Mob Mentality: Why Group Buying has Fallen off in China and How it Might be Fixed

A few weeks ago we posted about yet another Groupon China (a.k.a. Gaopeng) scandal involving a bogus McDonald’s meal deal and pointed out how the company’s problems reflect the deteriorating condition of China’s flailing group buying (tuangou) industry as a whole.

Back in July of this year China reportedly had over 5,500 tuangou sites claiming a sum total of over 42 million users and around RMB 18.9 billion in sales, according to an article in the China Youth Daily.

But since then, over 1,500 sites have either gone under or changed their business models and October alone saw over 450 tuangou sites shut down.

Bigger players have been suffering as well: 24quan, Gaopeng, Wowo and Tuanbao have all experienced massive layoffs and one site, Oula, has disappeared entirely without refunding any of the subscription fees for their pre-paid discount cards to its users around the country.

Typical of these cases, most of these companies simply expanded too quickly and prioritized getting investment over developing sustainable business models. In an article in the China Youth Daily, Zhao Zhanling – a lawyer who represents tuangou companies in labor arbitration cases – described how sites like Faopeng and Tuanbao opened hundreds of branch offices around the country but only managed to sign on two or three businesses each quarter in the smaller markets. Both companies were simply trying to build up their portfolios by opening branch offices to lure more investment but quickly discovered that “no business equals no cash” to pay salaries and other administrative expenses.

Despite the disappointing results, industry executives insist that there’s still a future for the group buying business model in China. Manzou CEO Feng Xiaomei says there is ample customer demand but tuangou sites must foster new selling points – i.e. opening exploring potential new markets in more “dynamic smaller markets” – and work more closely with partner merchants to select more appealing deals for customers. Feng adds that like other companies, her group buying website is searching for investors, but knows that their “only chance of survival is to become profitable.”

But profitability might not be the only thing that ensures the survival of these companies. Credibility is increasingly becoming a major concern for group buying companies. In September of 2011, Oula started selling prepaid Sinopec cards that offered a 93% discount on gasoline, but if consumers failed to make a full payment immediately, they never received their cards, leading to the formation of the Victims of Oula support group.

 Wang Tingting, an analyst for iwebchoice website, adds that the group buying deals can be divided between deals for goods and deals for services, but when it comes to the former tuangou sites companies are at a distinct disadvantage to large-scale B-to-C (Business-to-Consumer) sites like 360buy and Taobao. Group buying companies should instead focus more on deals from businesses offering services like catering and hair salons.