How Can Baidu Grow Its Group-Buying Business?

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China’s online search giant Baidu (NASDAQ: BIDU) first entered the group buying business in August 2013 by acquiring 59% of group buying business Nuomi from Renren (NYSE: RENN) for $160  million. [1] In January this year, Baidu acquired the rest of Renren’s stake in Nuomi. [2]. Group buying websites have faced major challenges in China in the past few years. The number of group buying companies in China currently stands at 176, when whereas there were over 6000 of these in 2011. [3] This represents a survival rate of only 3.5%. [4] In this article we try to understand the challenges facing group buying companies in China and how Baidu can overcome these.

See our complete analysis of Baidu here

History Of Group Buying In China

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Online Group buying in China started in late 2000’s when users combined the price discovery power of the internet and the stealth tactics of flash mobs to drive hard bargains with merchants. This trend that first began in online forums and chat rooms went under the name tuangou. People looking to buy the same goods meet online. Then they band together offline and approach merchants selling that particular good to try and get the best prices. Organizing shoppers in this manner can be time-consuming and inconvenient. The benefits from group buying are usually discounts in single digit percentages, which may not justify such an effort. This created an opportunity for websites to step in an take up this responsibility and thus began the Chinese group buying website bubble. [5]

Group buying is ideally suited to China in many ways. The Chinese are culturally prone to driving hard bargains, and go out of their way to find a good deal. They derive a sense of pride from striking a good deal or walking away if the terms are not agreeable. Additionally, the Chinese have a collectivist culture that makes group buying more agreeable to them than people from more individualist cultures. [6] This exciting opportunity spawned thousands of websites providing such services. However, many of these were part of a bubble and started with the aim of selling out to larger players. Consequently there was significant consolidation in the industry. In July 2011, the top 20 group buying companies controlled 89% of the revenue from this industry. The top 10 sites accounted for 75% of the market share. [7]

The Competition For Nuomi

As of early 2014, after thousands of such websites shut down or were bought over, many sites were still making losses trying to find their footing in this industry. However, the trend towards consolidation has strengthened. The top 9 companies accounted for 98% of the market share. Baidu rival and Chinese internet giant Alibaba (NYSE: BABA) backed site, Meituan grabbed 42% market share. Dianping, in which Baidu’s other rival Tencent (HKG: 0700) has a 20% stake came in second with 23%. Nuomi came in a distant fourth with only 10%. [8] Baidu sought to change this state of affairs by replacing Nuomi’s founder CEO with one of its own vice presidents. [9]

Alibaba and Tencent have also tweaked their strategies to compete in this segment. Alibaba backed Meituan, which majorly focused on gourmet food, is now expanding into independent hotels and restaurants. Alibaba introduced facility for customers of its Taobao platform to search and pay for local restaurant offered dining deals on their mobile. The payment can be made using Alibaba’s Alipay, giving customers protection against frauds and refund issues. Tencent has extended its WeChat service’s dining and ticket buying services to group buying with improved management of orders and refund services. [4]

Challenges Facing Chinese Group Buying

The Chinese group buying industry remains plagued with challenges. The first one relates to customer’s trust in the websites. This was seriously damaged after a joint venture between Groupon (NASDAQ: GRPN)and Tencent sold fake Tissot watches and invalid McDonald’s coupons. The lack of a reliable supply chain to fulfill group purchases made online is another challenge. There are also dealers and suppliers who fake documents which leads the websites they partner with damaged reputations. Last but not least there is also the ever-present hyper-competition and overcapacity due to the large amounts of funds that was sunk into this sector in the heydays of its bubble. Many such companies that were set up are expected to be cash-starved and likely to be sold of or closed. [3]

What Baidu Can Do With Nuomi

Analysts have opined that Nuomi can help Baidu monetize its large search engine user base better. By leveraging complementarities between online search and group buying, it can channel more of the group buying volume through Nuomi. Group buying begins with a search for deals, something a search engine service provider such as Baidu is adept at. The brand name created by Baidu in search can inspire trust in potential buyers. This can alleviate one of the most important drawbacks faced by group buying service providers in China, viz., the lack of trust of buyers in such websites. Additionally, Baidu can integrate its location based services and its maps and navigation services to help make the customer experience in Nuomi more seamless. Such services can help users locate the stores where deals are being offered and direct them there. [9]

Two facts make us optimistic about the prospects for Baidu with regards to Nuomi. Firstly, the Chinese e-commerce industry is growing 60% annually, which is 6 times faster than in the U.S. Secondly, Nuomi is yet to achieve a scale at which decreasing returns to scale set in. [10] So it can still continue to grow at a fast rate. Going ahead Nuomi could become an important driver for our valuation model of Baidu.

Moreover, Baidu has also extended its group buying services to Brazil. It bought Brazil’s largest group buying website Peixe Urbano this month. This platform has 25 million users in Brazil. It had experienced rapid growth until 2012 when it fell prey to an overall decline of group buying in Brazil. Baidu has estimated that 43 million Brazilians will be online by 2018, making it a high growth market for Baidu’s services. This overseas revenue will also augur well for Baidu in expanding its presence in the group buying industry.

Notes:
  1. Baidu To Buy Majority Stake In Nuomi []
  2. Baidu Finishes Nuomi []
  3. Party Over For Group Buying [] []
  4. Shrinking Group Buy Market [] []
  5. China’s Newest Shopping Craze []
  6. Can Groupon Succeed In China? []
  7. QQ Leads Group Buying Market []
  8. China Online Group Buying Websites []
  9. Nuomi’s Integration Into Baidu [] []
  10. Baidu Can Capitalize On E-Commerce Growth []