How Selling Cabbages is a Billions of Dollars Opportunity In China

What China thinks today, the World thinks tomorrow

It would not be an exaggeration to say that whatever is the rage in the Chinese digital economy today, would be the thing that the world will be talking about tomorrow or maybe even the day after tomorrow. Sometimes back it was live streaming e-commerce, before that it was O2O, and Super Apps, QR codes, and what not! Let us now come to, what is all the rage in Chinese e-commerce these days and what are the major players putting their money and resources towards?

Tuan Economy or Community Group Buying (CGB)

The latest trend to take the Chinese eCommerce market by storm is Community Group Buying. It is said in China that once a market generates 10bn RMN ($1.5Bn) GMV topline, that is when the big tech players get interested in it because of scalability potential. All the giants, be it Alibaba, Pinduoduo, Meituan or Didi Chuxing have either started their own ventures into this new e-commerce business line or have funded already existing players. Between Jan and Nov of 2020, a total of 26 financing events worth CNY 12 Billion were conducted for CGB companies. And for valid reasons too, McKinsey estimates the retail grocery market in China to be worth 5.2 trillion RMB ($ 794 billion) in 2019 with only 10% of this online. Just the CGB market is expected to reach $15.6 Billion by 2022, threefold compared to 2019.

Before we dive deep into the world of Community Group Buying, let us understand why Grocery Shopping has remained the holy grail of eCommerce; be it Amazon's acquisition of Fresh Foods (I had written more about Amazon and their strategy here); this is simply because the moment you have people coming to your app/platform for groceries, your DAU (Daily Active Users)goes up, your users engage more frequently and deeply with you and then you can leverage this to improve your relationship and consequently your share of wallet with them. Of course, the reason that no e-commerce player has been able to comprehensively crack this piece of the puzzle is that it comes with its inherent challenges, viz:

• Supply Chain Constraints owing to the time constraint of perishables
• Product Quality Control
• Economics → High CAC/Avg Order Value is lower and consequently messed up unit economics

Why this? Why now?

But what really made this community group buying business really take off, well, as they say, there is no one single right answer to this question, it is a happy coincidence of a number of factors coming together that has helped this, a few for example:

• Expanding the TAM rather than pay high CAC in the same market → there has been significant penetration achieved in the metro internet-savvy population; fewer chances to further penetrate this segment, so what is left is to go after the hitherto inaccessible customer segment and digitize their purchasing behavior.
• Covid-19 → People were more cooped up at home, hence fewer trips to the grocery store, more interaction with the community, and hence catalyst for anything that involves the community to take off
• The concentration of demand, supply, and aggregation → Combination of 2 unique or semi-unique Chinese characteristics :
• a) physical concentration of population in highly dense, high rise neighborhoods of 5-6k people
• b) digital concentration of population on WeChat

How does the Model Work?

The Tool →

The tool that really makes all of this possible is WeChat, an all-pervasive super app in China; while there are some players who have their own apps but most of the commerce of CGB (Community Group Buying) is made possible through WeChat

The Key Players →

The whole model of CGB is made possible by community leaders (Tuan Zhang) whose role essentially involves :

• Community Management → This in e-commerce terms will encompass user acquisition, engagement, and managing the entire customer lifecycle → reactivating the dormant ones with offer/deals, etc.
• Order management → it is the community leader's job to gather orders from the entire community (capped to a max of 500) and then place them with the platform who in turn ensure the same is delivered
• Logistics Management → the Tuan or leader of the community is also tasked with ensuring

And then there are the platforms and the users.

Operation

One of the most critical aspects of any retail exercise is managing demand and supply harmoniously. More so in a model like that of Community Group Buying.

On the supply side, the key here is to stock items that are purchased in high frequency (and consequently low prices); now maintaining a significant stock of such items can overwhelm any supply chain. CGB overcomes this by offering limited or no choice to buyers in terms of brands - so it is typically only one brand in a category that is on offer for the consumer. This not only helps simplifies the supply side but also results in faster decision-making on the consumers' end thereby resulting in more impulse purchase and of course the platforms get to enjoy economies of scale and thus can negotiate significantly better rates with the brands. the underlying insight here is that the consumer is price sensitive and not brand sensitive.

Economics of the Operation

Again, for any retail operation to work, not only should the end consumer see value but also the customers (the entire distribution chain) see this as a profitable proposition for them. Most of the tuan zhang are described as time rich people - like stay at home moms and in some cases existing distribution network for consumer goods is being leveraged in the form of existing small retailers being made community leaders - by a few rough estimates, → 60%-70% of the community leaders are shop owners around their community, while 30%-40% are moms. it is estimated that the typical commission for a tuan zhang in the process is around 10% and they end up taking home ~200 yuan ($31)/day from this operation.

One Step Forward, Two Steps Back?

Now, let me bring in an interesting perspective to this → what do models like this (Assisted commerce, that sounds pretty accurate description to me) mean in a world where players like Alibaba (with their HEMA format stores) and Amazon (with their GO format stores) are promoting a world, wherein you don't have to interact with even a cashier; how do the two square up? I think these models Assisted Commerce & Cashless Stores service two different purposes → one goes for depth and the other width. While one tries to grab a higher share of wallet for an already eCommerce savvy customer whereas the other is looking to expand the number of users that can be served by eCommerce in one form or the other.

plus ?a change, plus c'est la même chose (The More Things Change, the more they remain the same)

Interestingly, I could find some similarities in this model in what we have done in India on BFSI & Telecom. The current BC led model of ensuring that banking reaches the masses in rural hinterlands is something similar where the Bank Mitra (or BC) can be roughly compared to Tuan Zhang; or a similar model in the prepaid telecom recharge space wherein the distribution network really reached end consumers by onboarding folks like students in hostels, local barbers, etc. But of course, I am very cognizant of the fact that in both the above cases, there was no physical movement of goods and it was only virtual goods being moved over airwaves (money, prepaid recharge balance).

But of course, the model is not without its criticism, as recent actions by Chinese regulators show. State Administration for Market Regulation (SAMR) has recently taken cognizance of the community group buying platforms and has increased its surveillance and monitoring of their operations. As you can imagine, there will be concerns around how this impacts traditional distribution channels (large distributors over province-level geography and more importantly small retailers). In fact, the impact it can have on small retailers is well captured in this quote I came across - "If a convenience store joins community group buying it is committing suicide if it does not join, it will be murdered"

Turbulence Ahead?

What impact would it have on the overall prices of goods and retail inflation in the long term? or on the millions of mom and pop stores? or typically well connected (politically) and influential large-scale distributors. What if live streaming and community group buying come together? What would that mean for the future of not just marketing but sales and distribution as well? what does it mean in the world of D2C brands? For incumbents in the consumer goods space? or would it be a pathbreaking revolution that will finally bring the famed 'farm to fork' model to the real world?

So, in conclusion, all I can say is that this definitely looks like an initiative that will help expand the number of people that can be served through eCommerce and there will have to future innovations around distribution channels to keep pace with technology. This model right now is definitely not perfect but I am sure with suitable adjustments along the way, we will get there!