Source: Xiaohe Operations Notes (ID: gh_05e0f4d34036) This article discusses the essence of community group buying. This year, the community group buying market has not been calm: Tongcheng Life and Shixianghui went bankrupt, Chengxin优选 retreated, and Xingsheng优选 is on the defensive... As a result, public opinion has been spreading that community group buying is doomed. But what we see is the other side: The race is already decided, and the model has initially proven viable. Meituan Select and Duoduo Maicai are leading, Alibaba's MMC has a chance to catch up, Xingsheng优选 is holding its ground, and most other players can pack up and go home. How can we say this? Let us explain one by one. Community group buying is one of the few good businesses in recent years, both high-frequency and essential, especially with 700 million users in lower-tier markets, it's a fat piece of meat in the eyes of giants. Alibaba, Tencent, Meituan, Didi, and Pinduoduo have all invested heavily, as online traffic is tight, and growth can only come from offline traffic. For Meituan, compared to the first group-buying war, the significance of doing community group buying this time is different. Previously, it was as an e-commerce platform connecting consumers and merchants, but this time it is based on the reconstruction of "people, goods, and场所", connecting "people and goods", essentially retail. From existing data, Meituan has a high chance of winning, with daily orders already at 30 million items, firmly ranking first in the track. The T-shaped strategy is expected to add another vertical through community group buying: retail, upgrading to a π-shaped strategy. Next, let's talk about the essence of community group buying.

Business Essence

"Community group buying is centered around the community, with the group buying platform providing goods, community leaders pulling neighbors into a group chat, members ordering through mini-programs, and the platform delivering goods to the leader's home or store, where members pick up or have them delivered. It is a model of selling based on acquaintances and semi-acquaintances." — Industry consensus description of community group buying (Source: New Distribution) We understand this model as new retail, with the core still being people, goods, and场所. Traditional e-commerce is people finding goods; community group buying is goods finding people. Community group buying is an innovative combination of e-commerce and retail, based on community LBS location-based leader带货 services and social interaction based on acquaintance relationships. Let's scientifically understand this business from the perspective of people, goods, and场所. People are traffic and demand; in business, popularity is king, and with people, you have everything. There are two main types of consumer groups in community group buying, brought in by leaders through their social networks, product selection, and services. One type is users in third-tier cities and below in the sinking market, mainly married women responsible for family daily life, who value cost-effectiveness and expect low prices and high quality. Another type is young white-collar workers in first- and second-tier cities, who, as modern laborers, have little time for shopping due to work pressure. Being able to buy daily necessities without leaving home is a quality experience. Goods are products and supply, with the core purpose of meeting consumer needs. In the early stage, community group buying focuses on high cost-performance, high-frequency fresh produce, then gradually expands to daily necessities, snacks, maternal and baby products, beverages, alcohol, and beauty products, ultimately aiming to meet consumers' one-stop shopping needs. Consumers purchase 2-3 times a week, and their needs are not urgent, so next-day delivery is sufficient. Next-day delivery and self-pickup significantly reduce fulfillment costs. 场所 is the platform, the trading venue for supply and demand. The platform connects people and goods to form information flow (product information, purchase decisions) -> capital flow (payment) -> logistics flow (delivery). As the trading "场所", community group buying platforms have lightly transformed information and capital flows, and significantly transformed logistics. To understand community group buying, the core is to analyze the business model chain: platform -> merchants -> grid warehouses -> leaders. In simple terms, if each role can make money, the model has self-sustaining vitality. Especially the development trend of downstream grid warehouses, achieving a win-win between platform and them is key. The logistics of community group buying is divided into procurement and fulfillment systems, involving a complete supply chain: procurement and transportation from production and sales areas, storage and processing at central warehouses, sorting at grid warehouses, and finally delivery by leaders to consumers. This is destined to be a low-margin, high-cost track, and cost reduction capability determines whether the business can make money. Logistics fulfillment is the core competitiveness of many players, including three important nodes:

  1. Central warehouses are platform-operated, used for receiving, storing, processing, and shipping;
  2. Grid warehouses are franchise partnerships, similar to transfer stations, responsible for receiving goods, sorting to groups, and shipping;
  3. Leaders manage orders and consumer self-pickup. This logistics model, compared to platform malls, allows consumers to pick up goods themselves or have them delivered by leaders, reducing fulfillment costs and improving efficiency. Improving efficiency in logistics is the future exploration of the industry. We have analyzed the essence of this business from the perspective of people, goods, and场所. Next, let's look at the market situation. Track Analysis Let's first look at the big picture. An optimistic forecast is: "In 2020, the total scale of China's community retail market was about 11.9 trillion yuan, with an online penetration rate of 20.9%. With the synergy of various online channels, it is optimistically expected that by 2025, the total community retail market will reach 15.7 trillion yuan, with an online penetration rate of 45.5%, and the digital community retail market can reach 7.16 trillion yuan." — Quoted from Tianfeng Securities This growth rate is undoubtedly attractive in today's context of peaking C-end traffic. But this does not mean you have many opportunities, because the current market structure is already very clear: Meituan Select and Duoduo Maicai lead, Alibaba's MMC is accelerating to catch up, Xingsheng优选 is stable locally, while Shihuituan and Chengxin may go bankrupt. New players who entered in the past year can basically pack up and go home. Community group buying is a business that only top-tier giants can play, with burning money measured in tens of billions, requiring massive procurement, warehousing, and fulfillment funds. Meituan Select has burned over 20 billion yuan in less than two years since its launch, while Meituan Waimai took seven years to burn 13 billion yuan. In the current market, few companies can invest 10 billion in a new business. This track is destined to be an opportunity for giants, not for small and medium-sized companies. Compared to competitors, Meituan Select's biggest advantage lies in the strong organizational management capabilities established by Gan Jiawei since the group-buying war and continued to this day, with refined operations and rapid iteration capabilities across all links, especially good at low-margin, high-cost businesses. At the same time, new users of Meituan Select can fulfill other needs on Meituan, such as food, drink, and entertainment, so user LTV is naturally higher. Duoduo Maicai is more about Pinduoduo driving traffic to it, meeting the vegetable purchasing needs of Pinduoduo users. Its advantages lie in traffic and supply chain, with lower customer acquisition costs. Meituan Waimai fought Ele.me, like a second-floor fight against the first floor, and Ele.me has always been uncomfortable attacking from below. Meituan Select will continue this advantage in competition with Duoduo Maicai. Regarding future market trends, expectations are consistent. In the next 1-2 years, 2-3 national oligopolies will form the industry's endgame. Meituan Select, Pinduoduo, and MMC are most likely, with a market share pattern of 334 in the short to medium term, and moving towards 721 in the long term. At the same time, community group buying has some opportunity to become a platform for exposure and promotion of new consumer brands, potentially nurturing a batch of new domestic brands, which is a business opportunity for brand owners and distributors. More significantly, agricultural products still rely on traditional wet markets for circulation. If platforms can accelerate circulation, reduce costs, and achieve a degree of poverty alleviation, then this matter is meaningful. Challenges In fact, community group buying is a relatively difficult business. Even though Meituan Select has achieved industry first, there are still many challenges inside and outside the industry. We need to think: compared to traditional retail and traditional e-commerce, what is the core value created by community group buying? In third-tier cities and below, ordinary people have no pain points in buying vegetables. Whether the group buying market opened with low-priced fresh produce can smoothly expand categories remains to be verified over time. In first- and second-tier cities, it can indeed provide convenient shopping experiences for busy workers, just like the convenience of food delivery. After much thought, the core value of community group buying still lies in the low prices brought by low costs. The "pre-sale + next-day delivery + self-pickup" model can significantly reduce fulfillment costs and effectively improve turnover speed, theoretically achieving lower prices. Referring to Xingsheng's historical data, some brokerage reports predict that in a steady state, after excluding subsidy effects, community group buying product prices will be about 10% lower than traditional channels. In other aspects, we have not yet seen community group buying bring significant value to the industry, nor has it substantially reduced costs and increased efficiency. It seems more like involution of the traditional retail industry. This leads to a big problem that is difficult to solve: the critical attitude towards community group buying from the government to the public. The state has repeatedly emphasized that internet giants should not focus on livelihood businesses like vegetable buying and group buying, but should take on more responsibility for national transformation and upgrading, and empower industries with the internet. Because Taobao and Meituan have previously had a huge impact and hostage-taking on offline stores, the public has an instinctive aversion to internet giants competing with small vendors for business. The state does not support it, the public dislikes it, and public opinion attacks it, making community group buying very passive outside the industry. Within the industry, the difficulty is also visible. Operations are much harder than food delivery, requiring refined operational capabilities. Let's look at the complete business flow. Traffic acquisition: In the early stage, with "traffic" as the core, major platforms relied on subsidies, city openings, group openings, and main site traffic diversion to quickly increase group efficiency and form stable business flow. Currently, leading players have opened more than 300 cities, and the easiest wave of traffic has been captured. For small and medium players, they are already off the table in traffic acquisition, unable to burn money and afraid to burn. Wang Xing said at the Q2 earnings call that Meituan Select aims to bring 3-4 billion new users to Meituan in the next few years. Meituan is one of the most financially savvy companies in China, and Wang Xing is very demanding and accurate with data. From this statement, we can know that the traffic increment from community group buying in the next few years is still considerable. How these new users can feed back into other businesses is a question Meituan needs to consider. Currently, no relevant conversion data is visible in the market. Supply procurement: It is necessary to establish local product suppliers in each city, from negotiating cooperation with brand owners and distributors to onboarding and management. The management difficulty of the entire chain is high and will disrupt the old distributor system that has been popular since the 1990s. Old distributors generally have poor management levels, lack scientific understanding and planning of business, and their operations are basically natural growth. Fulfillment and delivery: Storage, transportation, sorting, and delivery—each link has significant management and operational difficulties. Warehouse construction consumes huge funds, manual sorting is inefficient, fresh products are non-standard and prone to loss, and there are freezing and refrigeration requirements in transportation, plus management of delivery to leaders. At the same time, as SKUs increase, the pressure on fulfillment and delivery only grows. This link urgently needs hardware and software technology to improve processing efficiency. Without efficiency improvements at this stage, SKU numbers cannot increase. Leader operations: Leaders are the aggregation of demand, and all the upstream supply chain relies on end leaders to serve users. Through standardized training (group operations, receiving, sorting, etc.), operating and managing leaders to ensure consumer experience while making money for leaders, so that leaders can be stable. Apart from the above operational difficulties, at the capital level, due to antitrust and various policies, investment in community group buying has cooled, causing small and medium players to exit due to lack of funds. Platform development is short-term dependent on demand, long-term on supply. In the next stage, the logistics fulfillment system is a key element, and efficient warehousing and distribution fulfillment is the foundation for user retention and SKU expansion. So to summarize, community group buying faces many operational difficulties, but there are patterns to follow and solutions are clear, requiring time to sort out. From a medium to long-term perspective, as SKUs increase and warehousing and distribution efficiency improves, community group buying has the opportunity to move to the next stage: delivery of everything to home. Delivery of Everything to Home Undoubtedly, Meituan's future boundary is: delivery of everything to home. If this is truly achieved, the most affected will be the traditional e-commerce industry. Buying goods delivered locally immediately versus shipped from Beijing are two completely different experiences, so Pinduoduo and Taobao will definitely get involved to avoid being disrupted. JD.com, because it already has the infrastructure to support near-field e-commerce for delivery of everything to home, is not in a hurry to invest heavily. And local life e-commerce has always been Meituan's positioning. Meituan's expected new retail is that in the future, when you want to buy any product, you can directly order on Meituan and have it delivered within half an hour. Traditional retail is inefficient, and internet companies combining technology and data to reconstruct the retail industry is worth looking forward to. As long as internet+ technology and efficiency catch up, new retail with better user experience and higher efficiency will gradually replace traditional retail, though this will take a process. This process will not take too long; we will see the outcome within five years. But whether other roles in the process will be eliminated depends on whether giants can also consider technology for good. When we are lucky enough to meet growth-oriented companies that advocate rationality, growth, data, and science, we should quickly join them. Because most companies are too mediocre, and mediocre people going to mediocre companies will only become more mediocre. Are you "watching" me?