With China’s cities saturated with group-buying apps, the big players have taken their show on the road.
Photo from CFP
By KE Xiaobin, SHE Xiaochen
One after another, smaller companies have departed the community group buying scene. Since July, Shihuituan, Shixianghui, and Tongcheng Life have announced layoffs or bankruptcies.
If these second-tier players are being hooked off stage, the leading actors are not exactly getting rave reviews. Meituan’s and Didi’s pet group buying apps are still in the red. Meituan’s Q1 report shows new business (including group buying) at over 8 billion yuan (US$1.2 billion), around six times the hugely impressive loss they made this time last year.
When A-listers came on stage, the show was already over for the middle of the market. Small companies had no choice but to shout louder or be drowned out by the noisy superstars. This is not always the tragedy it sounds like. Many of these companies were created with the singular expectation of joining the entourage. Others, unwanted or going it alone, require huge quantities of cash to survive.
It’s the same old Internet soap opera all over again. Huge companies splash unlimited amounts of cash until they are competing only with each other. Then, they sit gloating on top of their mountainous heap of money until the government arrives to restore market order. Or they run out of cash and expire.
The transformation of Shixianghui was as sudden as it was drastic. The company started in Wuhan in 2018. Last year, the pandemic drew the attention of the entire world to Wuhan, not to mention e-commerce megastars, Alibaba, Didi, and Meituan. Along with all the other big names, they stormed the Wuhan theater as lockdown ended.
DAI Shanhui, founder of Shixianghui knew they would come, but not so fast. Shixianghui wanted to avoid competition with the colossal but ended up squandering about 64 million yuan in Wuhan last year while Dai went begging for more investment. He didn’t get what he needed, and the money from Tencent's injection in 2019 couldn't support the company for long. Senior staff were last paid in March. Disputes and acrimony followed.
ON July 26, Shixianghui announced bankruptcy.
"The last time I spoke to Dai was three months ago," CHEN Ming, a senior executive of Shixianghui told Jiemian News. "Not the suppliers are ringing me up nonstop for the overdue money they are yet to get."
Dai denied them all, the failed financing and unpaid wages.
The day after Shixianghui closed its community group buying business, Dai announced a new round of financing. However, the project that he spoke of has nothing to do with Shixianghui. It is an entirely separate affair masterminded by a “friend” of Dai. Dai plays an insignificant part in it.
While the giants competed for provincial capitals, second-tier players shifted their focus to rural areas, another obviously costly route, which generally led to a more rapid decline and fall. Plenty of people have lost their jobs.
Community group buying companies are doing grocery retail business. In the case of supermarkets, differences in geography and consumers make it difficult to win a share of the market nationwide. Until now, conquering new territory simply meant offering people cheap stuff: bigger promotions. But regulatory policy now discourages the subsidy model.
Internet platforms may not “dump” at low prices. The selling price must be higher than the cost, regardless of promotions. Shihuituan was fined 1.5 million yuan in March and May for improper pricing, the point when the company really started to struggle.
Meanwhile, the days for giants to continue spraying money around may be numbered. With middle players leaving the field one after another and regulations tightening, cash flow is drying up.
Didi's group buying business Chengxinyouxuan has been losing about 3 billion yuan per quarter, sources told Jiemian News. It sought large amounts of financing but few showed any interest.
"Some 70 percent of Chengxinyouxuan's clients are retailers instead of actual customers," said the source. The VCs don't like it.
In July, Chengxinyouxuan closed its headquarters in Southwest China's Chengdu and moved to Hangzhou, it is also laying off staff in central provinces.
In March, Meituan Youxuan turned its first profit, but making up for losses is only one small idea. This is an incremental market that the giants urgently want to expand. Even something as ubiquitous as Didi has a penetration rate in small cities below five percent.
Driven by inertia and expectations, the giants will eventually win, while the middle companies have been gradually driven out of the game, though this is not the worst option for many.
For those who remain, there may be very little community spirit in the marketplace for many months to come.