CHINA’S NEWEST SHOPPING CRAZE

Last month, Fiona Li did what millions of Chinese shoppers do to find a bargain: she went online. A few clicks later, she had a lead on where to buy the consumer goodies her brother wanted for his new apartment. Instead of reaching for her credit card, though, she jotted down a time and a place: 8 p.m. at a downtown electronics store.
That evening, Ms. Li and her brother joined 15 strangers at the store to demand a group discount on a new television, refrigerator, and washing machine. Salespeople grumbled at the tactic, but the group refused to buckle. After two hours of haggling, and several walkouts by group members, the store manager agreed to a 10 percent markdown on the three items.
Li, a marketing assistant, went home with a smile on her face. "We wanted to save money, and finally we did it," she says. "It's in our nature, whether we're rich or poor, and if we can save money this way, why not?"
Welcome to China's newest shopping craze, tuangou, or team buying. By combining the power of the Internet to compare prices with the stealth tactics of the flash mob, team buyers are driving hard bargains in the world's hottest economy. Dozens of team-buying websites have sprung up to catch the trend, which first began in online forums and chat rooms.
Typically, shoppers looking for the same items find each other online, then band together offline to negotiate special deals on electronics, home furnishings, and automobiles. Some team buyers approach store managers beforehand, others simply show up and flex their collective muscle.
Bargaining is a way of life in China. Shoppers treat sticker prices as a starting point for negotiations, and it's a point of pride to strike a tough bargain or walk away if unhappy.
This habit of face-to-face haggling is one reason why regular online shopping is only slowly catching on in China, which has more than 110 million Internet users, second only to the US. E-commerce was worth around $1 billion in 2005, according to Beijing-based research company iResearch. Many shoppers, though, prefer cash-on-delivery or checks to online payment systems, and credit cards aren't widely used.
Internet surfers are also wary of 'one-click' shopping because they want to be sure what they're getting, and what happens if their washing machine stops spinning. In a market awash in fakes, there's plenty of skepticism about branded goods and the promises of distributors.
"Online shopping has been around for a few years, and Chinese people realize that it's quick and easy, but there's a crisis of trust and honesty. How do you know whether to trust the seller?" asks Ouyang Jixing, deputy director of www.020tgw.com, a team-buying website in Guangzhou.
The answer, says Mr. Ouyang, is to join forces with other team buyers using a website like his, which has signed up 10,000 members since it launched last year. The aim is to bring together distributors of branded goods with potential customers and earn commission from successful team buys. It also hosts several web forums, which is how Li found her team.
On a recent Sunday morning, website director Liu Xincheng squeezed into a tiny camera store on the second floor of an electronics mall. It was a tight fit because Mr. Liu had brought along 20 team buyers who wanted a discount on a $310 digital camera. The store manager, who had spent the previous week negotiating with Liu, was throwing in a free tripod and extra memory, and most of the buyers were happily testing their potential new toy.
"It's good for people to get together like this," says Jessie Wong, a first-time team buyer in the group. "I'm also thinking of buying a video camera, because I want to film my [university] graduation ceremony."
By joining a trip arranged by the website, shoppers have a much higher chance of success compared with unannounced team buys, says Liu. The camera buyers already knew the likely discount, so there was less friction at the store. He plans to replicate his website in other cities in China and wants to eventually list on NASDAQ. "This is a new concept. Those who are brave enough to take on the new ways can reap the rewards," he says.
Behind the bravado, though, the final markdown on the camera was only $12, an amount that didn't impress Zhou Wei, an engineer in the group. Last year, he joined five other team buyers and successfully lobbied for a four percent discount on an $8,750 Chinese-brand sedan. But he admits that it's more time consuming to arrange a team buy without a website organizer.
Website organizers say they also can give peace of mind to shoppers by accompanying them to the store to make sure that branded goods are genuine and that vendors provide after-sales service on electronics. That's one reason why Ye Zhenggang, a law student, reckons he'll do it again. "There's more power in the group because the vendors won't cheat us."
ONLINE SHOPPING CRAZE
China's online shopping mall owners are laughing all the way to the bank. In the past years, courtesy of a surge in the number of online shoppers in China, sales volumes have exploded, businesses have expanded and profits have skyrocketed. Shoppers are always lured to the places with the cheapest prices. Online shopping malls certainly have a price advantage, as no fees that would otherwise be incurred by physical shopping malls are added to the final price tag. Also online shopping is so convenient that a purchase is just a few clicks away. But there are also problems lurking behind this rapidly expanding business. Shoppers are often swindled by fraudulent online shop owners who sell fake or flawed products. Courier services can sometimes be quite tricky due to a lack of supervision and regulation.
So, what has contributed to the online shopping craze in China? And how can we better regulate the online shopping market?
CONSUMER BEHAVIOUR

Rational Decision maker
Why are they likely to go for Tuangou pattern?

GIVING RETAILERS A RUN FOR THEIR MONEY

The Christian Science Monitor recently ran a piece on the phenomenon of online “group purchase” sites in China. The basic concept is that consumers can organize a group online to get “wholesale” prices from retailers or distributors.

Shanghaiist writes about his/her investigation of SHtuangou here. My wife and I just today completed the purchase on SHtuangou for a plasma TV and saved 500RMB vs the Guomei price (Guomei is sort of the “Best Buy” of China).

CIC data monitors tuangou sites because their forums are filled with consumer opinions and experiences about products and services, in particular those related to home decoration.
For example, we found some Nanjing IKEA fans congregate on 51tuangou and actually organize regular trips to the Shanghai IKEA.

As I said over 5 years ago, Chinese netizens (or netizens of any country) won’t engage in e-commerce unless there is a compelling reason to do so, e.g. cheaper price. Chinese already use social media such as BBS to discuss products, services and prices. Using this network to bargain for products is a very natural extension for China where bargaining for price is a way of life and results in a truly unique Chinese adaptation of e-commerce.

If there was any doubt that these sites are affecting offline retailers, check out the pic of this sign I took in Guomei last month.

HISTORY FROM TODAY’s PERSPECTIVE

Scott Tong from American Public Radio recently did an impressive story on the Chinese phenomenon of tuangou called “China’s next export: Group shopping?” Scott interviewed me for the piece, as well as others. In summary, a tuangou involves consumers organizing into a large group, often via the Internet, and then leveraging the group to get better prices. Groups are either organized informally on BBS sites like Xcar or can be organized via tuangou sites like 51tuangou.com. China readers without a VPN will miss the video that accompanies the story, and it is a real gem. See below:

If you have been following this blog over the years, you will know that I really love this phenomenon as it is a clear example of how the Chinese Internet Community is reshaping the relationship between brands and consumers. The Internet Community not only influences purchase decisions, but also the way the purchases are actually made. It is social commerce in action. I first wrote about the phenomena in 2006 (Online tuangou “group purchase” giving offline retailers a run for their money), showing how Gome, the sort of ‘Best Buy’ of China, had “declared war” on tuangou.

Two years later, we wrote how Gome completely reversed the war (Retailers reverse the “Group Purchase” trend), and actually invited consumers to tuangou, in partnership with the Shanghai BBS community KDS.
In fact, we do see that the tuangou phenomenon is increasing in popularity. According to our analysis of over 100 million automobile BBS comments, we found that the number of mentions of tuangou doubled in 1 year’s time.

For a ‘first hand’ account of how the tuangou phenomena work, check out the experience of my colleague Ellen here. CNN later based an article on Ellen’s story here. In short, it took Ellen just 2 weeks to find 54 other people from Xcar BBS to organize a tuangou purchase with a Toyota 4s dealer to purchase a total of 55 Toyota Yaris cars at a 30,000 RMB discount. Read Ellen’s story to also see how the tuangou group has stayed connected since the purchase, serving as a sort of support group and circle of friends. Of course, 4S auto dealers don’t always get it right. In this video, you can see a fight breaking out between potential customers and Ford dealer who broke its promise on a tuangou. The fallout from this incident accounted for almost half of Focus buzz for the month of December 2008, which we wrote about here in our white paper co-authored with Roland Berger.

It is worth noting that sites similar to 51tuangou.com (now part of Liba) and SHtuangou.com are now being set up in other markets and are garnering interest, including Groupon in the United States which has raised over US$30 million in investment at a valuation of US $250 million. In fact, Western pundits for years there have been discussing the potential of the Internet to support ‘crowd sourcing.’ What is most interesting however is that crowd sourcing, and specifically the group purchase phenomena has been alive and well in China since the early days of the Chinese Internet.

While Groupon and other overseas sites must build a large community of consumers with a sort of “build it and they will come” approach, Chinese consumers have already organized themselves online within massive communities and even initiate group purchases without the help of a formal service offered by any site as we saw with Ellen’s case.

As I suggest in the American Public Radio piece:
“The community’s already there. So all it takes is for someone to virtually raise their hand and say, “Hey let’s organize.”
Sites like SHtuangou.com did not start the wave of group purchase, they rode the wave started by netizens. Techcrunch writes how European startups are racing to emulate Groupon…perhaps they should look to emulate Shtuangou.com
It is these massive communities which make up the larger collective of what we call the Internet Community, and these self-organized group purchases are an example the power of the Internet Community to transform the relationship between brands and consumers. This transformation is not unique to China, but it is happening at an advanced and an accelerated rate in a market due to the fact that compared to other markets, the Chinese Internet not only has the most people online, but also the most places to talk, the most people talking and among the highest levels of participation online.
TEAM SHOPPING

Welcome to China's newest shopping craze, tuangou, or team buying. By combining the power of the Internet to compare prices with the stealth tactics of the flash mob, team buyers are driving hard bargains in the world's hottest economy. Dozens of team-buying websites have sprung up to catch the trend, which first began in online forums and chat rooms.

Most people sign up for these events online, and then meet at the pre-appointed time. Sometimes they discuss this with the store managers beforehand, and sometimes they don't and just show up en masse. Shanghaiist decided to take a look at several local Chinese tuangou sites to see how the folks in this city are finding strength in numbers.

One of the top-ranking results was SHtuangou.com, where we found a fairly straight-forward interface where there are categories for the stuff you want to buy, as well as arranged group buying events. The most recent one we see was for wedding ceremony necessities, including jewelry stores, wedding photography and hotels. On this page you could see what companies had been invited, where to check out their products beforehand, as well as contact and sign-up information for the event. There's also a little video that shows what this process is like. Those are set up by the folks at the website. They also have forums for people to arrange their own groups.

How popular has this become? While it's unclear whether or not every website that uses tuangou is a bonafide team buying site, the sheer number of search results should speak for itself. This other Shanghai team buying site asks on its main page if you are still trying to drive a bargain on your own -- while offering scheduled events as well as forums for people to organize themselves. There are also comments on past events so you can get a sense of what works and what doesn't. Some of the events are sponsored by the sellers themselves (which doesn’t make it bad). Still, the most basic problem is the price -- some people just assume that by buying things in bulk together they are getting a good price without making comparisons beforehand.
Just from our brief look we've seen mp3 players, mobile phones, computers, vitamins, cosmetics, pets, rare Adidas sneakers and pretty much anything else you can think of. Did we mention cars and furniture?

Is this as new a phenomenon as the media reports make it out to be? Certainly, the proliferation of sites and the numbers of people participating is, but it seems that a group of folks in Shanghai already tried this back in 2004 when they decided to buy Kodak digital cameras, which in most places would go for about 6,490 yuan with an SD memory card. Team buying got the price down to less than 4,000 yuan, not to mention more memory cards, tripods, and little camera pouches were throw in as well.

If anyone is interested in buying a MacBook Pro (and who isn't!) please let us know, because Steve Jobs can afford to be a little less filthy rich than he is now. Or better yet, start up a thread in our new forum, where you can exchange some ideas and tips with potential team members. Make it happen.