December 17, 2020

What is community group buying and why is it trending in China?

What is community group buying?

“Community group buying” is an emerging way for Chinese consumers to shop for groceries and household goods. Group buying platforms have emerged empowering individuals to become “group buyers” or “community leaders” on behalf of their neighbors – unlocking significant bulk discounts for the consumer. 

Group purchases are streamlined via Wechat groups (the messaging app widely used in China). Everyday, the group buyer/leader sends their neighbors a form with a list of selected discounted grocery and household goods, usually 20%-30% cheaper than the same products they’d find in a nearby grocery store. To make a purchase, neighbors simply choose the items they want to buy via the form, and pay in Wechat. These orders are shared directly with the manufacturers by the group buying platforms to make bulk purchases. The next day, the bulk order is delivered to the community leader’s home or a central location for residents to pick-up. 

This method of centralizing shipping and distribution greatly reduces the cost of last-mile delivery and overhead, creating cost-savings that are passed onto the consumer. This approach has been effective in fourth tier cities and rural communities that are uniquely price sensitive and operate in close community settings.


Market landscape

Community group buying first caught the attention of VCs in 2018. At the time, the main players were early stage startups such as Xinsheng Youxuan, China Fresh and Shihui Group. Several startups have since raised huge amounts of funding from VCs, further attracting more players to compete in the space. At its peak, there were more than 200 community group buying platforms in just one city. 

In 2019, the market cooled as investors feared the business model might not be sustainable due to deep product discounts and a hyper competitive market. As capital dried up, the market consolidated with many startups going out of business or being acquired.

Things changed again in early 2020 when COVID-19 swept across China. Most cities in China were locked down for weeks. Because of this, community group buying platforms boomed as they were often the only viable option for people to shop for groceries.  The total investment in this space reached over RMB 10 billion (1.3 billion USD) in 2020. And this time, tech giants such as Alibaba, Meituan, Didi and Pinduoduo joined and led rounds as community group buying became widely adopted throughout China, not just in its rural communities.


Why has this piqued the interest of Big Tech?

According to a local research institute in China, the size of the community group buying market is estimated to reach RMB 100 billion (14 billion USD) in 2022. Mckinsey estimates that the Chinese online grocery market will grow at a CAGR of 30%-50% in the next two years. 

Additionally,  community group buying could be the new growth driver Chinese tech giants have been looking for. The past few years, China’s e-commerce industry has become increasingly saturated. User and revenue growth for both Alibaba and Tencent has plateaued. Community group buying unlocked access to new consumers in the suburbs and rural areas who were previously unreachable before.


Will the Chinese government intervene?

The popularity of community group buying has created a social problem in China: millions of small locally owned grocers are going out of business as their customers shop online. On December 11th, 2020, the Chinese government published a statement that urged big tech companies to focus on developing cutting edge technologies, rather than fighting over “selling cabbages.” Many wonder if the Chinese government might outright ban companies from operating community group buying platforms if they conclude the industry is doing more harm than good.


Why should this matter to you?

The community group buying model accelerated the growth of online grocery and forever changed consumer behavior in China. There’s potential for this model to expand beyond groceries and into other categories. And as many startups around the world look to China for inspiration around new business models and consumer trends, this is certainly one worth watching.

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