fresh produce is the last blue ocean of e-commerce; those who win fresh produce win the world.' In media and VC reports, fresh e-commerce was depicted as a blue ocean with a 5 trillion yuan market.

This statement continued the madness of the fresh produce track for years.

Miss Fresh and Dingdong Maicai, represented by the front-warehouse model, were the first to break out. On Tianyancha, Miss Fresh secured two rounds of financing in 2015 alone, totaling nearly 300 million yuan; Dingdong Maicai was later but completed an astonishing six rounds of financing in 2018, an unprecedented speed.

2018 community group buying financing table (Image source: Tianyancha)

An industry-recognized fact is that March 2018 was a milestone for community group buying. It was then that community group buying truly caught capital's attention.

Starting in 2017, Pinduoduo, surrounded by Alibaba and JD.com, created a miracle of 'rural encircling the cities.' This directly led to VCs caring about whether e-commerce was self-operated or platform-based before 2018, but after 2018, the question became how to do the sinking market.

At the same time, Pinduoduo's success validated the feasibility of the WeChat e-commerce ecosystem. WeChat groups, WeChat Pay, and mini-programs formed the foundation of community group buying.

VCs suddenly realized that the next 'Pinduoduo' they were seeking was hidden in community group buying.

In March of that year, the community group buying platform Linlinyi officially launched. In terms of customer acquisition, Linlinyi relied on WeChat official accounts and group traffic online, and in-store pickup offline.

Following Linlinyi, Tongcheng Life and Shihuituan also emerged. Zinc Finance compiled data showing that in 2018, there were over 40 mainstream community group buying platforms, with second- and third-tier cities accounting for 65%.

A VC who originally wanted to invest in Xingyou Preferred also told Zinc Finance that in 2019, he considered investing but was ultimately rejected. He summarized two reasons: First, VCs like Tencent Investment had already entered; second, Xingyou Preferred didn't lack money because single-store profitability was easy.

Industry financing also saw explosive growth that year. Questmobile data shows that in 2018, there were 23 financing events in community group buying, with total financing of about 4 billion yuan.

Business history is never short of coincidences. In 2015, Didi and Kuaidi burned 2 billion yuan, a scene still vivid. Where there is capital, there is a battlefield—this golden rule repeatedly proven in business history is now playing out in community group buying.

One of the most obvious examples is that, according to previous media reports, in Changsha, Xingyou Preferred's base, vegetable store owner Lao Hong was waiting for delivery from his partner company 'Ni Wo Nin', while 200 meters away in the same community, 'Friendship Convenience Store', mom-and-pop store owner Huanhuan also awaited goods from partner 'Xingyou Preferred'.

'A thousand-group war'—a very vivid metaphor has been preserved.

-03-

From Group Leaders to Supply Chain But in just one year, spring turned into winter.

In June 2019, 'Ni Wo Nin' was rumored to have a broken capital chain; 'Linlinyi' was reported to have withdrawn from multiple cities in Jiangsu and Zhejiang, shrinking its scale; Squirrel Pinduoduo was exposed to have laid off 2,000 people, an 80% cut, officially signaling the industry's bubble burst.

On August 30 of the same year, 'Shihuituan' announced the completion of its merger with 'Ni Wo Nin', the first merger of head community group buying brands. 'Congratulations to Ni Wo Nin for getting ashore, at least not dying.' This was the first reaction of a community group buying practitioner upon hearing of a peer's acquisition.

Shihuituan interface

Under the traffic-centric mindset, community group buying failed to build a moat.

'At present, the community group buying industry has not yet precipitated the value it should have. Users are in WeChat groups, group leaders have no loyalty, and the supply chain system is weak... These problems need to be solved urgently. ' Zhuang Shuai, founder of Bailian Consulting, told Zinc Finance.

'Group leaders' have always been the core of community group buying and also the unstable factor that has been criticized. How to maintain the stickiness between group leaders and platforms, prevent group leaders from being poached, and even guard against group leaders running away with traffic are almost questions every community group buying company needs to consider.

Under traffic-led community group buying, group leaders became almost everything. To poach group leaders, platforms used almost every means.

Gong Jiawei, who worked at a leading community group buying platform, entered the industry in May 2017, transitioning from personal entrepreneurship to a city partner in a third-tier city. He witnessed the crazy land-grabbing of the past two years.

Platform GMV kept rising, and high-quality group leaders became targets of competition. At the peak, the profiles of high-quality group leaders were even priced, costing tens of thousands of yuan to purchase. In Gong Jiawei's memory, someone first harassed by phone, and after being rejected, directly found the group leader's home address and visited with gifts.

In the fierce competition, the relationship between group leaders and platforms also subtly changed.

Originally, agreements between platforms and group leaders were often loose, and experienced group leaders would keep traffic in their own hands; but now, to reduce platform dependence on group leaders and ensure quality and efficiency, some platforms began to set screening criteria, replacing underperforming group leaders.

Shihuituan plans to have some group leaders open offline stores, and Xingyou Preferred's hard criterion for selecting group leaders is whether they have offline stores themselves.

At the same time, with the arrival of summer, supply chain issues began to emerge.

In this track, taking fruit as an example, the unspoken rule is that peers basically rely on the first wave of fruit price cuts, even selling below cost to grab traffic, then profiting from sales when fruit costs drop mid-season. Low-priced fruit became an important means of promotion and traffic generation.

And the traffic and price wars at the end also mean a fight over fruit quantities, reflected at the origin, which is another round of 'price war'—inflating prices.

Two supply chain contradictions arise clearly. First, strong financial support is needed; second, after entering summer, hot weather requires cold-chain transportation, raising costs, which is like a gamble for startups.

Examples are numerous. Squirrel Pinduoduo, which once had an annual GMV of 1 billion yuan, after building its own warehouses, had costs too high, sales profits couldn't support them, and operating costs were too high. The 100 million yuan in financing was burned through within six months, eventually leading to a broken capital chain and becoming a casualty in the thousand-group war.

Even Ni Wo Nin had an extremely difficult summer in 2019.

Zinc Finance exclusively obtained a set of data: in June 2019, Ni Wo Nin had expanded to 30,000 communities, with 300,000 daily orders but revenue of only 10 million yuan. On average, each community had only 10 orders, each order only 33 yuan.

That is, each community's daily order value was only a little over 300 yuan.

'Ni Wo Nin's expansion into other markets and competition with other peers led to poor overall data,' a person engaged in community group buying in Beijing told Zinc Finance.

From then on, everyone understood a truth: in fierce competition, the focus had long shifted from group leaders to supply chain. For players without capital and supply chain, the only fates awaiting them were extinction or acquisition.

-04-

The Supply Chain Contest If not for this year's black swan event, this track would have become desolate. But with offline transactions closed due to the pandemic, the online gap was further opened.

Core indicators such as order value, new users, and order numbers saw explosive growth. Xingyou Preferred President Zhou Yingjie revealed to media that compared to the same period last year, Xingyou Preferred's average order volume per store grew 3 times, new users grew 4 times, and GMV grew 5 times; Shihuituan's new paying users from February to March grew 4-5 times compared to January; Qian Dama's home delivery business grew 10 times during the pandemic.

Data is only the surface; even surviving companies can easily see that the industry has changed.

From the second half of 2018 to before the pandemic outbreak (January 2020), the online searchable data for the community group buying track is roughly as follows:

Xingyou Preferred is the top horse, with monthly GMV exceeding 1.2 billion yuan and 2019 sales exceeding 10 billion yuan, becoming the unicorn of this track. Following closely are Shihuituan, Meiri Yitao, Shixianghui, etc.

Head enterprises have already developed their own supply chain systems through the winter.

Qian Dama, rising from Guangzhou, focuses on 'not selling overnight meat.' Behind it, the supply chain is: the day before, stores place orders in the backend based on sales. The procurement department directly sources from origins, shipping from origin warehouses, and the next morning, through the city's distribution center, goods are transported to each store.

According to Yang Kang, head of its supply chain management center, the entire chain from supply to sale takes 12 hours. But because building a supply chain in different places is difficult, Qian Dama spent a full 5 years to expand from Guangdong to Chongqing;

Xingyou Preferred, running at the forefront, established a three-level logistics distribution system of 'center chain - grid station - store.' According to President Zhou Yingjie, suppliers cooperating with Xingyou Preferred only need to deliver products to Xingyou Preferred's warehouse; sorting and distribution are all done by Xingyou employees.

In addition to logistics and distribution, SKU is also the core of the supply chain.

In terms of category distribution, Xingyou Preferred has over 700 categories, with fresh produce accounting for 40%; Qian Dama's SKU does not exceed 400, mainly meat, supplemented by vegetables, fruits, and aquatic products; Shihuituan's SKU is 400-500.

Even companies that just received financing are strengthening their supply chain moats.

According to the person in charge, Shihuituan, which just received $81.4 million in financing, will use the funds for national warehouse and distribution construction and supply chain capability improvement, further enhancing the efficiency and experience of last-mile fulfillment.

Fast logistics and rich SKUs mean high efficiency, which is the core of the supply chain.

As Suzuki Toshifumi wrote in 'The Philosophy of Retailing', the most suitable for China now is the simplest thinking and management of gross margin, turnover time, loss control, and controlling every cent of cost, ultimately achieving profitability. For fresh e-commerce with low gross margins and high loss rates, high efficiency is the only way to solve the profitability problem.

In the final analysis, community group buying is essentially a business; making money is the only way to survive long-term. And this round of capital entry is also focused on improving the supply chain.

But for most mid-tier players, due to a lack of supply chain capabilities, they are still doing 'middleman' business. 'Most are still selling vegetables from one end of the city to the other, that's all. It's hard to talk about going deep into vegetable bases,' Zheng Shutian, technical director of Songxiao Cai, told Zinc Finance.

Also rising from the sinking market, Pinduoduo, after completing traffic accumulation, has begun to build its own logistics or choose to cooperate with Gome, using Gome's large appliance distribution system. As Pinduoduo CFO David Liu said, Pinduoduo is not in a hurry to compete in the industry; its focus is to continue building trust with users and enhance user stickiness.

Whether it's logistics or enriching SKUs, Pinduoduo is still strengthening its supply chain. But for community group buying with a 5 trillion yuan market, the supply chain step is still a bit slow.

It seems there will be no more capital entering just to play the old game of recruiting group leaders and creating hit products. Efficiency, efficiency, and more efficiency—even what Pinduoduo is trying to improve, VCs cannot fail to notice.

Source: Zinc Finance (ID: xincaijing) Author: Chen Kaile