Why community group buy is a bad startup business model

The author is a retired tech executive managing his personal investments in China. He prefers to remain anonymous – any queries/questions/debate please send through [email protected] and we will forward

When Xingsheng Youxuan achieved positive unit economics in the city of Changsha, investors became very excited about the Community Group Buy model Xingsheng pioneered.

The model, which sells fresh and groceries, is simple: the platform will develop community leaders, who collect orders from the community, take in the delivery from the platform, and distribute to the community members.

For more detail, Momentum Works did a pretty good job summarising the various group buy business models, and the leading players of community group buy in China, in its final instalment of Blooming Ecommerce in Indonesia report.

The problem is – since Xingsheng’s initial success, the whole industry seems to have plunged into a race to the bottom. The startups, including very well funded ones, failed one after another. Shihuituan, which has received funding from, amongst others, Alibaba Group, seems to be the latest one in trouble. It has shrunk from hundreds to a handful of cities; and many employees have not been receiving full salaries lately.

The reason for the doom 

Why do startups in this area keep failing? Here is my interpretation:

1. Demand for groceries and fresh is definitely high – whether it is a CNY 2 trillion market or a CNY 4 trillion market. However,
2. To fulfil such demand as a platform, a community group buy startup needs huge capital, strong execution, and perseverance;
3. Eventually you will need to build a very optimised supply chain and logistics network – otherwise your cost structure will not be competitive;
   1. Which means, to breakeven, you need volume, density and operational efficiency – no secret here, relentless technological and operational optimisation to reduce the average cost;
   2. For perishables, the higher the price difference between place of origin and location of final consumers, the more worthwhile it is to build a fulfilment network at scale;
4. Nonetheless, even if you succeed in all the above, you might only make tiny profit per order;
5. You will eventually need other business areas to monetise the customers you have acquired through Community Group Buy;
6. Acquiring customers at massive scale to monetise them through multiple offerings – that is exactly the strength of large platforms such as Alibaba, Meituan, or in Southeast Asia’s case, SEA and Grab;
7. Unless you are able to raise, and prepared to burn the money at the scale of these giants (Pinduoduo has done that in recent years), it would be very hard for you to sustain in the competition

Might as well spend your time building other business models which might have a better chance to succeed.