Why is the “community group purchase” be the most popular e-commerce model?

Talk to any tech-related person in Beijing this year and ask them what’s hot in tech. They’ll probably say community group buying, followed by live e-commerce. Billions of dollars are now being poured into startup investments, with all the major tech companies throwing their hats and money into the ring. There are rumors that entire business development teams will be hired from competitors within a month. Subsidies are feeding entire villages. It’s all over find Online grocery shopping in China’s lower-tier cities ? Fresh food has always been the holy grail of e-commerce. A daunting task and even Amazon can’t crack it. In China, McKinsey estimates the retail grocery market to be worth RMB 5.2 trillion ($794 billion) in 2019, and only 10% is currently online. In 2020, we finally seemed to have found a business model that works at scale per unit of economics. At least in theory.

Fresh food

That would be community group buying or community group buying, which is the least known business model in online retail. In this issue, we look at the innovations, contributing factors, factors that determine the winner’s success, and ultimately the challenges of this business model.

Online Grocery 1.0 in China

The failure of online grocery 1.0 was more economical than technical. Attracting users in a crowded commercial space is always a challenge, especially when consumers can get their groceries from many offline sources. A new service’s high customer acquisition cost (CAC) is a barrier, but nothing that can’t be solved with enough money. The problems are just beginning once customers are onboarded. Given the time constraints of perishable items, startups need to have a cold solid supply chain, quick turnaround in distribution centers, and fast last-mile delivery to minimize inventory damage. Always balance this with reasonable product quality control.

Even if a company executes the entire procurement and delivery process perfectly, unit economics usually don’t add up. Groceries’ average order value (AOV) has never been so high (unless meat and seafood are added, but that also creates higher quality control requirements). Maintaining consistent margins on products with fluctuating supply is a considerable sourcing challenge. These last-mile delivery costs for high frequency but low AOV deliveries often erode margins. Customers must order multiple times to allow startups to break even, and it costs money to retain and attract these users. The fixed costs of running a cold supply chain are high, so it takes many orders to break even.

These interrelated issues mean that online groceries are still a niche e-commerce product in most parts today. They cater to an affluent customer base with limited time but plenty of cash. This was also the case in China a few years ago. Only white-collar workers in China’s first-tier cities (a concept I mentioned in my short article) would order some vegetables for dinner during their lunch break. China has the comparative advantage of high urban density, and distribution can be isolated from the outside world, reducing logistics costs to a certain extent. But most of the Chinese population will go to offline stores for their grocery needs, whether it’s a supermarket or an open-air market.

OnlineGroceryy2.0 Community Group Buy

For community group buying, the format is as follows.

A self-appointed community leader creates and maintains a WeChat group.

The community leader registers local individuals (usually within their average walking distance), capping each WeChat group at 500 people.

They maintain a weekly or daily schedule of product selections posted to the group. These products are links to small programs where residents click to place orders. Residents do not have to order the same products and only pay when their collective needs exceed a specified value.

Products are not limited to groceries but include other necessities such as paper towels.

After residents place their orders, the entire collated order is delivered in bulk to the collection point the next day for community leaders to pick up.

The community leaders unpack the bulk orders and then organize them into hierarchies for the residents. They either deliver the charges or the residents pick them up themselves.

If there is a problem, community leaders are the first point of contact for residents. They escalate the issue to the platform and handle the solution on behalf of the resident.

Community leaders receive a 10% commission on their group orders for their work. Given the hands-on nature of the work, a community leader can usually only manage three micro-groups well at any one time.

As community leaders joined the supply chain, the unit economics of online grocery changed radically. The CAC is now lower because community leaders are responsible for creating their customer base. Customer Lifecycle Value (CLTV) is extended because customers have more in-person support, and social buying promotes frequent purchases. Conversion rates are much higher – up to 10% in WeChat community group purchases, rather than the typical 2-3% eCommerce conversion. Community leaders and customers are responsible for last-mile delivery, saving valuable additional logistics costs (lower logistics costs are often the only driver of marketplace profitability). platforms can carry fewer SKUs, buy in bulk directly from the source rather than through a middleman, and have higher pass-through rates of

“The home delivery model has a dispatch cost of $7-10 per order, which is relatively rigid, and other fulfillment costs such as warehousing are around $1-2. The community group buying model with better order density can achieve a delivery cost of less than $1.50 per single” – Xing Sheng You Xuan (one of the startup unicorns in the race)

The model is a win-win proposition for consumers, community leaders, and the produce platform itself. The typical community group buying customer is price-conscious, typically resides in third or fourth-tier cities, and is often elderly (a demographic that has difficulty navigating the complexities of purchasing consumer apps). These consumers have access to a fresher, cheaper, and potentially broader range of goods (especially seafood in more remote areas). For community leaders, who are often local store owners or full-time moms, can earn additional income while serving their communities. They can run assembly line operations that reduce corruption and high yields for production platforms. Ultimately, they can run a profitable business at scale.

Enablers and Triggers of Community Group Buying (CGB)

Enablers of Community Group Buying is a case study that illustrates how adaptive behavioral change can facilitate the adoption of adjacent business models. The phenomenon of WeChat buying groups has slowly built up with the applet. It took off with Poundworld, which made collective bidding a daily activity in group chats. These WeChat buying groups enabled a group of community entrepreneurs to gain a lucrative side business by knowing how to create and maintain chat groups. The high urban density mentioned above also means that these people can serve people within walking distance. Driving poverty reduction and promoting commerce in distant areas also means that retailers have built up extensive cold chain supply chain capabilities in China, allowing access to lower-tier cities that were previously inaccessible.

The community group buying trend is already gathering momentum in the background. The proliferation of startups began in 2018, with 2019 being a year of consolidation and acquisitions. As things stabilize in early 2020, large tech companies will move in.
COVID-19 proves the model and accelerates adoption rates. GF Smaller Apps September 2020 had 101 million MAUs, up 68% year-over-year. An underestimated fact during Covid is that information transfer is mainly community-based. Residents relied on local compound leaders for news about local infection rates and related prevention measures. At the same time, people needed to buy groceries, and the community was unified in purchasing for everyone who used the broadband.

Everyone now sees the benefits and opportunities of this business model. What an opportunity, McKinsey estimates that the online grocery market in China will grow at a CAGR of 30% – 50% over the next two years. For the tech giant, it’s not a different distribution channel but a way to access a specific unreachable customer base and completely digitize their purchasing process.

The rule of thumb for e-commerce retail in China is that once a marketplace can generate a 10 billion RMB ($1.5 billion) GMV top line, that’s when the big tech companies are interested because it indicates scalability.
Big-league tech companies like Poundland, Meituan, and Drip are making moves to dive headfirst into space. Alibaba has been a longtime participant in the BoxMall series and recently invested in Nice Tuan, an essential startup in the distance. Racer and Byte Jump entered the picture, and Tencent has invested in everyone twice. In addition to the size of the market, which is widely considered one of the last large consumer markets, the tech giants see huge upsell potential in other products.

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