Click to read the original article for details In the second half of the year, the sudden rise of community group buying brought fresh food e-commerce back from the brink of bankruptcy, rewriting its fate. When giants set their sights on the "traffic of a few cabbages and a few pounds of fruit," the businesses of small vendors, convenience stores, and other small and medium-sized merchants will undoubtedly be impacted, and even large and medium-sized supermarkets are not spared. Currently, community group buying categories are mainly fresh food and FMCG, which happen to be the strong categories of supermarkets, so sales diversion is inevitable. With giants entering community group buying with huge capital, market concerns about supermarket performance have also amplified. Judgments such as "supermarkets may face a wave of closures in 2021" and "community group buying will cause at least 30% of large and medium-sized supermarkets to close" have appeared in public opinion. This has directly affected the stock prices of listed companies. Listed companies primarily engaged in supermarket business, such as Yonghui Superstores, Jiajiayue, and Bubugao, have seen their stock prices decline since the second half of the year, erasing all gains accumulated in the first half due to the pandemic. This is also roughly consistent with the timeline of community group buying's rise. Jiajiayue stock performance (January-December 2020) Yonghui Superstores stock performance (January-December 2020) Facing community group buying, the market's attitude towards supermarket stocks seems overly pessimistic. In the view of several experts interviewed by Juchao, supermarket business will be affected to a certain extent by community group buying, but "30% closures" and "wave of closures" are unnecessary concerns. Supermarket stocks are likely to have been "wrongly killed" by the market.

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Will 30% of Supermarkets Close? Comparing the market size of community group buying with the total retail scale of offline supermarkets in China, the impact of community group buying on the entire offline supermarket sector is still limited. If not for the sudden outbreak of the community group buying war in the second half of the year, supermarkets would have had a fairly "comfortable" year. During the pandemic, large chain supermarkets had much stronger supply capabilities than scattered small retail stores, so order volumes surged, further capturing the retail market. In the first quarter of this year, supermarket companies such as Yonghui Superstores and Jiajiayue achieved much higher growth rates than the same period last year. As the pandemic improved, small and medium-sized merchants returned to the retail market to compete for business. Although growth in the second and third quarters slowed, they still maintained relatively considerable growth rates. At the same time, the expansion of large supermarket companies is still accelerating. As of the end of the third quarter of 2020, Jiajiayue opened 100 new stores and successively entered markets such as Hebei, Anhui, Jiangsu, and Inner Mongolia, starting its national layout; Yonghui Superstores added 58 net new stores in the first three quarters. On December 19, with the opening of Yonghui Superstores' Bazhong Wanda store in Sichuan, Yonghui Superstores officially entered the "thousand-store era." Against the backdrop of pandemic benefits, the stock performance of supermarket companies in the first half of the year was impressive. Yonghui Superstores, Bubugao, and Hongqi Chain all rose more than 80% in the first half, while Jiajiayue, which expanded faster, saw its stock price rise more than 100%. But as giants continued to enter community group buying, the stock prices of listed supermarket companies took a rollercoaster ride, falling straight from the peak. As of December 30, the cumulative annual gains for Yonghui Superstores and Jiajiayue in 2020 were -5.49% and -11.63%, respectively, with stock prices down 32% and 57% from their yearly highs. Despite Alibaba spending HK$28 billion in October to take control of Sun Art Retail Group (HK:06808), the latter's stock price was not boosted, with a cumulative annual gain of -17.07%. How disruptive is community group buying, which has left supermarket stocks in a "state of mourning"? Research from TF Securities points out that community group buying is a business model with innovations in both channels and marketing. The innovations mainly include three points: the group leader system, centralized procurement and distribution, and the pre-sale system. These three points respectively bring about three cost reductions: traffic costs, fulfillment costs, and fresh food loss, making it more suitable for price-sensitive customers and more suitable for promotion and replication in lower-tier markets. With channel restructuring and cost reduction, the unicorn community group buying company Xingsheng Youxuan achieved a net profit margin of 3% in its UE model (unit economics model) in June 2020, which is almost the average level of listed supermarket companies, proving that the business model is viable. This is one of the important reasons why giants are willing to spend heavily to capture this track. Facing internet giants flooding in with huge funds and elite teams, traditional supermarkets represented by Yonghui Superstores and Jiajiayue inevitably appear inferior. Zhuang Shuai, founder of Bailian Consulting, told Juchao that physical supermarkets actually face not only community e-commerce but also front-warehouse models represented by Daily Youxian and Meituan Maicai, and comprehensive e-commerce represented by Tmall and JD.com. However, physical supermarkets have maintained considerable resilience and have not seen mass closures even under the previous siege of e-commerce. On the contrary, "since the rise of e-commerce 15 years ago, the domestic supermarket and department store industry has maintained growth of more than 30% in both sales and the number of stores." According to Nielsen's February 2019 "China Shopper Trends Report - Convenience Stores," the number of supermarkets (up 10%), small supermarkets (up 9%), and convenience stores (up 14%) has grown strongly over the past three years. Han Xiao, senior analyst at Dolphin Think Tank, holds the same view. Citing data from iiMedia Research, he pointed out that the community group buying market is expected to reach 72 billion yuan in 2020, which is less than Walmart (China)'s 2019 sales. Compared with the total retail scale of offline supermarkets in China of 4.7 trillion yuan in 2019, the impact of community group buying on the entire offline supermarket sector is still limited. Especially with the "Nine No's" new regulations introduced at the end of 2020, which impose restrictions on nine aspects including community group buying product prices, market monopoly, restricting competition, and big data price discrimination. Han Xiao told Juchao that community group buying is still in a state of using fresh food to seize the market. According to his understanding, community group buying currently sells best products such as fruits, vegetables, and eggs, which are also the most fiercely price-competitive. The "Nine No's" new regulations have greatly weakened the power of the price "killer" that community group buying relies on for rapid expansion.

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The New Retail Story Is Not Outdated People's consumption habits and forms are always diverse, and the demand for offline consumption will always exist. Going back to 2015, giants were telling another story—new retail. Since 2015, Alibaba and Tencent have waged a full-scale battle over new retail, moving from online to offline, with department stores and supermarkets with rich payment scenarios becoming their targets. In less than 5 years, 6 of the top 10 domestic supermarkets have come under the control of Tencent or Alibaba. Among the top ten chain supermarkets, the Alibaba system controls RT-Mart and Lianhua Supermarket, and incubated Hema Fresh; the Tencent system has stakes in Yonghui, Walmart, and Bubugao; Suning.com acquired Carrefour. Currently, among the top ten chain supermarkets, only China Resources, Wumart, and Jiajiayue are not controlled or invested by Alibaba or Tencent. At that time, user growth and traffic dividends for traditional e-commerce were gradually shrinking, and growth "bottlenecks" began to appear. The "new retail" that integrates offline logistics, services, and experience advantages with online commerce, capital flow, and information flow became the focus of competition among giants. But a few years later, with the shadow of community group buying looming, the new retail story has not actually become outdated. Han Xiao believes that community group buying has little impact on offline supermarkets. The SKU magnitudes of the two are not on the same level (community group buying has only about 1,000 SKUs, while supermarkets have over 10,000), and the consumption scenarios, needs, and targeting are different. For example, supermarkets also have a certain social attribute in addition to delivering products, which community group buying does not have. The visual, auditory, tactile, and sensory attributes that offline physical stores provide when offering goods or services to customers are also irreplaceable by online e-commerce. Zhuang Shuai told Juchao that people's consumption habits and forms are always diverse, and the demand for offline consumption will always exist. On the other hand, supermarket companies themselves are also making strategic adjustments. Zhuang Shuai observed that supermarket companies have been adjusting their product and merchant structures in response to competition from comprehensive e-commerce and community group buying, such as adding dining, entertainment, parent-child activities, and other formats. In addition, supermarket companies are also combining with online channels to explore innovative business models and improve their service experience. Besides cooperating with or self-operating "supermarket-to-home" platforms such as JD Daojia, Meituan, and Dmall, some supermarkets have directly entered the community group buying field. Taking Yonghui Superstores as an example, according to this year's third-quarter report data, Yonghui's home delivery business currently accounts for 9.7% of revenue, with 50.7% of the home delivery business coming from the Yonghui Life app. Previously, Hema Fresh management also told the media that its in-store and online ratios are similar, both around 50%. Sun Art Retail Group has participated in community group buying. In April 2020, Cainiao Post launched the "Yifagou" business, using a "large store + self-pickup" model, relying on mini-program operations, targeting the nearest Cainiao Post users for self-pickup, with products provided by chain supermarkets such as RT-Mart and Auchan. Looking at a larger dimension, the market concentration of China's supermarket industry is still increasing. The combined market share of the top 5 companies in the offline supermarket industry is only 8.8%, far lower than the US level of 46%. With the backing of giants, a high degree of digitalization, and the integration of online and offline commerce, capital flow, and information flow, leading supermarkets can gain more advantages in competition. As they continue to expand, they squeeze out the space of weaker competitors and small and medium-sized merchants. According to Euromonitor data, in 2019, the total retail scale of offline supermarkets in China reached 4.7 trillion yuan, accounting for 54.5% of the 8.6 trillion yuan market for food and daily necessities. The sales scale of food and daily necessities through e-commerce-related channels was about 2 trillion yuan, accounting for about 24.3%; the remaining 21.2% market share was held by non-chain channels such as wet markets and independent small stores. This process of increasing market concentration is slow but ongoing. Compared with Europe, the US, Japan, and South Korea, there is still much room for improvement in the concentration of China's supermarket industry, and the market share of the top five chain supermarkets by retail sales is also on the rise. The offensive of giants under the wave of community group buying and the "defensive expansion" of supermarket leaders will accelerate this process.

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The Balance of "More, Faster, Better, Cheaper" Different retail forms such as offline supermarkets (including home delivery services), front-warehouse models, and community group buying are not a life-and-death competition but coexist. From the layout of giants, their investment in retail is increasingly diversified. While giants are increasing their investment in community group buying, they are also increasing investment in physical supermarkets—Alibaba increased its stake and took control of Sun Art Retail Group with HK$28 billion; JD.com's stake in Yonghui Superstores also rose from 6.43% at the end of 2019 to 7.26%. Giants' investment in retail is increasingly diversified. For example, Alibaba has launched Taobao Maicai, which uses the community group buying model, and also led the C3 round of financing for Shihuituan, while also having extensive offline supermarket layouts and supermarket-to-home services represented by Ele.me. In addition to its offline supermarket layout, Tencent invested in Xingsheng Youxuan's A+ and C+ rounds in May 2019 and July 2020, respectively, and also invested in another community group buying platform, Shixianghui. It also invested in Daily Youxian, which uses the front-warehouse model. Such an all-round layout also sends a signal: "Different retail forms such as offline supermarkets (including home delivery services), front-warehouse models, and community group buying are not a life-and-death competition but coexist," Zhuang Shuai told Juchao. Bao Yuezhong, an expert in the new retail industry, holds the same view. He believes that China's retail market system has formed a market pattern where three forms coexist: traditional in-store retail, e-commerce home delivery retail, and community social retail. From the essence of various retail formats, several formats are all committed to satisfying consumers' pursuit of "more, faster, better, cheaper," but the four requirements themselves have contradictions and conflicts—the "cheaper" that emphasizes economies of scale limits categories, the "faster" that emphasizes instant delivery limits the scale of the population, and the "more" and "better" that emphasize omnipotence and ideal life lead to higher product premiums. Based on the dimension of "more, faster, better, cheaper," the biggest competitiveness of community group buying is "saving money," sacrificing "fast" and "more." Han Xiao told Juchao that community group buying does not need to rent warehouses, does not need traffic acquisition, and relies on local entities for last-mile delivery, making the model very light. In terms of "better," "in terms of the quality, specifications, and taste of fruits and vegetables, community group buying and front-warehouse players are not on the same standard." The front-warehouse model has about 3,500 SKUs, with extremely high overall costs, including warehousing fees, ground promotion marketing costs, and logistics costs for instant delivery, so few companies can currently be profitable. However, it can provide better products and faster, more thoughtful services, meeting the needs of a completely different group of people than community group buying. Offline supermarkets have more SKUs and better product quality. Although prices are slightly higher than community group buying, they are still cost-effective and can also achieve instant delivery through home delivery services. On December 4, Chen Ying, co-founder of Shihuituan, defined a market territory for the community group buying industry in his 2020 year-end "Internal Letter"—a market share of 35 trillion yuan. For comparison, China's total retail sales of consumer goods in 2019 was 41.2 trillion yuan. This means that community group buying is trying to break through the product limitations mainly of fresh food and FMCG, and also pulls its competition into a broader retail market. Zhuang Shuai told Juchao that in the future, retail forms, whether in-store retail, e-commerce home delivery retail, or community social retail, will be in a state of trade-offs, depending on which service can bring consumers a better experience and meet their differentiated needs. In the future, several retail forms are also likely to move towards integration, "integrating the advantages of various forms to form a strategy that uses different retail forms to meet different purchase scenarios for the same target users." 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