Groupon was founded in 2008 with the idea of getting people together online to bargain collectively for bigger discounts in the same product or service.
The idea quickly caught on in China and by 2010 there were hundreds of Groupon-lites. But a brutal consolidation in the sector soon followed. Dubbed “the Battle of 100 Tuan” – tuan means ‘group’ or ‘regiment’ in Chinese – it also borrowed the name of a major campaign by the Red Army against Japanese intruders in 1940, which was said to have involved more than 100 regiments from both militaries.
The winning tuan in the more recent clash 10 years ago was Meituan. Translating as ‘beautiful group’, the company has since evolved from an early imitator of Groupon to the all-in-one ‘everything’ app – and the third most valuable Chinese internet firm by market capitalisation.
A decade on, another battle has erupted in the group-buying market. Armies have been dispatched by nearly all of the biggest Chinese internet players. And the struggle – which was intensified by the Covid-19 lockdowns in China earlier this year – is set to reshape much of the retail landscape in the world’s biggest consumer market.
Where is the war being waged?
The concept that has triggered the latest round of conflict is usually referred to as ‘community group-buying’, but ‘Tuan e-commerce’ might be a catchier term.
The idea of group-buying is not new. Meituan’s early success was based on bringing diners together for bigger bargains from restaurants. Much of Pinduoduo’s early business was built on group purchases too: the fast-growing firm appeared in our pages for the first time in April 2018 as a challenger to Alibaba by offering lower prices to buyers who recruited others to shop together on its app for discounts on products, often purchased directly from manufacturers (see WiC404).
The latest approach to securing a bigger customer base – and a trend that has intensified since the second quarter of this year – focuses more on the specific location of the customer group or community.
At its core is a service that allows a group of residents within the same property complex or neighbourhood to get discounts by shopping together in bulk.
Much of the focus is on e-commerce for groceries or daily necessities. In a more conventional model, apps run by the likes of Alibaba or Pinduoduo connect individuals to merchants for the sale of a product, and then arrange for doorstep delivery. For community group-buying it’s a little different. The goods are delivered in bulk to an agreed spot in the respective community, with each buyer then picking up their share of the purchases.
Such a model offers lower prices for the buyers but it can also bestow operating cost benefits on the e-commerce platforms, primarily in fewer ‘last mile’ deliveries to individual customers by motorbike riders. The elimination of some of that logistical cost translates into bigger discounts for urban consumers in residential compounds and rural residents in villages around the country.
Step up the ‘regimental commanders’
A key figure in holding the tuan together is the tuanzhang, or ‘group leader’, who acts as a local business partner for the sales platform: recruiting new members, promoting products among neighbours, tallying up their orders and arranging the pickup of goods from a central location within the neighbourhood.
In the early days of the trend, e-commerce firms often recruited the owners of local stores as tuanzhang as these small shops provided outlets for temporary storage and distribution.
But increasingly housewives have taken on the leadership roles, seeing it as a new occupation they can tailor to their daily routines. Many are already price-sensitive shoppers and always responsive to the prospects of a bargain. They can also be effective promoters in talking about the quality of different goods or groceries with friends. Most importantly, they have the local contacts and connections that keep the tuan together as a network of loyal members.
Typically the tuanzhang work through an app developed by the e-commerce firm, or simply via the country’s most popular messaging app WeChat. They post links to product listings and promotional offers, encouraging members to make their orders. Many tuanzhang then temporarily store the delivered goods in their homes or on their doorsteps, encouraging swift collection. The leaders receive commissions based on the number or value of the group’s purchases. According to news portal Jiemian, fierce competition over this booming business has meant that internet firms have been willing to offer hefty incentives to recruit new tuanchang. Some of them are commanding up to 10% of a deal’s value. As such, it has become a potential moneyspinner for the most effective of the housewife tuanzhang, which also helps to explain why the sector has prospered so rapidly in recent months.
How did the trend get started?
‘Tuan e-commerce’ is said to have flowered first in Hunan’s Changsha, where price-conscious shoppers started to experiment with group-buying from apartment blocks in the city in 2016.
Xingsheng Youxuan, the leading player in the sector, is headquartered in Changsha, where it has emerged as one of the few unicorns in China with a regional footprint rather than a national one.
Nonetheless it was still reported to be valued at $4 billion, following an $800 million fundraising round led by KKR in July.
The company traces its roots back to a small wholesale operation set up in 1990 by Yue Lihua. Then 17 years-old, the Hunan native set out as a supplier to village retailers. After failed attempts to set up larger supermarkets, he resolved to keep things smaller by serving a market often overlooked by the major players: husband-and-wife shops that sell daily necessities to the local community.
This operation later morphed into Furong Xingsheng, a convenience store chain. Yue expanded his business through a franchise model, becoming one of the earliest businesses in Hunan to do so. It grew into a retail network with more than 10,000 branches in central China.
Yue then expanded into e-commerce in 2013. His initial efforts weren’t very successful but his fortunes started to change when purchases of fresh meat and vegetables online started to become more common among consumers (see WiC375). The unit was subsequently rebranded as Xingsheng Youxuan (youxuan translates as ‘quality selection’).
Franchisees pulled in higher incomes by selling fresh food that was not available on the shelves of their convenience stores. Traffic also increased at their shops as customers arrived on a more regular basis to collect their perishable purchases in person.
But Yue shares credit for the concept with other pioneers of community group-buying in his home province. Because of its proximity to a huge network of suppliers – Hunan is one of China’s major agricultural provinces – there was no shortage of internet start-ups selling fresh goods to locals. Nevertheless by 2018 Yue’s Xingsheng had emerged as the winner in Hunan, in part due to the advantages it enjoyed from its extensive physical network.
What else is supercharging community buying more widely?
Hundreds of millions of Chinese in urban areas live in apartments inside gated compounds, across multiple blocks or towers. These residential projects create social communities in their own right, providing a perfect platform for group-buying. Across much of rural China community feeling is still strong too, even if the living conditions are different.
In both contexts there are grassroots organisations of the Communist Party, such as the ‘street offices’ or ‘village offices’. These quasi-official units are tasked with maintaining social stability, and their local leaders promote government policies at the micro level. As social and political structures, they were a fundamental reason why China was able to implement strict social distancing controls amid the Covid-19 outbreak this year. But they also became major contributors to the community-buying boom during the pandemic, when people came to realise the full potential of a retail model that eliminates visits to stores and lowers the prices on many necessities.
The idea went national, spreading to other Chinese cities after Wuhan’s 76-day lockdown, and China’s internet giants soon grasped there was another new market that could give them yet another growth story (and one that was only 5% occupied). In the past few months, they have been investing heavily in ‘Tuan e-commerce’.
Which of the giants are gearing up in community group-buying?
All the major names have entered the fray in recent months, or announced plans to do so.
Tencent has stuck to its strategy of backing the leading player. It was an early investor in Xingsheng, although the exact size of its shareholding isn’t immediately clear after at least three rounds of fundraisings since 2016.
Alibaba has been investing heavily in the O2O model for a while. One of the leading initiatives has been Hema, a supermarket chain that sells fresh food. The venture won rave reviews for running round-the-clock in locked-down Wuhan earlier this year, including supplies of animal feed to the local zoo (see WiC482).
Alibaba is also an investor in Shihuituan, or Nice Tuan, which focuses on deliveries of higher-quality food. The three year-old firm completed another $200-million investment round this week, led by Alibaba, reportedly its fourth funding round of the year.
Other internet heavyweights such as Pinduoduo, Meituan and Didi Chuxing have all been investing aggressively in community group-buying. After launching a vegetable-buying function on its app in August, Pinduoduo raised $6.1 billion last month through new shares and convertible bonds. The fundraising came as its stock price hit an all-time high – the Nasdaq-listed firm is now worth $175 billion. Pinduoduo is filling its war chest for the battles ahead in the community group-buying business. In an earnings call last month, the five year-old firm again told analysts that it will invest heavily in new logistics infrastructure for sales of agricultural goods.
Meituan might also be tempted to tap the secondary market, with its share price at heady levels. It will need the capital as it too expands in the ‘Tuan e-commerce’ market for fresh foods and groceries too. One of its core strengths is doorstep delivery from its army of riders. But in July the company launched Meituan Youxuan, a direct competitor to Xingsheng Youxuan, and it is now recruiting its own franchisees and tuanzhang nationwide.
Didi Chuxing thinks it can grab a share of the market as well. The ride-hailing app set up its Chengxin Youxuan unit in June, following an inspection tour of Changsha by senior executives. Citing company insiders, 36Kr, a news portal, reported that Didi’s chief executive Cheng Wei told staff last month that he is yet to put a ceiling on the potential investment in Chengxin Youxuan and that the primary objective of the new unit is to become a major new player in the community group-buying business.“For Didi and Meituan this is not a battle to defend their core business but an attempt to look for a secondary growth engine,” 36Kr noted.
Other latecomers are scrambling to put together their own legion of tuanzhang across the country. Late Post, a WeChat-based newspaper, reports that JD.com’s chief executive Liu Qiangdong even told his senior executives this week that he is taking personal charge of the company’s ‘Tuan e-commerce’ push.
Even Bytedance, which operates the popular short video and livestreaming app Douyin, is reported to be planning to invest in this new retailing frontier.
What’s the wider impact of the ‘Tuan e-commerce’ trend?
China’s internet heavyweights are getting new scrutiny from antitrust regulators (see WiC519) but they will be positioning their investments in community group-buying as a social positive in making grocery shopping cheaper and more efficient. This is part of the wider promise of ‘new retail’: eliminate layers in the supply chain and cut down on ‘circulation costs’ (government jargon for distribution expenses) to support cheaper goods for consumers and lower rates of inflation in the broader economy.
Critics of the trend warn that there will be victims too – not least the millions of mom-and-pop stores in local communities that risk losing much of their daily trade – unless they opt to join the new platforms as tuanzhang, of course.
Other incumbents in the existing supply chain, such as the provincial-level distributors of many brands (some of which are backed by local governments), won’t be overjoyed about what ‘Tuan e-commerce’ might mean for their futures as well – suggesting there could be some form of political backlash at municipal levels.
A combination of livestreaming e-commerce and community group-buying would be a double-blow for many traditional middlemen. Recent efforts by businesspeople such as Gree’s chairwoman Dong Mingzhu to sell air-con units directly to consumers via livestreaming could pave the way for major brands to reduce their reliance on regional distributors to drive sales.
But the biggest market for ‘Tuan e-commerce’ is fresh food sales. And on this front, the government will be looking at the benefits for sellers, not just consumers. Chinese Premier Li Keqiang has long encouraged the ‘internet-plus-agriculture’ concept, which matches more affluent urban shoppers with rural farmers, allowing them to transact more directly via online purchases – typically buying premium produce such as organic fruits and vegetable.
Last-mile delivery costs have been a bottleneck in that model, preventing lower-margin business from becoming viable. Powered by the new enthusiasm for community group-buying, perhaps Li’s pet project may finally bear fruit…
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.