After months of explosive growth, the boom in Chinese group-shopping websites appears to be subsiding, with some familiar names in the chaotic market emerging at the front of a very crowded field.
Juhuasuan, the group shopping service launched last year by Taobao, China’s largest online retailing service, was the mainland’s top group-shopping website in 2010, according to a report released in June by Shanghai-based market research firm iResearch. Juhuasuan recorded a total transaction volume of RMB 520 million last year, about twice the volume of independent start-up Lashou, which finished in second place with RMB 260 million. Both sites officially debuted in March 2010.
Other notable names in the top 10: Nuomi, a group shopping website started by social network site RenRen, in fifth place; Internet messaging and online gaming giant Tencent’s entry, tuan.qq.com, in seventh; and Groupon.cn, the Chinese subsidiary of U.S.-based Groupon, in ninth. Statistics for the first half of 2011 were not available.
With minimal barriers to entry, China’s group shopping field in the last 12 months or so has quickly become overpopulated with clones of Groupon, the company that successfully pioneered the business model in the U.S. There were 5,048 group-buying websites in China at the end of May, according to the China Internet Network Information Center, a government group that monitors China’s internet and provides domain name registry services. At least 1,000 sites opened in 2010; the momentum carried into this year with 732 opening in March 2011 alone.
According to an April report by Analysys International, a consulting company specializing in the technology, media, and telecom industries in China, the total transaction volume of all group-shopping sites is expected to balloon to about RMB 1.6 billion in 2011, and to zoom ahead to RMB 2.6 billion in 2012.
But the young industry’s era of Malthusian website multiplication appears to be tapering off. Just 300 new sites came online in April, less than half the number that debuted in March, according to a story by Chinese news syndicate cnYES. Meanwhile, group-shopping websites such as Kaixintuan and Meituan are rumored to be closing shop in small-to medium-sized cities.
With so many sites scrambling for customers and working capital, a shakeout, in which smaller websites are wiped out or merged with larger ones, appears to be underway. Competition for scarce technical and managerial talent has given rise to large-scale poaching of employees. According to cnYES, Lashou earlier this year had 300 of its staff defect en masse for Wowotuan, which resorted to awarding all its employees stock options to retain them. Poaching is reportedly driving up salaries to untenable levels: 20 firms entered into a verbal agreement to halt all poaching, but the pact did not last, cnYes reported.
Revenue is also being pinched. While Groupon reportedly enjoys a 50:50 profit split with its partner retailers in the U.S., most Chinese sites, in an effort to attract retailers, only take 10% of deals. Shen Boyang, general manager of Nuomituan, another group buy site, told cnYES that sites are all losing money.
Ran Wang, CEO of China eCapital Corporation, an investment bank, recently predicted that 99% of group shopping websites will quickly disappear, leaving the industry with at most 10 large players. Observers predict survivors will be divided into two categories: big websites that offer comprehensive group buying for the national market, and smaller websites that cater to second- and third-tier cities.
For now, though, the cloning continues. Several copycat sites modeled after Taobao’s Juhuasuan, which has a daily transaction volume exceeding RMB 20 million, are currently operating. Among them is a site named Naguo Juhuasuan that is a painstakingly thorough replica of China’s apparent market leader—a copy of a copy, since Taobao was likely inspired by Groupon’s success to launch a group shopping site of its own on the mainland.