Far too much ink has been spilled already on the boom and bust cycle of group-buying in China, but I couldn’t resist a few observations for the new year.
1) Waiting for Consolidation
The great consolidation is coming, but it hasn’t arrived yet. Instead, we’re being treated to an adaptation of Waiting for Godot, with absurd valuations and IPO jokes, while everyone waits around for something, anything that will bail them out.
A new king of the dwarfs is crowned every month never with more than about 13% market share. In November 2011, Dataotuan (see Slideshow below) and Tuan800 have Meituan as #1 (with 255m RMB or 40m USD in gross billings), while iResearch has Taobao’s Juhuasuan in that spot. Compare that to the United States, where Groupon has approximately 50% market share and Living Social another 20%.
‘Consolidation’ is probably far too charitable a word. What assets do these group-buying sites have anyway? A URL, an email list, some disloyal customers, and a massive sales staff. When money runs out, it’ll be fire sales (90% off deals), not acquisitions. That’s already happening to the hundreds of smaller players, but has yet to shake out the 30+ ‘large’ players in the market. By the end of the year, I expect that to be cut down to 10 or so.
2) Synergies Help
Group-buying has two major costs: customer acquisition and deal sourcing. Sites that already have one end of the equation are at an advantage.
In customer acquisition, social networks like Nuomi (by Renren), QQ Tuan (by Tencent), Juhuasuan (by Taobao), etc. can drive massive traffic on the cheap. These sites, of course, are also Internet giants who can sustain losses far longer than the independent players who are now desperately pounding their fists against the US IPO window, which remains firmly closed.
In deal sourcing, many vertical portals and e-commerce sites like Lvmama, have an advantage because of their existing industry relationships. If you have both, like Dianping, then you turn what was once a nice little coupon business into a site that is a very legitimate IPO candidate in 2012. Bravo to Dianping.
3) E-commerce Is Not An Exit Strategy
The latest trend is for group-buying sites, like Lashou, to claim a rebirth as e-commerce sites. I don’t buy it. I think it’ll be extraordinarily difficult to change the mindset of customers from bargain-hunters to regular shoppers. Nor is it clear that China’s B2C e-commerce market is in a much better state than the abysmal group-buying market–losses are heavy and consolidation also looms large.
In this respect, Meituan–Dataotuan’s #1 in November 2011–has it right. Their deals are 95% local services as compared to an industry-wide average of 75%. It’s capturing a growing percentage of the ‘top deals’, a measure of the quality of its deals. For the full Dataotuan presentation, see below.
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