Making the right moves

Updated: 2011-11-25 10:21

By Su Zhou (China Daily European Weekly)

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Juhuasuan banks on platform to shore up revenue, profit

Making the right moves

Alibaba's strong database, well-developed ratings system and other information can help nurture its group-buying unit, Juhuasuan. Provided to China Daily

After a year of explosive growth, Chinese group-buying websites are in the consolidation mode as stiff competition and shrinking margins are queering the pitch for many independent players

Zhou Xiaoming, who runs a Beijing-based group-buying website, started his business in March last year with his own savings. But his business faced closure by the end of the year, as the competition was stiffer than he had anticipated.

Rather than give up, Zhou decided to team up with Juhuasuan, the open group-buying platform of Taobao Marketplace. That decision saved his business and offered prospects of better returns.

"There is no charge to join the Juhuasuan platform and it is like having a rent-free store in a business center," Zhou says. "With their support, I can now focus on providing better services for customers."

On Nov 11 this year, so-called singles day in China, the turnover of Zhou's company surpassed 150,000 yuan ($23,577, 17,550 euros), nearly three times the daily average.

"While other group-buying websites are trying to crowd competitors out of the market, Juhuasuan is looking to join hands with small players," he says.

Zhou is only one of the several partners that Juhuasuan has in 50 cities. Yan Limin, general manager of Juhuasuan, says that the company's partners are not confined to group-buying companies but also to other local service providers.

"We don't do any group-buying activities by ourselves. Rather the efforts are to attract more companies to make transactions using our platform," Yan says.

"The local service market is too big and varied. So the model of a big Groupon network with headquarters in Beijing cannot succeed in China."

According to Yan, only local service providers would be able to manage the local business needs. "We provide a platform to support partners and encourage them to provide group-buying services to customers."

Juhuasuan, launched in March last year, was one of the businesses under the Taobao Marketplace, the largest customer-to-customer platform of Alibaba Group. But with the rapid development of the group-buying industry, Juhuasuan was divested from the Taobao Marketplace as an independent subsidiary of Alibaba last month.

Last year, the trade volume under the Juhuasuan platform was more than 520 million yuan, and the figure for this year is expected to surpass 11 billion yuan. The trade volume of its rival Lashou, which recently postponed its Nasdaq listing, was only 260 million yuan last year.

"The Juhuasuan model (serving as a platform) is different from other (group-buying) websites like Lashou, 55tuan or Meituan," says He Xi, an e-commerce analyst with Analysys International. "Many group-buying companies are too eager to succeed, and their focus is to invest more money rather than improving services.

"Their development strategy is to invest money on brand building, expansion and hiring so as to get more venture capital or to go public. Their only hope is to use huge amounts of money to outsmart their competition."

However, Yan feels that this is not the right approach to develop group-buying business in China. Most of them rely on the business model of buying services or products at lower prices and then selling them at higher prices.

Juhuasuan, for its part, does not have any immediate plans to float its shares, he says.

Some of the other companies are also changing tack by expanding the scope of their business. Lashou, for instance, has sketched plans to develop an online platform for travel services next year, and 55tuan has opened a third-party platform for other local companies.

As far as Juhuasuan is concerned, it will still maintain its function as a "platform", and develop a mechanism to impose fees on merchants for using the platform. This is just like Taobao Mall, the business-to-business platform of Alibaba, Yan says.

"We only build the platform, and only it can solve the problems of group-buying the industry."

To some extent, such a strategy is necessary as in China's e-commerce market, innovation tends to get duplicated and only those platforms which have stand-alone advantages can succeed," he says.

"By accounting for nearly 70 percent of the e-commerce market in China, Alibaba can provide a lot of information to Juhuasuan, like the latest consumption preferences, popular brands and the consumption power of certain consumer groups," Yan says.

"What's more, Alibaba also provides a mature ratings system to Juhuasuan, which helps in the development of group-buying. Taobao Marketplace has had a ratings system for eight years, which makes it impossible for other websites to follow."

To protect consumer rights, Juhuasuan requires merchants to make a deposit as "risk-control money" that is parked in their alipay accounts, the Chinese counterpart of PayPal. Merchants in first-tier cities such as Beijing are required to make a deposit of 300,000 yuan; for merchants in second-tier cities such as Tianjin, the sum is 200,000 yuan.

"This information is accessible to online consumers," Yan says. "If merchants violate consumer rights and interests we compensate the consumers with funds from the risk-control money account."

But He admits that these do not guarantee a monopoly for Juhuasuan in the group-buying market.

"The Groupon copycats in China will certainly find other ways to survive. But Juhuasuan does prove the possibility of a combination of group-buying and e-commerce," He says. "The intervention of platforms can effectively integrate resources and minimize costs, but this is not the only trend for the industry.

"With the help of LBS (location-based service) or other Internet applications, some specialized group-buying websites will more opportunities for development.

"But if they do not readjust their strategies they will surely perish in the future."