How do you go from thousands to hundreds in short order?
If you’ve been watching China’s group buying market, you’d have seen the numbers plummet as quickly as they rose.
In 2011, group buying sites topped out at 5,000, just over a year after the first players emerged in the mainland.
Today less than 500 remain, according to tuan800.com, one of the survivors. That puts the survival rate at less than 10 percent.
Blame it on cut-throat competition and a murky business model.
The market could not support such a proliferation of group buying sites over a short period, forcing them into unhealthy competition and, ultimately, massive consolidation.
The five remaining players — dianping.com, Lashou.com, Meituan.com, noumi.com and 55tuan.com — command more than 90 percent of the market.
That suggests a maturing industry but its development is far from stable.
Why is it so? A big part of the reason is that no one seems to understand the whole concept of group buying.
Theoretically, group buying sites operate as a discount hub, offering products at steep discounts to pools of buyers. Sellers benefit from increased sales volumes.
The idea is simple enough but the business model has a problem.
Take Groupon (GRPN.US), the largest of all players, for instance.
Listed two years ago, Groupon has yet to develop a working profit model. It has recorded losses for two straight years and the stock trades 68 percent below its initial public offering price.
Some analysts say Groupon’s core is fatally flawed. Its business model can be easily replicated by low-cost sites. Copycats have mushroomed as a result.
Also, Groupon uses email to market itself but spam-weary consumers have not taken to it kindly. So, out goes Groupon’s promotional materials before they’re seen by the intended recipients.
However, Groupon’s Chinese counterparts may be less vulnerable to these challenges.
Unlike Groupon, which is a standalone business, Chinese group buying sites are backed by technology giants such as Baidu, Alibaba and Tencent (00700.HK) which help them extend their reach far and wide.
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