Who Exactly Is Community Group Buying Taking Food From?

Click "Read Original" for details**** Community group buying, after its revival this year, has been like a shot of adrenaline, seemingly set to stay "hot" throughout 2020. A hot topic recently has been, "Community group buying's billion-dollar subsidies are ruining FMCG." Some say that community group buying most directly harms the hundreds of thousands of FMCG distributors scattered across the country. Blatant price chaos and cross-regional channel stuffing seem to have become "legitimized," with early-adopting distributors reaping short-term profits while neighboring distributors suffer. Others say that the impact of community group buying on offline business is no less than the last e-commerce revolution, with the subsidy war directly burning the minds and bodies of 20,000 KA supermarkets and 6 million small retail store owners. Some local supermarket chains have already predicted a 10%-30% decline in performance. Smart supermarket and store owners became group leaders, only to find themselves in trouble due to overlapping categories and price disparities. Still others say that on the surface, brand manufacturers seem to be the "beneficiaries" of this craze, with some FMCG manufacturers turning a blind eye to price chaos and even colluding with platforms, seemingly benefiting greatly, but in reality, they are damaging their own reputations, and some brands have already faced joint boycotts from distributors in certain regions. So, today we discuss this controversial topic: Who exactly is community group buying taking food from? **-01- Brand Manufacturers Manufacturers' minds are complex at this juncture, like a young maiden in love, wanting a partner but fearing both the partner's absence and misbehavior... That is, manufacturers see community group buying's popularity and its ability to skip the long-standing complex distribution channels to reach C-end consumers directly, so they are eager to embrace it. But they also fear that doing so will harm the traditional distribution system that benefits them, disrupting the entire price structure, which is a matter of life and death. Typical examples include Master Kong preparing to establish a new e-commerce department to coordinate B2B and community platforms; Tsingtao Brewery's senior management discussing whether to create a dedicated product for community e-commerce channels to avoid impacting traditional distribution while maintaining channel grip; and Uni-President launching a new beverage directly on the Xingsheng Youxuan platform. So, manufacturers are generally in a wait-and-see mode, appeasing and deliberately supporting, with extremely ambiguous attitudes. The above examples show that large enterprises have a keen sense of such trends, but not all brand manufacturers can do the same. This community group buying platform, by compressing and eliminating intermediary links, will naturally push upstream brand manufacturers to evolve towards optimal cost-performance products, which is what Mr. Ma calls "new manufacturing." Brands that fail to grasp this critical point and lack the ability to spread and promote will inevitably be eliminated in this massive wave. **-02- Distributors Logically, manufacturers have a strong need for revolution, as which brand manufacturer would want to reach consumers through 4-5 layers, and which wouldn't want to establish an F2C model? More importantly, as the creators of brand value, manufacturers should be the first to initiate change from the upstream source. But then we return to the problem mentioned earlier: the inertia of traditional forces is too strong, and manufacturers wanting to revolutionize themselves is like pulling one hair and affecting the whole body. So, some mention that distributors may fail to complete tasks, and with the channel price system disrupted, profits may be blocked, leading to mass deaths. Could this happen? Because the chain must not be broken; manufacturers want revolution, not self-destruction. However, while the entire chain cannot be broken, compressing it at this juncture is achievable. In the second half of community group buying, it is highly likely to trigger a transformation in the role of distributors, leading to a new way of life—restructuring traditional distributors into supply chain operators. Simply put, distributors' functions will shift. Currently, they sell goods on behalf of manufacturers, with the responsibility of selling goods into B-end. In the future, they will procure goods on behalf of consumers. The platform will feed user demands back to distributors, who will procure based on those demands, facilitating the transfer of products from manufacturers to the platform. At this point, distributors' main profit composition will no longer be the middleman's price difference but manufacturer commissions, with more work yielding more rewards, and order volume determining rebate points. But why can't manufacturers directly compress the chain to the platform, bypassing distributors? This is like in real life, where two families know they will become in-laws, yet a matchmaker always appears to mediate. Indeed, this is the function of media. For example, there are tens of thousands of FMCG manufacturers nationwide, and platforms cannot connect with each one individually, nor can they communicate order by order. Manufacturers seek scale, while platforms seek full category coverage. So, the function of service providers is to aggregate demand to widen the chain, then deliver it through a centralized pipeline to the platform. On the other hand, the mechanisms of platforms and manufacturers cannot directly dialogue. Traditional supermarket payment terms are typically 30 days or longer, requiring distributors to provide capital and warehousing. Community group buying, with its inherent planned procurement capability, compresses the payment cycle to T+1, but even so, negotiations with manufacturers fail because manufacturers produce based on orders, and service providers are still needed to advance funds. Therefore, future operations service providers must handle information flow, fund advancement, and comprehensive services. So, distributors need to transform, but they will not perish. **-03- Second-Tier Wholesalers But since it's a revolution, there will be sacrifices; since the chain is compressed, some will be squeezed out. Looking back at the major revolutions second-tier wholesalers have experienced: from 1990-2000, as more well-funded wholesalers obtained agency rights for well-known brands, second-tier wholesalers left the scene one after another, and everyone thought distributors would replace wholesalers, but they didn't. From 2000-2010, hypermarkets entered China, regional stores rose, and prices from within hypermarkets were even lower than local wholesalers, leading people to think wholesalers were doomed, but they weren't. From 2010-2020, the internet exploded, e-commerce and new retail rose, and even offline physical retail felt threatened. Everyone thought wholesalers surviving in the cracks would finally lose their position, but they didn't. However, this time, second-tier wholesalers might really be in trouble. So far, information from various fields has repeatedly indicated that the outlook for second-tier wholesalers is very bleak. Community group buying has pierced prices, and neither manufacturers nor consumers are willing to pay for the lengthy intermediate circulation links. This is both the essence and the fact. The B2B war of the past aimed to eliminate second-tier wholesalers, but B2B wasn't thorough then, as will be mentioned later. Now B2B is no longer as glorious, but community groups, disguised as group buying, are doing B2B's "dirty work." Operations service providers move goods from manufacturer warehouses to community group warehouses, small B merchants order directly as on B2B software, and C-end users order on the platform for in-store pickup. When new internet giants and old track veterans weave a large network across the country, with local regional platforms filling gaps, second-tier wholesalers will face large-scale elimination. **-04- KA Supermarkets The entry of KA supermarkets can be considered China's first retail productivity revolution. In supermarkets, visual, auditory, olfactory, and tactile senses are all satisfied, creating a complete consumption scenario. When supermarkets first entered China, they were almost as popular as zoos. People partly paid for the scenario, and even now, people still say "go shopping" at supermarkets. From the 1990s to the 2000s, supermarkets were as thriving as community group buying is today. Any report would inevitably mention where a hypermarket opened and how many stores it had. That was the beginning. But now at the endgame, we see more reports of mergers and exits. Supermarket revenue and traffic are declining. Why? Because e-commerce offers low prices and satisfies consumers' need to order anytime, anywhere. Duobaodong can be said to have stepped heavily on supermarket business; everything that can be shipped individually has been handled by Duobaodong, and now what cannot be shipped individually is being taken over by community group buying. In other words, e-commerce took half of supermarkets' business, and community group buying took the other half, stepping with the other foot. Additionally, supermarkets' payment terms are at least 30 days. When supermarkets procure goods, suppliers factor in interest and bad debt rates, so community group buying's quasi-cash procurement is at least 15% cheaper than supermarkets. Furthermore, supermarkets have labor, rent, utilities, and other costs, with a markup rate of at least 25%. In summary, this community group buying craze will further reduce foot traffic and visit rates to comprehensive KA stores, directly eliminating "3-low" (low labor efficiency, low area efficiency, low time efficiency) hypermarkets. It is predicted that nearly 1/3 of comprehensive hypermarkets will disappear. **-05- Terminal Small Stores According to the national policy "Opinions" on September 29, "The state will focus on supporting physical stores to establish omni-channel, all-weather connections with consumers through the internet, encouraging physical enterprises to return to the essence of business, using e-commerce to attract customers, and encouraging enterprises to continuously innovate business models in line with the times." As a new business model, it will reconstruct the entire existing sales system, but why are second-tier wholesalers being revolutionized, not terminal small stores? In martial arts TV dramas, those using spears against swords always shout, "An inch longer is an inch stronger, an inch shorter is an inch more dangerous." But in the business chain, it's the opposite: whoever is closest to the user has the highest value. So, "e-commerce" held in hands anytime, anywhere won't die, and community small stores passed by daily won't die either. If one must be killed, it would be the next level up—the second-tier wholesalers mentioned above. Moreover, these 6 million small stores won't die; they will become even more "spirited." The "Internet+" concept often mentioned in recent years—Internet+food delivery gave rise to food delivery apps, Internet+currency gave rise to online payments, and Internet+retail gave rise to online e-commerce represented by Duobaodong—but Duobaodong's emergence also marked the beginning of the offline battle, yet it didn't bring these millions of small stores along to embrace the internet. But the emergence of community group buying provides an opportunity for offline small stores to enter the internet domain. Why? Because in the future, whether group leaders are strengthened or weakened, they will exist. Offline pickup is the killer feature that reduces logistics costs to the extreme, and pickup points are currently the lightest model with the lowest fulfillment costs. With the inherent "soil" environment in place, the rest is to catalyze community-based chain stores, including CVS convenience chains, fresh food chains, and pharmacies, to advance store cluster integration (chain stores counter-harvest community group buying), thereby building a new store commerce transformation centered on stores, forming a third force in local e-commerce retail. Community group buying pushes 6.8 million terminal community small stores onto the last train of mobile internet. **-06- FMCG B2B After all this, we finally return to the B2B mentioned earlier. We won't delve into the rise and fall within the B2B track, but two recent events seem to signal something. First, on November 16, Best announced that Best Store Plus would exit the competition; second, recent senior management changes at Alibaba Retail Link. Some may think the above "signals" are only meaningful if you believe them. But community group buying replacing B2B may be an inevitable outcome, just as mobile phones replaced pagers in the 1990s. Why did B2B attack second-tier wholesalers but fail to eliminate them? Because B2B fought with its own B-end logic, but wholesalers have their own reason for existence, so as mentioned earlier, B2B didn't do the job thoroughly. Now community group buying steps in with a BC-integrated business model. Putting all eggs in the B-end order basket makes the platform unstable. So community group buying uses group leaders to open the C-end, satisfying users' cost-performance needs, and then turns to solve the supply chain problems of 6 million small stores. This will make the already struggling FMCG B2B track even worse. **-07- Traditional E-commerce Duobaodong Taobao's rise slammed shut a door in the online retail track, but Alibaba only focused on how wide to build the door to block others, not noticing that there was a crack above and a crack below. Above, JD.com took over the entire electronics and digital category and some high-end products that Taobao couldn't endorse; below, Pinduoduo caught the small and medium manufacturers that overflowed during Taobao's consumption upgrade and went down to 5th and 6th tier markets. So, we can't help but ask: What is left for community group buying? Rice, flour, oil, vegetables, fruits, salt, soy sauce, etc.—items with large volume, low value, short shelf life, and shipping costs that can't be covered by a few yuan per order. Through centralized procurement and distribution, logistics costs are compressed to a few cents per order. So, community group buying is currently mainly seizing areas that traditional e-commerce cannot handle. If you can't, let me do it. **-08- Local Life If community group buying is now the hot trend, with various forces entering the fray to grab a piece, then the entry of same-city life platforms represented by Meituan is a must-win. If they lose this battle, the tide will turn, and all their previous luck will be directly divided and seized. If you don't believe it, open your phone and observe: as these community group buying platforms' mini-programs or apps update and improve, aren't they becoming more and more like a certain leading platform's app? It's almost "copying." Anyone who has played tower defense games knows that if your base is lost, what's the use of pushing towers outside? So, the logic for local life platforms doing community group buying is: rather than waiting to be revolutionized by invaders, it's better to reform from within. Summary: In short, community group buying, as a manifestation of local community e-commerce retail, has three major characteristics: regionalization, localization, and community-based. As the standard-bearer of the third Chinese retail revolution, it is destroying and resetting the traditional channel width and length of manufacturers in a full-chain manner, compressing and rerouting the long-standing "manufacturer → distributor → second-tier wholesaler → retail store → user" relationship chain, forming a new chain pattern of "manufacturer → operations service provider → platform → group leader pickup point ← user." It seems that community group buying is not actively taking food from anyone's bowl; those who lose their jobs are reaping what they sow. Indeed!

Chen Haichao | Chief Consultant, Mai Marketing New Retail Consulting Agency

He Nian | Researcher, New Retail & Community Group Buying Add author WeChat Note: NameCompanyPosition