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The Tipping Point in the Chinese Group Buying Market?

Living Social (second largest group buying firm by market share in the United States) seems slated to raise another US$200 million that will value it between US$5 billion to US$6 billion. JP Morgan Asset Management’s new Digital Growth Fund and existing stakeholders, Amazon and T. Rowe Price, are some of the contributors to the round. Meanwhile, the successful IPO of its largest competitor Groupon a couple of weeks ago increased Groupon’s valuation to more than US$16 billion, with stock prices closing at an average of US$25 for the past 2 weeks. With both players monopolizing the game and constantly launching new services, the group buying scene in the States still counts itself to be relatively robust.

Increasing Woes in the Chinese Group Buying Scene

On the other side of the globe, figures seem to indicate that the Chinese group buying industry has maximized its growth. From a constant increase in the daily reach of the Chinese group buying market since the start of the industry in March 2010, this growth finally hit a decline after August this year. The total reach in the month of August was 29,305,000 visitors; the highest ever, and the numbers started to dip from September onwards.

Lashou, one of the top Chinese group buying firms by market share, had originally planned to go for IPO on November 14th, but has since announced its indefinite delay. Prior to this, news also pointed to the possible stagnation of the market, with big players such as Lashou cutting down huge on expenses and retrenching staff relentlessly. Amidst growing dissent in the group buying scene, the most recent incident has it that 24quan delayed payment of wages to their employees, and it was even rumored 24quan has to do so to fulfill its desire be the first firm to make profits in 2012.

The number of group buying websites has reached its peak in the month of July and August, where total numbers hit an all-time high of more than 5,000. As of the month of October 2011, about 1,000 out of the 5,000 group buying websites in China had not updated their deals page for as long as a month. This means that they have either ceased changing their deals, or they have simply exited the market. With the trend that group buying websites are dipping, does it spell the start of the industry’s decline?

Have We Passed the Tipping Point?

Total monthly sales from group buying in China have maintained an average of about US$18.5 million since July 2011. The total number of firms may have reached the upper limit, but that does not necessarily mean that the market has no further potential to grow. The empty market share left by firms exiting the market can be rapidly filled by existing or new firms. With so many firms providing very similar services, it also means that they can be substituted easily without consumers feeling the change. As such, users’ shopping experiences will not be affected, maintaining transaction volumes.

Furthermore, the decline in numbers actually indicates that first-tier cities, such as Beijing, Guangzhou and Shenzhen are the ones experiencing declining growths. On the other hand, growth in second and third-tier cities such as Wuhan and Chengdu have been on a steady increase, marking the potential of the underdeveloped markets in many other cities in China.

On top of that, Chinese consumers are increasingly turning towards purchase of goods over service deals. Taking Lashou as an example, the percentage of its sales of goods was 13% of total sales in September 2010, and this has increased to 67% in just a year. This can be largely be attributed to the increasingly convenient local delivery systems, as well as integration of group buying into many popular e-commerce websites in larger players such as 360buy and Vancl, which have started offering group buying as one of their many service channels.

Declining numbers do not mean that the group buying market has lost its market potential; it indicates that pure group buying is declining, and it is integrating smoothly into other forms of e-commerce.

Who Will Be Left Standing?

Group buying firms will fall one after another; but the industry will not. The business model is definitely here to stay. Independent firms such as 24quan are feeling the pinch in this competition, and this is also true for firms providing pure group buying services. All of the larger players have been making massive losses and will not budge to give up without a fight. In this prolonged game of survival, the last few giants standing at the end of all the hustling may well be those that have strong financial backing, such as Lashou and 55tuan. Another category of survivors will also stem from those who have the foresight to diversify out of the pure group buying model. From the way I see it, it is almost certain that the winners will eventually emerge as versatile e-commerce firms, providing group buying as only one of their multiple sales channels.

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  1. […] last week, we discussed the tipping point of the Chinese group buying market, and how firms have to diversify out of pure group buying models to […]

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