“The community group buying model reduces cost and improves efficiency because of its scale advantage,” said Zhao Yue, an analyst at research firm Analysys. “The online grocery delivery model costs 3 to 5 yuan in additional fees for couriers to deliver to a consumer’s doorstep. But the community group buying model saves platforms [these] costs, as it delivers to group leaders directly.”

Last-mile delivery costs for community group buying account for about 2 per cent of each sale, compared to roughly 13 per cent [for individual deliveries] at e-commerce grocery chain supermarkets such as Missfresh and DingDong Maicai, according to a recent research note from Kaiyuan Securities.

As a community group buying leader, also known as Tuan Zhang in Chinese, Zhang manages two groups of 400 people on Tencent’s pervasive messaging app WeChat, in addition to running a bricks-and-mortar store in a residential area of Wuhan, ground zero of the Covid-19 pandemic in China. But her “store” is actually a collection point for members to pick up their grocery parcels.

Pinduoduo eyes untapped consumers in rural e-commerce market

Community group buying is a big trend in China’s lower tier markets – sometimes called sinking markets – which is a loose term covering all those cities smaller than the country’s four first-tier metropolises Beijing, Shanghai, Guangzhou and Shenzhen. Many of these cities, such as Chengdu in southwestern Sichuan with a population of around 16 million, can still be huge by Western standards.

“Due to the high penetration of e-commerce in first- and second-tier cities, the incremental space [to grow] in these markets is already very limited,” said Feiqi Luo, research associate at Euromonitor International, a market research provider. “But there are almost 700 million digital users in these so-called sinking markets, showing giant online consumption potential.”

Community group buying actually began as a concept before the pandemic, but the industry suffered several bankruptcies, such as Beijing-based Songshu Pinpin and Hefei-based Dai Luo Bo, casting doubt on the viability of the business model. But the onset of Covid-19 and related social lockdowns has been a game changer, according to several analysts the Post spoke to.

“Community group buying has the potential to become a crucial infrastructure plank of new retail businesses in these ‘sinking markets’,” said Huang Zepeng, an analyst at Kaiyuan securities, in a research note. “Massive orders of daily necessities and reduced delivery costs due to centralised control, should see this model thrive, especially in smaller cities despite a lower margin per order.”

As such, online grocery services have become a focus for many of China’s major e-commerce companies.

Alibaba Group Holding’s supermarket chain Freshippo and delivery giant Meituan are both major players in the field – along with Tencent-backed start-up Xingsheng Preference. China’s third-largest e-commerce player Pinduoduo said in November it has become China’s largest online platform for agricultural products by enabling direct selling from farms to dining tables.

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The online grocery market in China is forecast to reach 1 trillion yuan (US$147 billion) in three years, up from 400 billion yuan in 2019, as more consumers continue to buy everyday goods through various e-commerce platforms amid public health concerns, according to a recent research note from CLSA.

However, digitising and improving the current rural supply chain infrastructure to guarantee fast and stable shipments of delicate rural produce, will be a costly challenge for e-commerce platforms. But there is no doubt that the pandemic has altered daily life for many Chinese consumers.

Previously, many Chinese people would buy groceries from their local supermarkets and wet markets, especially in smaller cities due to a relatively slower pace of life and lower prices offered by local vendors. The pandemic has changed this routine though. By 2025, almost half of China’s grocery shopping is expected to take place online, up from 20 per cent currently, Pinduoduo recently said in a post citing an estimate by US investment bank Goldman Sachs.

Zhang will typically send out links to her WeChat groups, inviting members to WeChat-based mini-apps or other separate apps, where they can place orders for meat, fish, vegetables and fruits, often at heavily discounted prices. Some vegetables sell for as low as 0.01 yuan for new buyers, and can be collected the next day at her Wuhan collection point.

Group leaders are incentivised to lure more new customers from their families and friends into their community groups by being offered larger rewards – such as cash kickbacks – on top of points they earn on grocery orders. Zhang said low prices is one of the biggest draws of community group buying, now that the platforms are very competitive with traditional wet markets.

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“We believe that grocery shopping in China is undergoing similar structural changes in consumer behaviour to those we saw in other sectors a few years ago,” said Chen Lei, CEO of Pinduduo, during the company’s quarterly earnings call in November. “The presumption that most consumers still prefer to go to the wet market or supermarket for their daily essentials has been challenged over the past few months.”

Zhang says life is becoming hectic now that Didi Chuxing, Pinduoduo, Meituan, Alibaba and JD.com are doubling down on their efforts to hire more group leaders.

Duo Duo MaiCai, Pinduduo’s online grocery app launched in August, has now set up over 20 pickup stores in Zhang’s residential area. “The platforms do not have any restraints in competing with each other,” said Zhang, who manages two community groups across six platforms.

The platforms that are competing for her WeChat groups include Alibaba-backed Nice Tuan, Tencent Holdings-backed Xingsheng Preference, Duo Duo Maicai and platforms from ride-hailing giant Didi Chuxing and giant on-demand delivery services provider Meituan.

Didi set up its first team for local group buying communities in May in Chengdu, and launched its separate grocery buying app Chengxin Youxuan in June. The services are now available online in more than 200 cities and counties spanning Sichuan, Hubei, Zhejiang and Hainan provinces, according to company information.

Didi confirmed Chinese media reports that Cheng Wei, founder and CEO of Didi, said in a meeting last month that there was no cap on resources to support expansion of community group buying.

JD.com announced last week that it would invest about US$700 million in Xingsheng Preference, which operates community group buying in 14 provinces across China, according to the company’s filing to the US Securities and Exchange Commission.

Meanwhile Richard Liu, founder and chief executive of JD.com, will personally lead a newly-merged business segment focused on the lower-tier cities, according to a report from local media outlet Tech Planet.

“In the upcoming year … we will aim to win the lower-tier city market … by fully integrating the advantages of the whole group,” said Liu in a recent internal letter seen by the Post.

JD.com declined to comment on the matter.

Alibaba was the leading investor in the November Series C3 funding round for Nice Tuan, a grocery e-commerce start-up in Beijing, which raised US$196 million from 10 investors including state-backed CICC Capital.

Alibaba also launched its own community group buying app, Freshippo Youxuan, in Wuhan in late October, to leverage its vast retail ecosystem, according to a report from Chinese media outlet Rixin. It also said that Freshippo Youxuan would hire 5,000 community group leaders in Wuhan.

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Alibaba did not immediately respond to a request for comment on the matter.

At a senior executive meeting in mid-September, Daniel Zhang, chairman and CEO of Alibaba, tapped Hou Yi, president of Freshippo, to take the lead in its community group buying expansion, according to a report from Wan Dian (LatePost), a China tech-focused media outlet.

Wang Xing, co-founder and chief executive of Meituan, said in its third-quarter earnings call last month that Meituan Youxuan was now an effective grocery delivery business model in smaller cities and that it aimed to move into 1,000 cities by the end of this year.

“I am not sure who will be the final winner in this market,” Wang said, “The competition will not end soon.”