China’s Group Purchasing Market: Some 5472 Websites Compete Fiercely for Business
On August 12th, 2011, Renren.com released its financial report for the second-quarter this year. As it was shown in this report, nuomi.com, renren.com’s subsidiary launched in July, 2010, achieved net revenue of $ 1.1 million, while its operating expenses are as high as $ 5.6 million.
Struggling to make ends meet constantly tests the patience of the group purchase website. “99% of the group purchase websites will definitely close down. Only 3 or 5 websites of the best quality could withstand the trial of time.” said Wang Ran, CEO of ECapital.
It is rather fast for the group buying industry to develop right from the kick start all the way to the winter of the industry.
From the craze of extravaganza to the rapid collapse, China’s online group buying industry demonstrates to the world a crazy experience of how an immature industry gradually achieves maturity.
Some websites would even spend the 20 yuan as marketing cost for only 1 yuan sales revenue
According to Li Binhong, CEO of cq118.com, the blowout of the group purchasing market has everything to do with its low threshold and a clear profit-making pattern.
The first group purchasing website was Groupon, a United States Websites established in November 2008. The website had been commented by the Forbes magazine as the fastest-growing company in history. It began to make a profit in the first seven months since it was launched, a speed so quick that makes this business look so attractive to the outside world, yet at the same time this business model is doomed to be widely copied.
“The threshold of this business is very low as it is not that technology-involved. Even a newly graduated college student would be able to open such a website with some thousands yuan of investment,” Said Lin Jin, founder of QIGGI, the first group purchasing webstie in Chongqing. And because these websites require users’ to make pre-payment and then carry out re-consumption, making the websites has adequate cash flow, then they can find themselves several rounds of investment in order to form a solid investment foundation.
However, under the current, competitive market circumstances where thousands of group purchasing websites vied for business opportunity, this seemingly simple profit model is having a hard time to secure a profit channel.
“5472! What a crowd! In the fierce price competition, it is difficult for these websites to attract frequent customers for customers are constantly making comparisons between the products offered by different websites to find which goods are most cost-effective,” said Liu Jin.
Thus, these websites can only compress the commission rate to give more profit margin to the internet users. In more than a year’s time, the vicious price competition has driven these websites compressing their gross profit rate. Some websites would even spend the 20 yuan as marketing cost for only 1 yuan sales revenue.
A report from China Electronic Business Research Center gathered that the reasons for the depression on the group purchasing websites are as follows: firstly, they all adopt a same business mode, namely, the threshold of this business is very low at the beginning, but in the competition afterward it requires a huge amount of post-investment and improvement in their operation, management mode, after-sale service, so as to win the favor of the customers. Secondly, they are eager to obtain risk investment. But the truth is that only the strongest ones can be the reapers of the investment. Therefore, the operators of these websites are willing to spend fortunes to enlarge the size of their firm.
Struggling to make ends meet through vicious competition had, within one year or so, reduced the blue sea market of group purchase to a bloody mess.
Although knowing it is irrational to invest vehemently in Ads, business operators seems have no other choices,
As mentioned earlier, most of these websites lack core competitiveness, namely, differentiated profit model and constant customer groups. In this context, massive advertising will help the websites to make acquaintance with the internet users. Therefore, advertisement is the first choice of most of the large group purchasing websites.
Prior to this, other industries also had adopted this approach. Typical example could be found in the advertisement campaign of Melatonin and Confucius Family Liquor. According to the chairman of the Confucius Family Liquor Co., Ltd, at that time their advertising strategy was very much advanced: each day the advertising fee he paid to CCTV amounted only to the price of a Santana, while the profit he got from this advertisement was well over the price of an Audi.
But what happened now?
Clearly, Confucius Family Liquor had already seen its better days.
Today, the bus platform, subway and billboard between buildings are packed with the advertisements of the group purchasing websites. “These websites are like fishermen, casting piece after piece of advertisement nets to catch new customers,” said an advertisement agent.
“Currently the marketing costs are the largest expenses of Lashou.com.” said Wu Bo, CEO of Lashou.com. as the first years’ competition for a market place, the challenge facing these websites is to secure their brand image.
Wu Bo said by the end of last year, after getting the second round of venture capital of $ 55 million, the investors had been urging him to increase the investment, “they could barely wait till the Spring Festival and kept on urging me to drop out three-month advertising costs in a month,.” Although Wu Bo knew this investment approach is not rational, he had to do so.
According to the “China Internet Week”,: this year meituan.com’s advertising budget is 130 million yuan, that of nuomi.com, 200 million yuan, that of lashou.com, 200 million yuan, that of tuanbao.com, 550 million yuan, and even the dianping.com, a website seldom do any advertising in the 8 years since its founding, planned to spend 300 million yuan to 400 million yuan in ad on its group purchasing website.
Huge advertising expenses make matter worse for the group purchasing websites that have already trapped in the “hard battle” between these websites.
After a craze of poaching, most of the website began the streamlining of staff
On the surface, these websites waged a war by advertising. However, in secret they began to compete for human resources.
Recently it has been said that 200 staff from lashou.com’s SouthEast Region had defected to wowo.com
Wang Yun Ming, the Deputy President of wowo.com, had confirmed the news. But he insisted that this 200 staff came to wowo.com on their own initiative. Wowo.com did not carry out any malicious poaching.
The remark made by Xu Maodong, CEO of wowo.com is more confident: when 2 or 3 of lashou.com’s staff went to wowo.com, you can call us poaching. But now, with some 200 people all run to us, this is more of demolition than poaching.
Wowo.com’s practices caused a strong reaction among the whole industry. According to Ren Chunlei, CEO of tuanbao.com, what wowo.com has done is “suicidal and evil” poaching. But Wu Bo claimed all these are nothing but hype,” while rumor has it that he had held a conference and promised his employees promise to increase their salaries and options.
In fact, for any emerging industry, the easiest way to accelerate the sales growth is twofold: the first approach is to find several “squanderers” to make the initial investment, and the second one is to poach personnel from its peer companies, group purchasing website is no exception to this general rule.
Before, there has been news saying that before the Gaopeng.com was launched online, 60% of the staff of lashou.com and manzuo.com has received a call from headhunters. Among them, 70% of the employees of a relatively small group purchasing website have been lured away. This even led to several Chinese group purchasing websites co-founded an alliance against malicious poaching.
If the craze of poaching can bring in rapid expansion of the market it gives no cause for much criticism. However, according to reporters, after the poaching and money-burning having been done, most of the websites start a new round of streamlining.
It is understood that in as early as April this year, kaixin001.com had laid off some 100 employees and had shut down its sub-websites in Nanjing, Ningbo, Zhengzhou, Xiamen, Chengdu and other 12 cities
Following this, meituan.com had closed down 4 of its sub-websites.
In early July, some employees were forced to leave wowo.com. By August 4, two groups of a total of 20 former employees, with the help of their agent, filed their laid-off to Beijing Arbitration Commission for arbitration. Wowo.com had trapped in the “layoff scandal”.
Groupon, the first group purchasing websites in The United States had admitted last weekend that its joint venture in China, Gaopeng.com “is dismissing a number of underperforming staff.” gaopeng.com’s Beijing headquarters began to make phased layoffs, too.
“Being aggressive will be very dangerous.” Hong said Li Bin
If they cannot make it to the market, they cannot make it at all.
After a series of maddening scramble, group-purchasing market gradually entered their turning point: shuffle.
When describing his experience, Liu Jin cited the saying “The early bird failed to catch the worm.”
At as early as the end of 2009, Liu Jin, who had work experience in the United States had noticed originator of group purchasing website Groupon. In February 2010, he founded the QIGGI. However, the early start did not turn out to be a very successful one: the team is incomplete and incompetent, he had to run for the business all by himself; local VC do not understand the buy mode, therefore most of them hold out; with other domestic large-scale website flooded into the Chongqing, QIGGI ended up with bankruptcy at a loss of 300 thousand yuan.
QIGGI is not the only loser of the entire local group purchasing website; other websites such as Fantong.com, bigoutuan.com had already lost ground in this battle. Of all the 40 local websites, less than 10 of them are currently active in the market. This phenomenon is similar with the situation in the other cities.
One positive result we get from the death of a large number of group purchasing website is that the industry concentration gets intensified.
According to the statistics of Analysys.com International, the current group purchasing websites can be divided into separate websites (such as the lashou.com), group purchasing divisions of portal sites (such as tuan.sina.com.cn), group purchasing channel of e-commerce sites (such as that in the 360buy.com), group purchasing websites launched by classified information websites (such as 58 buy.com) and websites established in the context of SNS sites (such as nuomi.com). “Although there are still new group purchasing websites constantly add to the rank, but the market space is already too tight for the newcomers.” According Chen Shou, analyst at Analysys.com International, large-scale group purchasing websites such as lashou.com and meituan.com are constantly taking up more market shares and the threshold for competition is already very high. In April 2011, the lashou.com, meituan.com, and 24quan.com ranked top 3 in this industry, with an overall market share of nearly 20%.
Wang Ran, ECapital CEO expects that 99% of the group purchasing website will definitely close down. Only 3 or 5 websites of the best quality could withstand the trial of time. Wu Bo also shares this view, he even predicted the timing of it: by the end of this year.
Time and tide wait for no one. the final battle between those websites finally get started.
“This year the aim of large group purchasing websites is to go public for financing. If they cannot make it to the market, they cannot make it at all.” said Liu Jin.
in the first half of this year, the meituan.com, 24quan.com, dianping.com, wowo.com, manzuo.com and lashou.com have successively won tens of millions to hundreds of millions of dollars in financing. How about the situation the second half of this year?
This summer, overseas Chinese stocks suffered the biggest ever “crisis of confidence,” IPO of the Thunder and Shanda literature had repeatedly postponed, foreign capital investment enthusiasm for the Internet had reduced considerably.
According to Wang Xing, CEO for meituan.com, ever since this June, “the website laughs last laughs through the winter of the industry.”
Situation is not optimistic. According to Analysys International, the industry and the capital have begun to freeze— up to two years period. “The winter in capital markets has already brought the chill to the high-valuation field of industry including group-purchasing. “