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Community group buying- CGB (社区团购) is a hyper-local retail model, which relies on personal network of individuals (community leaders) for organising group purchase at discounted prices of grocery items, etc.

If you don’t know about CGB and want to learn more, here’s a deep dive by yours truly:

Old Rope

Community Group Buying in China- Tale of New Retail ($4.6B funded- Xing Sheng You Xuan 兴盛优选)🛒🇨🇳💰

I am starting a closed community for folks who want to learn about all things China-tech. The purpose is to share frequent knowledge, updates about local tech, and to learn from experts. Community group buying- CGB (社区团购) is a hyper-local retail model, which relies on personal network of individuals (community leaders) for organizing group purchase at d…

2 years ago · 6 likes · 3 comments · Rahul Maheshwari

Over the last 1 year, I have come across many startups in India and SEA who are building the ‘Nicetuan’ of their region. With ($)billions invested in this space in China, it is often surrounded by controversy with concerns related to policy, competition and sustainability.

Tongcheng Life Bankruptcy- July’21 ⚠️

Founded in 2018, Tongcheng Life (同程生活) had raised $300M+ from seasoned investors, and was one of the leading CGB platforms with $1B+ annual GMV (2020), until it announced bankruptcy in July 2021.

Tongcheng Life works on negative working capital model, where it receives credit from the suppliers of grocery and fresh produce. On July 6, 2021, the company officially announced its inability to pay back the suppliers, defaulting on millions of dollars.

In the internal letter, He Pengyu (CEO) explained that starting from September 2020, the community group buying industry has undergone a sudden change, and the industry has changed from an era of “striving for innovation” and “struggling execution” to an era of “struggling capital” and “struggling subsidies”. The business model has been challenged.

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Nicetuan Downsizing- August’21 🔻

Nicetuan or Shihuituan (十荟团), a CGB platform, founded in 2018 has raised $1.2B with $1B+ in annual GMV. On August 23, 2021, Nicetuan has started laying off employees without advance notice, in several cities like Zhengzhou, Xian, Kunming, etc. Unit economics and profitability of the markets have been the key drivers here.

Chen Ying (CEO) said in an internal letter that community group buying should have entered a stage of benign development. Therefore, the previous subsidy war and other disturbances have caused the entire industry to show an unhealthy state of development. It is necessary to look at the development of the entire business more rationally, return to the essence of business, and carry out a comprehensive business upgrade.

Concerns around Business Model and Policy 😟

Is it really solving for 0 CAC?

CGB’s key thesis is to leverage micro influencer networks to save on cost of acquisition that traditional e-commerce platforms have to bear. But due to massive competition, discounting has been the only differentiation strategy.

Unit Economics of CGB (without discounts)

Unit economics are already poor, and discounting only makes it worse. Hence, the model is not sustainable even after raising ($)billions.

Government fines predatory pricing!

Several players have been punished for predatory pricing, hence heavily funded platforms cannot drive competition out of market just on low pricing. The government wants to safeguard the interests of local street vendors who cannot match up with discounted prices offered by funded platforms.

Since the beginning of this year, Nicetuan has been punished twice in March and May due to low-price unfair competition. On May 27th, the State Administration for Market Regulation issued a message that according to law, the CGB platform Nicetuan was once again fined $230K and ordered to suspend business for rectification.

Official notifications by the government: N1, N2, N3.

Supply Chain MOATS are more theoretical than practical

Even though the platforms follow a comprehensive multi-warehousing model, the traditional agricultural supply chain is relatively longer with middlemen which reduces the gross margins. Also, most of the players use similar supply chain capabilities which doesn’t provide for any differentiation anymore- seemingly commoditised.

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Key learnings for startups in India and SEA! 🌏

After China, startups across India and South East Asia have attracted tier 1 capital, with hope of building the largest group buying platforms in their respective markets.
It’s important to note that even though massive investment has gone into this segment in China, there is very little evidence of sustainability.

New age startups should focus on profitability from day 0
Picking the right category of products is essential, where supply chain MOATs can be built, instead of going very horizontal.
Even if funding is solved for, predatory pricing might invite policy challenges.

It’s always good to learn from other’s <billion dollar> mistakes 😉

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Old Rope

Dark side of China's Community Buying 🇨🇳