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The Future of Group Buying in China

Web Wednesday Beijing

The theme for Web Wednesday Beijing this month was “The Future of Group Buying in China”, and the speaker invited for the evening was Ahn Seunghae, Founder and CEO of Letyo.com, a group buying deals aggregator in China. This comes timely, especially when negative news such as massive retrenchment of staff by a couple of large group buying firms in China have been buzzing the e-commerce community of late. The main question here: Is the group buying market in China actually in decline?

Group Buying in China – the gist of it.

Ahn shared on the current situation in the Chinese group buying market, coming from the view of an industry expert. Since the start of the group buying in China in Q1 of 2010, we have witnessed its explosive growth. From a market size of just 5.9 billion CNY in 2010, sales are expected to grow to a whopping 62 billion CNY and 110 billion CNY at the end of 2011 and 2012 respectively. Ahn noted the impact group buying had on China’s e-commerce market, where the increase in B2C transactions had in turn given exponential growth to the e-commerce market.

Constant evolution and diversification are natural policies of the group buying firms to stay relevant in this highly saturated market, given the competitive nature of Chinese markets. Group buying has now become more than just a medium of e-commerce; it has transformed itself into a new online shopping experience for consumers, complete with the provision of extensive information aimed at helping them purchase products and services closest to their preferences. On top of that, many relatively large players in the e-commerce industry have also expanded their services and integrated group buying into their business models. What used to be a distinct segregation of the different markets in the past, has now become a confluence of a variety of markets within the e-commerce industry.

Prediction of the Group Buying market trend

Analysts and many others in the industry thought that group buying in China has reached its peak, and predicted the downfall of group buying firms. Lee Kai-fu, CEO of Innovation Works mentioned on his weibo account that by the end of 2011, only 10 sizeable group buying firms will remain operational and profitable, after all the competition. Also, Wu Bo, CEO of Lashou.com predicted in March 2011 that only 5-10 group buying websites would remain standing in China at the end of the year. However, Ahn held a different view, and sought to refute those claims by boldly predicting that the market will grow to contain 10,000 group buying websites in 2011, and expand further to 21,000 group buying websites in 2012.

He used the Gartner Hype curve to draw similarities to the Chinese group buying market. With more elaboration, Ahn felt that it was absolutely normal for expectations to dip right after a rapid rise. However, the argument was that the declining expectation would not only decrease, it would also lead to a rise and stabilization of the market, which would be after the year 2013.

When asked about the key factors that would differentiate the companies that would be left standing eventually and those that would have failed, Ahn listed 3 factors:

1)      Capability to Source

  1. The number of group buying websites is in the thousands, which means that group buying deals are many times more. Surviving group buying firms will need to have the capability to source for the best deals to maintain the competitive edge in terms of their offered products.

2)      Marketing

  1. The success of marketing campaigns depends on the method and time frame at which the advertisements are made. Localization also plays an important part in marketing strategies, and firms must capitalize on local needs and wants.

3)      Funding

  1. To stay in this highly competitive market, funding is absolutely necessary. Advertising and staff recruitment will take up most of the finances, and companies will need to source for funding to avoid making just a transient appearance in the market.

Another interesting question proposed to Ahn was to understand the reasons behind the failure of location-based services(LBS) in China’s group buying market. There are 2 reasons for this. Firstly, the majority of consumers are white-collared women, and they prefer to purchase the group buying coupons on the desktops at their offices. Many of them also prefer to use the internet on their computers instead of having wireless plans on their mobile phones. Furthermore, the mobile payment system in China has not been fully developed, and it is very inconvenient for consumers to make their purchases on their smartphones.

Future of Group Buying?

Now, on to the most interesting question that has been lingering in the market. What does the future hold for group buying in China? The future of the group buying industry in China has been one of the most popular topics in the Chinese e-commerce arena in recent months. Speculations have also been made with respect to the future of this explosive market. With much news about the potential failure of Groupon in China (Groupon is named Gaopeng in China), Ahn ended the presentation with some of his predictions. Ultimately, the fate of Groupon depends on its objective in China. If Groupon wants to be one of the top 3 group buying firms in China, its chances of survivability will only be 5%. Conversely, if its aim were to be the top 10 or top 20 firms in the market, the chances will then be much higher at 30% and 90% respectively.

I have to admit, China is a special market. Taking a quick comparison with the group buying industry in the United States, things are very much different. The US group buying market is dominated by 2 firms, Groupon and Living Social, whom account for more than half of the market share. However, in China, with the exclusion of Taobao.com, there is no clear dominating player, and the playing field is still very much open, with new firms springing into the market, probably on a daily basis. Consumerism is here to stay, especially when China has a rapidly increasing middle class. As such, regardless of how the group buying firms play out in the market, consumers are still the ones who will be declared eventual winners.

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