The most important knowledge system I studied in 2018—the business dimension—can explain many innovative retail e-commerce business models. The currently popular community group buying is no exception. Since the second half of 2018, community group buying has attracted over 3 billion yuan in capital. Sequoia, Hillhouse, IDG, GGV, Today Capital... multiple first-tier institutions have placed bets on this track. To thoroughly understand the impact of "community group buying" on the future development of the retail e-commerce industry, let's first briefly review the main content of the "business dimension":
It is composed of time and space, or time and distance. Time includes: purchase time, usage time. Space includes: purchase distance, usage distance. Based on the analysis of "two-dimensional business," a conclusion is drawn: Innovation in retail e-commerce lies in striving to shorten purchase distance, purchase time, and usage time until they are infinitely close to being identical!
-01- The "Two-Dimensional Model" Combining Traditional Supermarkets, Convenience Stores, and E-commerce Through research on community retail formats, the traditional main offline formats include department stores (shopping malls), supermarkets, and convenience stores (community stores); innovative formats include unmanned vending cabinets and community group buying; online e-commerce platforms penetrate communities through the "delivery to home" model.
The reason supermarkets, department stores (shopping malls), and convenience stores coexist near communities for a long time is partly determined by differences in price and product richness, and partly by the purchase distance in the "business dimension." Supermarkets and department stores (shopping malls) are far from communities (long purchase distance), but prices are cheaper and the variety of purchasable goods is richer. Convenience stores are close to communities (short purchase distance), but prices are higher than supermarkets and product variety is smaller. The purchase time and usage time of both depend on purchase distance, meaning purchase time and usage time equal purchase distance. For 6-7 years, the "delivery to home" model has not developed rapidly, due to the offline traditional formats it connects. When two B-end enterprises connect and cooperate, the difficulties encountered are generally greater than imagined, and efficiency is low. However, "delivery to home" is the earliest model combining e-commerce with offline traditional formats. It shortens purchase time and purchase distance compared to physical stores, and shortens usage time compared to e-commerce. By comparing the "two-dimensional" models of e-commerce and supermarkets, the following simple equations can be derived: Supermarket purchase distance = JD.com's delivery time; JD.com's purchase time = Supermarket purchase distance; Supermarket usage time = Supermarket purchase time; JD.com's usage time = JD.com's delivery time. In these equations, whether to buy from JD.com or the supermarket depends on delivery speed and distance to the store; the two are actually evenly matched, with no clear advantage for either. Although price advantages can interfere with purchase time and distance, they play a minor role in the business dimension, especially when facing younger consumers who are less price-sensitive and strong brand owners with stronger price control capabilities. If JD.com and supermarkets are combined, i.e., JD Daojia, then JD.com's delivery time (delivery distance) will be greatly shortened (delivery to store for pickup, achieving goods-to-person like e-commerce), and users' usage time is simultaneously shortened. Supermarket purchase time is shortened on the JD Daojia platform, and distance to store is replaced by delivery time (delivery distance).
-02- The Business Model of Community Group Buying But the "delivery to home" model still hasn't achieved the ultimate ideal of retail e-commerce: infinitely shortening purchase distance, purchase time, and usage time until they are infinitely close to being identical! Moreover, delivery costs are very high. Even with the model of part-time couriers (JD Daojia merged with Dada Express years ago), delivery efficiency still requires 1 to 2 hours. Platform companies bear huge losses to support sales growth, because although supermarkets and department stores (shopping malls) have a wide variety of goods, consumers' high-frequency purchases are still concentrated in fresh produce and FMCG. Brand merchants in these two categories pay numerous fees in supermarkets and are unwilling to spend extra costs on delivery-to-home platforms. Therefore, marketing expenses, price subsidies, and delivery costs need to be borne by the delivery-to-home platforms!
Can community group buying further shorten purchase time, usage time, and purchase distance? To facilitate understanding of the community group buying business model, I have drawn a simple diagram based on my understanding: The community group buying business model is slightly more advanced than the "delivery to home" model in that: it converts the original fixed delivery cost into a sales commission. The original part-time courier is upgraded to a "group leader," who, although taking on the work of customer acquisition, has "expected returns" clearly greater than the fixed delivery income of a few yuan per order. Group leaders are much more motivated and have a stronger sense of belonging than part-time couriers. As for whether it is more sustainable? My analysis concludes that the sustainability of the two is comparable, with one rising as the other falls. Some community group buying companies are considered upgraded versions of the "delivery to home" model, such as "Xingsheng Youxuan," heavily invested by Today Capital, and the community group buying recently launched by Suning Xiaodian. Both have offline self-operated or franchised convenience stores as trust endorsements and "front warehouses." Through the natural sales of an increasing number of convenience stores and the incremental sales from community group buying, the platform further strengthens its supply chain bargaining power and service capabilities, forming a virtuous cycle and reducing the risk of this innovative business model. (Suning Xiaodian is fully self-operated: 10,000 stores in 2018, with plans to add 15,000 in 2019 to reach 25,000; Xingsheng Youxuan is mostly franchised: 12,000 stores in 2018) After more than a year of development, the head effect in community group buying has become increasingly evident. The latest data shows that in the past six months, "Xingsheng Youxuan" has seen the fastest growth in monthly active users of community group buying mini-programs, ranking first. (Suning Xiaodian's community group buying has just started, and third-party institutions have not yet conducted statistics) According to previous analyses by many experts and industry insiders, whether the community group buying model without offline convenience stores (or front warehouses), purely based on group leaders + front warehouses + small trucks, can succeed is a big question mark. After all, the group leader is merely an upgraded version of the part-time courier in the "delivery to home" model. This upgrade not only increases the workload but also relies on "expected returns" to maintain the relationship. Once group leaders find that expected returns are not met or competitors offer higher expected returns, they will quickly leave. Group leaders have added work in user acquisition and management, increasing the difficulty. Although the community group buying model makes platform management more difficult and riskier than the "delivery to home" model, "recruiting group leaders" can start sales immediately, which is significantly lower entry barrier than the "delivery to home" model, which requires negotiating with physical stores one by one, building platforms, spending money on promotions, and subsidizing delivery costs. In addition to low operational barriers, community group buying also has huge horizontal category imagination space. According to a domestic survey on the proportion of community commerce in a first-tier city:
Catering (including restaurants, specialty dining, snacks, beverage bars, cake shops, etc.) accounts for 37.6%; Retail (clothing, shoes, hats) accounts for 18.5%; Life services (banks, supermarkets, budget hotels, laundry, wedding photography, etc.) account for 32.9%; Leisure and entertainment (beauty salons, internet cafes, chess and card rooms, etc.) account for 11%. Although this data does not reflect the proportion of household consumption in community consumption, it shows from another angle that a considerable portion of household consumption is completed at physical stores around the community. This fact is also corroborated by the penetration of online shopping in recent years (in 2017, national online retail sales were approximately 7.18 trillion yuan, still only accounting for 19.6% of total retail sales of consumer goods). To achieve more than 50% of household daily expenditure, community group buying must include more consumer categories. Then one of its ultimate forms will be a community comprehensive service platform. Local group buying transactions for physical goods and non-standard services will become a killer feature for user stickiness, while low-frequency, high-value consumption such as entertainment, education, and tourism, as well as financial or quasi-financial services, will become pillars supporting platform profitability. Of course, this is also the imagination space for the "delivery to home" model. Vertical development involves, after channels become more down-market and denser, relying on a large number of community terminals to jointly develop private-label products with upstream suppliers, thereby greatly improving bargaining power and increasing gross margins. Analyzing this way, "community group buying" also has strategic significance and status for giants: On December 26, 2018, Yonghui Superstores launched its first community group buying order with a cherry product, becoming the first in the retail industry to do community group buying. JD.com, which just "took down" its unmanned shelves, quietly launched its own community group buying mini-program "Youjia Puzi" at the end of last year. At the Suning.com New Year Festival press conference, it announced that it would launch community group buying services on January 18, 2019, recruiting 100,000 "group leaders" nationwide, covering 20,000 communities, and achieving interaction and self-propagation among 60 million users. According to public data statistics, there are currently more than 40 community group buying platforms in the market. If uncounted data is included, the "Hundred Regiments War" has slowly begun.
The "Two-Dimensional Model" of Community Group Buying: What is the relationship between purchase time, usage time, and purchase distance? Group leaders indeed play an important role. Their existence shortens purchase time (via WeChat groups and mini-programs) and purchase distance (no need to walk to convenience stores), while usage time and purchase distance achieve an equivalent relationship. This model leads to changes in purchasing behavior, transforming consumers from active purchasing to a combination of active and passive purchasing. For example: Xiao Li goes to a supermarket or a convenience store at the community entrance every day after work to buy groceries and cook. If going to the supermarket, from arriving at the supermarket to the produce section, to queuing at checkout (even self-checkout requires queuing), and then home, it takes about 1 hour. Later, he bought through "delivery to home," placing orders 2 hours before leaving work. If delivered early, he would ask the courier to leave it at the door; if overtime occurred, it was very troublesome, and the meat and vegetables might spoil; if he arrived home early, he had to wait for the delivery. The delivery time for "delivery to home" cannot be precisely guaranteed, and he often forgot to open the app or mini-program to place orders, so he had to go to the supermarket or convenience store again. The price of "delivery to home" is the same as the supermarket, and occasionally there are promotions on the platform, making prices cheaper. Later, Aunt Wang next door became a "group leader," created a WeChat group, and posted a notice in the hallway. Xiao Li scanned the QR code to join and found more than 30 neighbors inside. He was happy to meet so many neighbors. Aunt Wang's two children are usually busy with work, her husband passed away early, and her grandchildren are all in school. She was always idle, but now she is busy every day recommending products in the group that are much more discounted than supermarkets and "delivery to home." Because it's a WeChat group with neighbors and WeChat friends, Xiao Li would take time to look at the messages Aunt Wang sent, and gradually several people formed the habit of group buying to save money. Sometimes, to buy products cheaper, they would invite colleagues and friends from the same community to join the group and participate in group buying. After ordering, they could pick up goods at Aunt Wang's house or have Aunt Wang deliver them. Aunt Wang could see her order data and income in real time through the mini-program. As more people joined the WeChat group and business improved, she even bought a new double-door refrigerator. It is said that Aunt Wang now earns nearly as much in commissions as Xiao Li, a white-collar worker. From this user case, community group buying not only effectively shortens purchase time and purchase distance, but also improves consumers' shopping experience and efficiency. Community group buying platforms reduce costs for customer acquisition, delivery, and part of product warehousing, but increase costs for acquiring and managing group leaders. From a competitive environment perspective, the "two-dimensional" model of community group buying clearly intercepts traffic from traditional e-commerce and traditional supermarkets and convenience stores. Moreover, community group buying prioritizes density over scale. The more orders in a unit area, the more prominent the scale value. This layout model is very similar to opening stores. No wonder they are also aggressively launching this business model. If there is only scale without density, the larger the scale, the higher the backend investment costs. Therefore, community group buying that occupies regional density advantages is more viable. Now, traditional e-commerce, offline physical stores, and companies with a large number of front warehouses basically understand the advantages and disadvantages of community group buying. Once they achieve major breakthroughs in fresh produce supply chain standardization and have strong bargaining power in FMCG supply chains, once they decide to fully enter this field, the elimination round in community group buying will accelerate. Community group buying without offline physical stores needs to continuously strengthen brand trust building and fresh produce supply chain standardization, quickly acquire group leaders, and improve group leader stickiness through comprehensive services such as benefits, skill improvement, and corporate culture, quickly forming a moat.
Finally, let's look forward to the future landscape of community group buying:
E-commerce giants each support several community group buying platforms to compete, just as there is Tmall besides JD.com, Meituan besides Ele.me, and Pinduoduo besides Miss Fresh... Regional physical chain giants incubate or strategically invest in regional leaders. Property giants support or strategically invest in leaders with exclusive resources in managed communities. National chain physical retail enterprises have their own community group buying as a standard service. Through the analysis of the two-dimensional model of community group buying, it is now clear that this business model is unlikely to become an oligopoly economy, but will present a pattern of multiple players coexisting in different consumption circles with regional, demographic, and industry segmentation.
Source: Zhuang Shuai Retail E-commerce Channel (ID: zhuangshuaiec), Author: Zhuang Shuai Tips will be paid 400-2000 yuan upon adoption.