Source: Yuanchuan Business Review (ID: ycsypl) Community group buying, from a red-hot new trend to a collective cooldown, took just over a year. In the second half of last year, Didi launched Orange Heart优选 (Orange Heart Youxuan), shouting the slogan "no upper limit on investment," but now several rounds of regional adjustments have been accompanied by layoffs and city closures; Jingxi Pinpin brought out the "long-silent" Liu Qiangdong to lead personally, but now it has fizzled out. Startups without deep pockets have it even harder. Community group buying platform Dailuobo went bankrupt simply because no one took over within 21 months of bankruptcy reorganization; Shixianghui, after enduring hardships, pivoted to the community snack track. Tongcheng Life was once valued at $1 billion, but when it went bankrupt, it "threw away its armor and weapons," even changing its name to Micheng Life. Fresh food e-commerce has always seemed like a tough business. Dingdong Maicai broke its IPO price upon listing, and although it surged 95% the next day, it turned out that US retail investors mistakenly thought Dingdong was Didi. After this blunder, the stock price quickly turned green. According to Dingdong's Q3 report this year, the company's net loss in Q3 was 2.01 billion yuan, about 2.5 times that of the same period last year. The fresh food industry is so bleak, yet the big players still refuse to let go of this business. So, the question arises: 1. Can fresh food e-commerce actually make money? 2. Are there barriers to selling vegetables in communities? 3. Does the played-out community group buying have a future? Optimized Cost-Reduction Model The reason community group buying became so popular is largely due to the allure of the Xingsheng优选 (Xingsheng Youxuan) model. Although the front-warehouse model has produced two listed companies, Dingdong Maicai and Daily Youxian, profitability remains elusive. Community group buying, with its superior model, has shown profit potential. During the pandemic, Xingsheng优选's community group buying model achieved initial profitability [1]. This is why the big players followed suit and "copied the homework." In comparison, community group buying has advantages over front-warehouse in fulfillment models and cost control. Front-warehouse is all-encompassing, doing everything itself, which is thankless; community group buying outsources what can be shared. First, front-warehouse, for high quality, mostly does direct sourcing from production areas, and under the self-operated model, the platform bears transportation and all inventory risks (spoilage and returns). Community group buying is consignment, where local suppliers share some costs and risks. In terms of categories, fresh food is high-frequency but prone to losses; community group buying reduces the proportion of fresh food to one-third (front-warehouse is over 50%). The strategy of using fresh food to attract traffic and daily necessities to make money achieves strengths and avoids weaknesses. Second, in warehousing, front-warehouse densely deploys points, with huge self-operated warehousing investments. Community group buying uses a three-tier warehouse system, where the front-end shared warehouse and the back-end grid warehouse are outsourced, and the platform only self-operates the central warehouse. The biggest headache for front-warehouse is fulfillment costs. To ensure instant delivery, you need warehouse space to keep food fresh, workers to pick quickly, and a large number of riders for "last mile" delivery. Take Dingdong Maicai as an example: in 2020, the company lost 2 billion yuan, corresponding to a fulfillment cost of about 20 yuan per order. According to Guosen Securities' estimates, even if Dingdong could reduce fulfillment costs to 7 yuan per order, it would still lose 660 million yuan in 2020 [1]. No wonder Hema CEO Hou Yi criticized front-warehouse as a "model for VCs." Although it might be a bit of peer disdain, in the face of huge losses, front-warehouse has nothing to say. Community group buying's trump card is "pre-sale + self-pickup + next-day delivery." In the community group buying system, there are no riders, only group leaders; not home delivery, but waiting for pickup. The model itself saves a lot of money. For example, Xingsheng优选, before the big players entered, reduced its fulfillment costs in Hunan to 3%, achieving initial profitability. Now in mature regions, the average fulfillment cost per order for community group buying can drop to 1 yuan [2], about 1/20 of front-warehouse. Even more attractive, community group buying can also be cheap. If front-warehouse uses high investment to exchange for "more and faster," then community group buying compromises "more and faster" to exchange for "savings." According to UE model estimates, its price advantage comes 10% from purchase price advantages, 5% from improved circulation efficiency, and 5-10% from platform subsidies [3]. The platform can achieve purchase price advantages mainly because of the large procurement scale per SKU and shorter payment terms to suppliers. Compared to supermarkets' typical 2-month payment terms, community group buying, because it doesn't keep inventory, can shorten payment terms to 3 days, with the fastest payment the next day. This advantage allows it to pressure suppliers on prices. The improvement in circulation efficiency comes from community group buying streamlining the distribution chain. Traditional fresh food distribution has many links and many markup stages. According to Anxin Securities research, apples from farmers in Shaanxi at 3.65 yuan per jin sell for 9.8 yuan per jin in Shanghai. Community group buying's three-tier warehouse system has only three markup stages: shared warehouse, grid warehouse, and group leader, compared to six in traditional distribution, reducing middlemen's profits. However, a business with a better model was ruined by the crazy subsidies of the big players. When the big players entered, they launched fresh food bestsellers at absurdly low prices, comparable to Pinduoduo, without even needing to "cut a knife." One cent per jin cabbage, nine mao per box of eggs made consumers exclaim "so cheap." But huge subsidies made profitability impossible. As of May this year, Meituan优选 and Duoduo Maicai's losses were generally over 10% [1]. Platforms that couldn't afford to burn money simply went bankrupt. Shixianghui founder Dai Shanhui said helplessly, "The direction forward has been blocked by giants." So, does community group buying, which seems anyone can join, have barriers? Two Barriers to Selling Vegetables From a competitive barrier perspective, the greater the supply difficulty, the higher the transformation threshold, and the higher the barrier formed. For example, in the express delivery time-sensitive market, there are both asset-heavy barriers and policy barriers. SF Express does well because it invested heavily in building capacity and obtained approvals to establish an airline and purchase aircraft. SF's annual air transport volume accounts for one-third of the national air cargo volume, making it impossible for peers to break in [5]. Another example is food delivery. Although it's hard-earned money, once the platform attracts enough merchants and riders, it not only creates economies of scale, but this supply scale is also difficult for peers to replicate. So, what will be the competitive barriers for community group buying? From an industry perspective, fresh food is inherently a tough bone. Short shelf life leads to high spoilage, cold chain transportation costs are high; fresh food categories are non-standard, making supply chain management difficult. These traits naturally raise the transformation threshold. Previous fresh food e-commerce failed to become a good business mainly because the profit model wasn't good enough. Community group buying, through model optimization, has made the fresh food business less difficult. But compared to conquering territory, defending it is a greater test for platforms, involving two barrier elements: the platform's localization capability and organizational capability. Localization capability is based on the business nature of community group buying. Community group buying is a typical regional economy of scale, and its chain heavily relies on local suppliers. This business must be developed city by city, making rapid national replication difficult. The industry landscape is rarely winner-take-all; more often, it's regional victories. Xingsheng优选 could be profitable initially because of its years of cultivation in Hunan—not only mature local supply chains but also a large number of group leaders and community convenience stores. Before doing community group buying, Xingsheng优选 was already a retail giant in Changsha, with over 18,000 community convenience stores, and each small store is a pickup point. Later, when internet giants entered Changsha, they poached Xingsheng优选's group leaders—"he who gets group leaders gets the world" is proof of the importance of localization. Operational organizational capability concerns how to do the group buying business well in a region. Community group buying has many links: upstream involves suppliers, midstream involves grid warehouse franchisees, and downstream may require competing for quality group leaders. This is a comprehensive test of management ability. Those platforms that fell provide many negative examples: on the day Tongcheng Life declared bankruptcy, nearly 6,000 suppliers came to collect debts; some grid warehouses, to save costs, had drivers double as pickers. Platforms still operating have also put management on the agenda. For example, Meituan优选 strengthened grid warehouse assessments, requiring drivers to check goods before departure and verify delivery lists upon arrival; reminding group leaders to avoid fresh food spoilage, etc. [6]. When internet giants entered, they might have harbored the idea of "rather lose money than starve opponents." However, a series of policies made the money-throwing unsustainable. Combined with changes in the industry landscape, it's time for companies to think about competing on comprehensive strength. Shift from Scale to Efficiency At the end of 2020, the State Administration for Market Regulation proposed "nine no's," opposing low-price dumping in community group buying, and subsequently imposed maximum fines on five companies including Orange Heart优选 and Duoduo Maicai. People's Daily's remark "Don't just focus on the traffic of a few cabbages and fruits" made platforms tremble. Although subsidies on various apps still emerge endlessly, with explicit regulations, subsidies have been restrained. A series of policies including the "nine no's" became a turning point guiding platforms toward healthy development. Seeing that burning money was futile, the big players also changed their approach, putting efficiency before scale. The big players had efficiency in mind from the start. It's just that overly fierce competition led to many distorted behaviors to improve efficiency, such as installing timers in central warehouses to supervise workers packing (this undesirable behavior may still exist). But with the restraint on burning money and the landscape changes from some players exiting, remaining companies can improve efficiency structurally. At the corporate structure level, concentrate resources and shrink business. According to LatePost, since May, Duoduo Maicai has recalled provincial heads of underperforming regions to headquarters and merged them into better-performing regions. In October, Meituan integrated businesses like Youxuan, Kuailv, and Maicai, with senior vice president Chen Liang taking unified charge [4]. Correspondingly, in business scope, they no longer blindly expand but defend their positions. Since August, Xingsheng优选 has suspended expansion plans in the Northeast [4]. The current landscape is also moving toward regional dominance: Xingsheng优选 has advantages in Changsha, Wuhan, Nanchang, and other regions; Duoduo Maicai and Meituan优选 have basically completed national coverage, but in lower-tier markets, Meituan's performance is slightly inferior to Pinduoduo. In management, they've shifted from rough to refined. During the big players' crazy expansion, they not only fought over group leaders but even recruited beauty salons and fortune tellers as group leaders. Now, big players can control the source when selecting group leaders—data shows that the proportion of group leaders with physical stores rose from 73% in the first half of 2020 to 90% in early 2021, while those without physical stores dropped from 27% to below 10% [7]. From the results, some companies are indeed moving closer to profitability. In March this year, Wang Xing said at an earnings call that Meituan优选 had begun generating gross profit. According to LatePost, since Q3, with no significant growth in order volume and new users, Meituan优选 began raising prices—something the platform wouldn't have dared before. Meituan优选 hopes to achieve positive gross margin for 20% of SKUs within the year. In summary, when the competitive landscape stabilizes and becomes clear, and the behavior of burning money and involution stops, internet companies will get closer to the blueprint Xingsheng优选 initially painted. Epilogue In recent business topics, what's most lacking is probably businesses with beautiful models that didn't end well. In those years when user scale was everything, crazy burning money, and burning out others the night before burning yourself, equaled victory. Shared bikes once had an ideal profit model, but ultimately died from burning money and disorderly expansion, becoming a graveyard. Consumers no longer expect ofo to return 200 yuan deposits, and instead joke about "Peking University graduate owes me 200 yuan." In the process of chasing trends, the giants' determination to drag down peers even at the cost of their own losses not only scared competitors but also made ordinary people suffer. Didi's goal was to be the "world's largest mobility platform," but at the beginning of the year, to promote Orange Heart优选, it encouraged drivers to post vegetable ads on their cars. Whether drivers got fresh food business is unknown, but the news of "175 yuan reward not yet warmed, first pay 200 yuan traffic fine" contributed new jokes to the internet. References: [1] Community Group Buying Industry Deep Report: Focusing on Family Kitchens, Returning to the Essence of Supply Chain Upgrades, Everbright Securities [2] Fresh Food E-commerce War Escalates, Where to Go: Dingdong Maicai vs. Daily Youxian vs. Community Group Buying, Soochow Securities [3] Community Group Buying Deep Research: During the Smoke of War, What Are Brands/Platforms/Group Leaders Thinking? Soochow Securities [4] Community Group Buying First Anniversary: Companies Have Invested Tens of Thousands of Employees, Burned Tens of Billions, No Retreat, LatePost [5] The Last Battle of Express Delivery, Yuanchuan Research Institute [6] Community Group Buying Two Strong Competition, Wang Xing and Huang Zheng "Fight to the End," Baobian [7] Community Group Buying Elimination Race Begins, Shuangyi Consulting [8] Deep in the "Loss" Vortex, Where Will Community Group Buying Grid Warehouses Go, itlaoyou Are you "watching" me?