Click to read the original article for details Supply chain is likely to be the core barrier. Core content: 1. How large is the market space for community group buying? 2. What is the current cost model for community group buying? 3. What is the core competitive barrier for community group buying? 4. What is the endgame for community group buying? The fierce competition in "community group buying," the latest battlefield for giants, is already affecting traditional business models. On December 22, 2020, the State Administration for Market Regulation, together with the Ministry of Commerce, held an administrative guidance meeting to regulate the order of community group buying. Six internet platform companies—Alibaba, Tencent, JD.com, Meituan, Pinduoduo, and Didi—participated. The meeting required internet platforms to strictly abide by the "Nine Prohibitions." Earlier, on December 11, an article in People's Daily mentioned, "Don't just covet the traffic of a few cabbages and a few pounds of fruit." The keyword for the second half of 2020 was undoubtedly community group buying. Didi was the first to enter in June, piloting Orange Heart优选 (Orange Heart Youxuan) in Chengdu. By December, it had launched in over 20 provinces, with daily order volume peaking far exceeding 10 million orders. In July, Meituan established the "Youxuan Business Unit" and launched Meituan Youxuan. In November, Alibaba's community group buying business "Hema Youxuan" launched in Wuhan with 10,000 groups. Additionally, Alibaba adopted a horse-racing mechanism internally, with Retail Link, Cainiao, and Hema all testing community group buying. On the other side, pure community group buying platforms also performed impressively. According to data disclosed by Xing Sheng Youxuan, daily orders in September 2020 were approximately 8 million, a year-on-year increase of about 100%, with average order value rising from around 10 yuan to 15-20 yuan. Shihui Tuan's GMV in Q3 2020 reached 2.5 billion yuan, with October GMV exceeding 1 billion yuan and monthly active users surpassing 5 million. This represented a 53.8% increase from April's 650 million GMV, and the company's GMV target for 2020 was 10 billion yuan. -01- Customer acquisition cost is about 3-5 yuan; community group buying starts from traffic depression In 2014, in Changsha, Wuhan, and other places, group leaders collected orders via WeChat and QQ groups and then placed centralized orders with suppliers to obtain lower procurement costs. This was the earliest prototype of community group buying. The typical operating model of community group buying at present is: recruit "group leaders" (reportedly mostly convenience store owners or "stay-at-home moms") by residential community, create WeChat groups, where group leaders publish and promote group purchase products, and consumers place orders through mini-programs. The next day, the community group buying platform delivers the goods to the group leader's pickup point based on order volume. Consumers pick up their goods there, and the group leader earns a commission based on sales. Community group buying primarily targets women aged 25-50, who account for over 70% of users. Since it is a next-day delivery service, it lacks appeal for young people and is more used by post-marriage household managers, with the overall user base aged 25 and above. In terms of consumption frequency, current retained users purchase 7-10 times per month on the platform, with a weekly purchase rate of 2-3 times. In China, the population aged 25-50 in second-, third-, and fourth-tier cities is approximately 500-600 million, of which about 300-400 million could be potential demand for community group buying. Community group buying platforms nationwide generally adopt one of two playbooks: one is hunger marketing, where platforms offer 100-300 SKUs daily, updating the product pool each day for promotional purposes; the other is mall-style selection, represented by Xing Sheng Youxuan, which adds over 800 SKUs daily, promotes some products, and allows searching across all products in the mall. As the primary traffic-driving category for community group buying, fresh produce's share on platforms is continuously changing. Pinduoduo's Duoduo Maicai has fresh produce accounting for over 70%, while other platforms, especially more mature ones, see a gradual decline in fresh produce share. In terms of SKU count, fresh produce generally accounts for 30%-40% of a platform; for mall-style platforms, it is about 20%-30%. Besides fresh produce, another hallmark of community group buying is low prices. Currently, the average order value is around 20 yuan, with each order typically containing 2-3 SKUs. The "1 million orders" claimed by platforms should strictly be understood as selling 1 million items. In terms of traffic, community group buying clearly has the attributes of a traffic depression. Platforms offer products at 1 cent or 1 mao, and group leaders lure users into groups with low-priced items. The single customer acquisition cost is about 3-5 yuan, with a retention rate of 20%-30%. On a monthly retention basis, the effective customer acquisition cost is 15-20 yuan. Regarding fulfillment timeliness, the two older platforms (Xing Sheng Youxuan and Shihui Tuan) have more stable supply and timely fulfillment due to longer operations, generally fulfilling by 2 p.m. the next day, while newer platforms typically fulfill after 4 p.m. In terms of product procurement channels, community group buying players mostly use a supplier system, as suppliers can address source traceability and accountability. Currently, there are two types of suppliers: one directly corresponds to farmers or origin production areas; the other is comprehensive suppliers who source multiple SKUs from the market to supply platforms. Under the direct supply model, farmers sell to platforms at a 5%-10% markup, and the platform's product price is the purchase price plus 15%. If competition stabilizes in the future, the markup could reach 25%. Under the supplier model, suppliers' markup to platforms ranges from 10%-20%, and platforms add another 10%-15%, meaning agricultural products are sold at 20%-35% above the farmer's purchase price. For standard products, platforms have their own channels: JD.com has JD New Channel, Alibaba has Retail Link, and Xing Sheng Youxuan has the supplier channel of Furong Xing Sheng. Users are less price-sensitive to standard products than fresh produce, so platforms can bring in multiple ordinary suppliers. Community group buying brings new benefits to traditional suppliers, with some suppliers increasing supply to platforms by nearly 10 times. Since fresh produce often features hit products, only a few suppliers can provide large-volume bestsellers, so platforms' sources are roughly similar, differing only in packaging. -02- Competing for markets beyond e-commerce and food delivery Community group buying was once viewed negatively by the industry in 2019, but the pandemic turned it around. Before the pandemic, the market structure was stable, with the top three being Xing Sheng Youxuan, Shihui Tuan, and Tongcheng Life. After giants entered, price wars erupted. It is reported that platforms had to reduce gross margins by 5% to compete, whereas before the giants' entry, established platforms had already achieved a viable revenue model and break-even. Experts from Third Bridge believe that from the current industry landscape, established community group buying companies maintain sound business fundamentals despite being squeezed in some markets. By mid-next year, the industry structure will see significant divergence. The new giants have covered 100-200 prefecture-level cities, and by May-June next year, community group buying will basically cover most prefecture-level cities and important counties in China. The competitive focus will also shift from current second- and third-tier cities to fourth- and fifth-tier cities and counties. In simpler terms, the areas covered by "San Tong Yi Da" (typically referring to ZTO, YTO, Shentong, and Yunda express companies) (townships) are basically the final destinations for community group buying. Regarding the overall scale of community group buying, the aforementioned expert estimates the market size will be 100 billion yuan in 2020 and 200-300 billion yuan in 2021. Community group buying originated in lower-tier markets and is suitable for the vast market from second-tier cities to rural areas, which is beyond the reach of food delivery or other O2O businesses. For example, as of September 2020, Xing Sheng Youxuan had covered 13 provinces, 161 prefecture-level cities, 938 counties/county-level cities, 4,777 townships, and 31,405 villages. For reference, according to the National Bureau of Statistics and the Ministry of Housing and Urban-Rural Development, in 2019 China had 293 prefecture-level cities, 1,519 county-level cities in 2018, 18,300 organic towns, 10,200 townships, and 2.452 million villages. In comparison, the penetration rate of the food delivery industry in cities below the third tier is only 30%-40%, with 70% of food delivery orders coming from first-tier cities, and virtually no food delivery in rural areas. According to 2020 data from CBN Weekly, the urban population of China's first-tier (4) plus new first-tier (15) cities is only 250 million, with a coverage rate of 18%. According to Nielsen data, the population in third- and fourth-tier cities and below is as high as 953 million, and a large amount of demand has not been digitized. That is, in absolute population terms, community group buying users are the true "mainstream" users. The mobile internet's downward penetration has made these users mainstream online users. According to QuestMobile, in October 2020, lower-tier users accounted for 58% of mobile internet users, reaching 669 million. In the lower-tier market, Taobao had 433 million monthly active users, and Pinduoduo had 332 million, with year-on-year increases of 52.47 million and 77.91 million, respectively. Compared to first- and second-tier cities, community group buying targets mid-value user groups. There are about 200 million high-value users in China with monthly household income above 3,000 yuan. Of these, 10%-30% have already been tapped by the existing consumer market, and 30%-50% of these 200 million are new potential users, which are the target for community group buying. Wu Yuefeng, fund manager at Fengjing Capital, previously said in an interview that giants do not believe the community group buying model has been proven, but rather that buying potential users at current traffic prices is appropriate, as the commercial value of these users has not been fully exploited. -03- Platforms currently net loss 10%-20%: Intense competition for group leaders "Sub-value lower-tier users" sounds attractive, but how much does it cost platforms to acquire users? Let's calculate the cost model of current community group buying platforms. At the 2020 China Fresh Produce Retail Conference, Liu Kai, vice chairman of Shihui Tuan, stated that Shihui Tuan's fulfillment cost is currently around 7%, down from an initial 12%. As the supply chain stabilized, it dropped to 7% within six months, and is expected to fall to 5% in the future. According to the estimation model in a research report by China Merchants Securities, for fresh produce categories, product costs account for 75%, group leader commissions 10%, fulfillment costs 7%-12%, and profit 3% (with revenue at 100%). Currently, new platforms have group leader commissions of about 12%-15%, logistics costs of about 15%, warehouse costs of 3%-5%, and online operating costs of 3% (logistics + warehouse + operations are fulfillment costs). Total costs account for over 35%, while older platforms have total costs of about 25%. Third Bridge experts believe that compressing community group buying costs (group leader + fulfillment) to 20% would be the limit. Using 75% of selling price as product cost and 25% as total costs, "old platforms" roughly break even, while new platforms are expected to lose about 11%-13%. Third Bridge experts say that current gross margins are around 15%, and with intensified competition, platforms are net losing 10%-20%. They also believe community group buying is not a low-margin business; current low margins are due to competition, and future margins could rise to 20%-25%. In the overall cost model, besides supply chain affecting fulfillment costs, another major cost is group leader commissions. Under current high competition, group leaders play roles in traffic, fulfillment, and after-sales, and their costs have no room to decrease; platforms attract group leaders with high commissions. Initially, 80% of group leaders were convenience store and supermarket owners, and 20% were "stay-at-home moms." Recently, store-based group leaders have accounted for over 90%, and the store formats are expanding beyond convenience stores to include auto repair shops, restaurants, and other store owners joining the group leader ranks. Stores have clear locations, making it easier for platform sales personnel to develop them, so their proportion is relatively high. However, due to intensified competition, platforms have no time to train new group leaders, leading to uneven service quality. Third Bridge experts actually favor "stay-at-home mom" group leaders. Store-owner group leaders treat group buying as a supplementary business, making it hard to fully commit, and service quality may not improve. In contrast, stay-at-home moms can fully dedicate themselves and may even offer soft services like home delivery in the future. Currently, which type of group leader emerges faster is not a market concern; for platforms, retaining excellent group leaders is more critical. Closely related to platform group leader resources are frontline BD (business development) staff. The loss of mid-to-high-level platform personnel has little impact on group leader retention, but if an excellent BD leaves, it may mean losing over 50% of the group leaders they maintained. In response, platforms currently have no direct effective measures, mostly just "stabilizing" their BD teams. From the group leader's perspective, under the current uncertain competitive landscape, group leaders are unwilling to be exclusively bound to one platform. It may be normal for a group leader to promote group buying for multiple platforms in the short term. When a leading platform emerges, some group leaders may choose exclusive cooperation, truly "binding" group leaders to the platform. -04- Is supply chain the real barrier? In the short term, group leader commissions cannot be reduced, so to cut costs, the only option is to compress the supply chain. A better supply chain means more direct sourcing, lower procurement costs, and better fulfillment guarantees, which also means lower procurement costs and improved user experience. For business to scale, the supply chain must keep up. According to a previous statement from Xing Sheng Youxuan insiders, within 100,000 orders, platforms can purchase standard product surplus; for 100,000-1 million orders, they need to establish a complete supply chain and operation system for fresh produce; above 1 million orders, they need to establish customized relationships or deep cooperation with upstream suppliers for categories. Many platforms have therefore increased investment in supply chains. Didi's Orange Heart Youxuan stated that it has reached strategic cooperation with dozens of well-known companies and brands, including COFCO, Want Want, Three Squirrels, and Master Kong, and has initially established a supply chain network in 20 provinces and cities nationwide. No matter how it changes, the essence of community group buying remains retail. In various discussions about "new retail," the industry generally agrees that the core of retail is always the supply chain, which is also why most market voices believe supply chain is the core barrier for community group buying. Observing the performance of new and old platforms, Xing Sheng Youxuan and Shihui Tuan, with more stable supply chains, perform better in fulfillment timeliness and service systems, demonstrating the key role of a quality supply chain in improving customer experience and repurchase rates. Looking back at the essence of new retail, it uses digital technology to improve sales, service, and supply chain efficiency, thereby forcing a change in the underlying logic of the entire retail industry. Community group buying is also a form of new retail, leveraging the sales end to drive the supply chain and form a retail model suitable for lower-tier markets. Without supply chain construction, community group buying is just a marketing tool, and without supply chain barriers, platforms can only become also-rans. Of course, there are differing opinions on whether supply chain is an absolute barrier. Third Bridge experts do not believe supply chain is an absolute threshold for the industry. It is difficult to achieve true supply chain barriers between platforms—many new entrants have improved their supply chains in a short time, and a complete barrier system has not yet emerged. -05- Endgame speculation: Regional next-day short-distance home delivery e-commerce? Since the rapid development of community group buying, there have been different voices. A widely accepted view is that group leaders are a temporary phenomenon, and community group buying is not the ultimate form. The thought-provoking question is: what is the ultimate form? On December 7 last year, Chen Ying, CEO of Shihui Tuan, published an internal letter titled "Why is the energy of community group buying beyond our imagination?" He wrote that community group buying targets the entire e-commerce market, that is, the full-category e-commerce market from cities to rural areas. Community group buying reinvents and transforms every link of the traditional e-commerce supply chain, and this is a 35 trillion yuan market. Community group buying can directly supply consumer goods of the same quality and price as in first- and second-tier cities to rural areas, with cost-effective next-day or same-city short-distance e-commerce. When this model covers all categories at lower prices, consumers will no longer choose the 3-5 day delivery experience of traditional e-commerce. He also mentioned that as a retail model in essence, community group buying does not possess the network effects and Matthew effects of classic internet models. User experience will not improve with scale; it requires tangible improvements in supply chain capabilities. At least 3-5 companies will survive long-term, and the one with the best experience will win the market. From the perspective of the entire existing market, in the fresh produce sector, community group buying has the most obvious substitution effect on wet markets. In current fresh produce sales channels, supermarkets account for 37% and wet markets 56.3%. For non-fresh categories, community group buying mainly replaces grocery stores and wholesale markets. For the industry, especially the fresh produce industry, community group buying indeed solves pain points: community group buying's order-based procurement first solves fresh produce loss, which is the most painful point in the industry; Second, in the broader fresh produce industry, the SKU count in front-store-back-warehouse and micro-fulfillment center models is limited, while community group buying's online display theoretically has unlimited SKUs, greatly optimizing user choice. Compared to front-store-back-warehouse and micro-fulfillment center models, community group buying also has better operating costs. Compared to e-commerce, community group buying also has advantages. Traditional e-commerce fulfills via express delivery, but in lower-tier markets, insufficient order density leads to high fulfillment costs. The essence of community group buying is channel innovation; sufficient order density and average order value are necessary to ensure the channel's viability. Through online operations, community group buying establishes a digital, visualized distribution network. In the long term, community group buying can develop into retail infrastructure connected at the village level, establishing a distribution network for goods to reach lower-tier markets. Moreover, in terms of procurement, traditional wet markets, grocery stores, and wholesale markets have fragmented, non-standardized, and unstable supply channels. Community group buying leverages order models to drive the front end and integrates local quality supply chains to enter these markets, which is essentially a supply chain reinvention for small retail formats. A typical entry point is replacing existing grocery stores with large supermarkets. Third Bridge experts also favor store-based community group buying. According to the expert's actual survey, store-based enterprises doing community group buying achieve monthly group efficiency of 40,000-50,000 yuan; pure community group buying platforms currently achieve 5,000-8,000 yuan per month. Community group buying density and single-group efficiency currently make profitability impossible. When physical stores or chain enterprises do community group buying, their logistics and warehousing costs are infinitely amortized, and they can also improve store group efficiency. Since e-commerce opening physical stores is far more difficult than stores doing group buying, overall, "physical stores doing community group buying will be more competitive". Additionally, the current self-pickup model will inevitably be replaced in the future. Third Bridge experts believe that future community group buying will definitely be home delivery, and the self-pickup model will be disrupted. One key point is the cost model for next-day home delivery—compared to instant food delivery, the home delivery cost for community group buying will drop significantly. Current instant food delivery costs about 7-8 yuan per order, requiring immediacy and delivering only a few orders at a time, while community group buying's next-day delivery can deliver hundreds of orders at once, with lower timeliness requirements, and its fulfillment cost is 1 yuan per order. That is, the true last-mile cost is not high. As group leaders' traffic-driving role diminishes, home delivery will definitely be cheaper than the group leader self-pickup model, as group leader commissions currently account for about 15% of total costs. Experts believe that once platforms accumulate enough existing users, home delivery will become the mainstream model for community group buying, or community group buying should be more akin to a next-day short-distance home delivery e-commerce model. Another endgame reference is foreign discount grocery stores. Discount grocery stores focus on daily FMCG products such as food, snacks, clothing, and household items. US discount grocery stores have developed for many years, with success factors including choosing a near-field model and differentiated supply chain management advantages over supermarkets. The supply chain development of discount grocery stores has also shifted from mostly surplus sales to establishing proprietary supply chain systems. Taking Dollar Tree as an example, the proportion of surplus goods gradually declined from 40%-50% at the model's inception to 10%, while imported goods from China, Mexico, etc., reached 40%-50%. Discount grocery stores consistently maintain gross margins above 30%. From a market perspective, due to market fragmentation and hard costs, it is unlikely for community group buying to achieve a monopoly. More likely, multiple platforms will hold relative advantages in their respective markets. 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