Consumer Staples Author: Yue Liu Editor: Luke Sheehan Feb 27, 2021 02:34 PM (GMT+8)

The retail industry players have always been competing for high efficiency and satisfying consumer experience.

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◇ The fresh food industry's online penetration rate is still meager, which indicates future growth potential. 

◇ Community group buying eliminates the complicated commodity circulation process, lowers the markup rate, and has a price advantage over fresh food platforms and traditional supermarkets. The approach is also more profitable.

◇ Internet giants are the current major players and the most likely winners as they have financial advantages and large customer bases. They can also make up for the supply chain's shortcomings by investing or acquiring fresh food platforms. 

◇ The industry also faces the risks of strengthened government supervision, price wars and the pandemic.

Community group buying develops fresh and daily necessities retail based on WeChat groups, mini-programs, apps and other traffic channels around community life scenarios. Those platforms use the team leader's community acquaintance resources for customer acquisition and adopt an 'online reservation + self-pickup' model to realize online pre-sale and centralized distribution of fresh food and other categories. 

Females, people living in the middle- and low-tier cities, and those aged 25-35 account for a relatively high proportion of the user group, among which middle-income households have the highest density. Compared with other e-commerce models, community group buying SKUs are fewer, ranging from 300 to 550. Fast-moving consumption food and fresh food that are conducive to attracting new users and increasing user stickiness account for the highest stock proportion. 

This business emerged as early as 2015, but burning large amounts of money did not help gain profits. The fragility of the supply chain system has also made the industry slack. However, catalyzed by the pandemic in 2020, community group buying has attracted attention, especially from Internet giants such as Alibaba, Pinduoduo and Meituan. 

According to QuestMobile, the number of monthly active users in the fresh food WeChat mini-app industry reached CNY 88.47 million in May 2020, a significant year-on-year increase of 65.6%. Also, the structure of terminal retail channels for agricultural products during the pandemic has changed significantly, with the proportion of community group buying consumption channels surging from 2% to 11.9% after the epidemic. 

The fresh food industry is embracing the online channel

The adoption of online channels in the fresh food market is still low, creating huge growth potential due to the frequent rigid demand characteristics. According to Euromonitor, the market size of fresh food in China reached CNY 4.98 trillion in 2019 and is expected to reach CNY 5.1 trillion in 2020. 

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From 2017 to 2020, the online penetration rate of fast-moving consumer goods (FMCG) and grocery increased by 2% annually. Catalyzed by the pandemic, Statista predicts that this number will increase by 3% to 15% in 2021. For agricultural products, 52% of their sales are in traditional channels and e-commerce channels only accounted for 3% in 2019, which creates a broad room for future development. 

Community group buying is likely to help the fresh food industry achieve profitability 

Fresh food, as non-standard products, requires a robust supply chain capability. Simultaneously, it is subjected to multiple costs such as labor, rental, terminal distribution and waste, which can lead to an overall loss. However, community group buying provides fresh food e-commerce companies with increased revenue due to pre-sales mode adoption: sales determined production. This model can also improve the current situation where the loss rate of fruits and vegetables caused by the complicated circulation process under traditional channels exceeds 10%, reducing the mark-up rate.

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Assuming that the terminal markup rate is 25-30% while maintaining the same gross profit margin, community group buying requires a much lower unit price than fresh food platforms, as group buying can get lower prices from upstream suppliers. Fresh food platform's logistics cost is also higher than community group buying due to its heavy asset model. Besides, the presale model can reduce inventory pressure, effectively improve inventory turnover and reduce wastage costs. Therefore, the possibility of community group buying to achieve profit is greatly enhanced in general. 

Community group buying is also more attractive to suppliers than traditional supermarkets. Due to the large orders from community group buying and fast payments, suppliers will give more discounts. The billing period for community group buying is within seven days, while traditional supermarkets generally require 45-60 days.

From comparing the two models, the price of community group buying products is generally lower due to lower delivery costs in product circulation. Moreover, this model's main consumer groups belong to third- and fourth-tier residents with strong price sensitivity, so modest and affordable prices give community group buying platforms more tremendous advantages to open up the market. 

Internet giants may be the winner

The prominent players in the community group buying market include Internet giants, fresh food platforms and offline retailers. Internet giants such as Alibaba, JD.com, Meituan, Didi and Pinduoduo have joined the community group buying battlefield to obtain new traffic and increase consumer stickiness. They have sufficient financial strength and high brand awareness, which can quickly seize resources and cultivate consumers' minds. But their supply chain foundation is weak, and future acquisitions or investment in fresh food platforms may be the right choice. 

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The fresh food platform has built a relatively mature business model and supply chain through deep cultivation in the early stage, but its lack of financial strength will impede its expansion by the giants. Offline supermarkets have a group of highly loyal community consumers, but the online traffic is insufficient and operational capabilities are lacking. Community group buying is more of a channel to supplement in-store sales and emphasizes user communication. Therefore, the future community group buying market is likely to be dominated by Internet giants. 

Risks

The current policy on strengthening anti-monopoly supervision over platform companies, especially 'low-price dumping,' may slow the industry's pace of exaggeration. The main participants in the community group buying market are platform-based Internet companies. Besides, community group buying involves people's livelihood and significantly impacts participants in the traditional fresh and fast-moving consumer goods industry, and even affects the CPI index. Government departments will not leave the market unregulated.

Internet giants are still applying price war strategies to quickly attract traffic, which may worsen the market competition environment and generate negative externalities.

The repeated occurrence of COVID-19 may also affect product supply and logistics transportation.