China’s state media has denounced the group buying industry’s cash burn strategy as a number of start-ups have either filed for bankruptcy or reduced operations amid the financial hardship caused by their “subsidy wars” to seize market share.
“Burning cash has not only failed to create a prosperous market, but has resulted in a series of chaos,” said a commentary published on Wednesday by the Economic Daily, a newspaper directly under the Central Committee of the Chinese Communist Party.
The commentary blamed some community group buying operators for abusing their platforms’ power to disrupt the market, including dumping low-priced goods, as well as illegally collecting and using consumers’ personal information.
It also indicated that group buying operators’ subsidy wars only provided a sense of “false prosperity”, a lesson that should have been learned from what has happened before in the country’s bike-sharing and ride-hailing industries.
The Economic Daily’s commentary followed news that community group buying provider Nice Tuan, which is backed by e-commerce giant Alibaba Group Holding, has ceased operations in multiple cities in August. Alibaba owns the South China Morning Post.
“This field, which should have entered a stage of benign development, is now in an unhealthy state because of the subsidy wars,” said Chen Ying, founder of Nice Tuan, in an internal letter on Saturday.
In July, once-rising community group buying start-up Tongcheng Life became the sector’s first big casualty when it filed for bankruptcy because of “poor management and a tough business environment”.
Those setbacks signal that the Chinese internet industry’s once-foolproof formula – achieve explosive growth on the back of subsidies and later raise prices to generate profit, while collecting massive amounts of user data – is no longer viable.
“No one can make a profit in the short term,” said Zhuang Shuai, founder of Bailian Consulting. “Service and innovation have stagnated, which has resulted in serious internal discord in the entire industry.”
Many of China’s technology giants have squeezed into the group buying market since the coronavirus pandemic started, acquiring new users with the lure of low-priced goods and providing community leaders with high commission fees, according to Zhuang. Group buying provided a way to cut out the middleman by connecting food suppliers directly with end customers.
This market is forecast to be worth about 104 billion yuan (US$16 billion) this year, up 38 per cent from 2020, according to consultancy China E-commerce Research Centre. Big Tech companies like Meituan, Pinduoduo and Didi Chuxing have doubled down on this sector, competing against start-ups like Nice Tuan.
That situation has made community group buying a target for Beijing, which has increased regulatory scrutiny of Big Tech firms. Community group buying, according to some state media reports, put local food merchants and traditional wet markets at a disadvantage against Big Tech companies with their economies of scale.
In December, China’s State Administration for Market Regulation (SAMR) and the Ministry of Commerce summoned Alibaba, Tencent Holdings, JD.com, Meituan, Pinduoduo and Didi to warn them about certain practices. “It is strictly prohibited to sell products below cost with the purpose of squeezing out competitors or seeking monopoly positions,” SAMR said in a statement at the time.
In March, SAMR fined the group buying platforms of Didi, Meituan, and Pinduoduo as well as Alibaba-backed Nice Tuan, for price dumping and fraud.
“Burning cash for community group buying operators is not a long-term thing,” said He Yixuan, an analyst at research firm Analysys. “Operators need to invest a lot in obtaining new users and improving their supply chain.”
“For the tech giants, their money doesn’t grow on trees,” He said. “If there is no good profit in the short term, they also face financial pressure.”