So How Does Shihuituan Actually Work?
Let’s start on the front line – the point of sale of the business is handled by community leaders. Their involvement is the primary difference in this model and key to the success of the entire operation. These are mainly stay-at-home mothers or local mom-and-pop stores who act as on-the-ground sales and marketing agents or “influencers” for Shihuituan, earning a commission of up to 10 per cent on average. While the commission earned tends to be fairly small sums, it’s a meaningful additional income for households living in lower-tier cities. The company has so far built up a network of 80,000 community leaders, serving 20 million households in 60 cities in China.
Reducing Acquisition Spend
Shihuituan targets China’s smaller, lower-tier cities because they see less competition in these areas. People living here tend to get lower quality products offered at higher price because of the logistics inefficiencies, so there’s an opportunity for price competitive, high-quality goods. Thanks to their close social relationship with the local community, people trust making purchases from Shihuituan’s community leaders, even if they don’t know where these products are coming from. This has significant cost benefits for Shihuituan. Most eCommerce businesses need to invest approximately USD 10-20 or more to gain a customer. Yet in this model, the cost per acquisition is close to zero. Each community leader takes care of a micro network of around 100 customers on average, using social app WeChat to interact and share information of the latest group-buying deals. WeChat is where people already gather in China, so it makes it easy for community leaders to bump into someone to tell them about Shihuituan’s services and add them into the group. And as their group is relatively small, community leaders can talk to each one of those customers individually and guide them to make a purchase.Keeping Logistics Cost Low
The community leaders also place orders and receive the delivery of purchases. As they live within a community, they’re conveniently located close to the consumers, which means they can take the role of handling last-mile packages, or have people come to their point of sales to pick them up. For Shihuituan, this substantially lowers the cost of logistics which is usually a major spend for eCommerce businesses.
Competitive Pricing Boosts Transaction Frequency
The merchandise is supplied by third-party vendors who use the platform to access aggregated customer demand. The most common purchases on the platform are high-quality fresh fruits, vegetables, frozen seafood, and FMCG items. Given the competitive pricing due to low logistics costs, customers often purchase goods for one meal at a time, which adds to the frequency of transactions per user.Speed of Delivery Via Smart Supply Chain
Shihuituan does not operate a full cold chain logistic model but tries instead to boost the efficiency by reducing the time that a fresh product needs to move from the warehouse to the consumers.The solution is 12-hour delivery for fresh produce across China for most of its orders, with the goods only leaving the warehouse for 5-7 hours in cold boxes or frozen boxes. The community leaders can use their own freezers, fridges or cold stores to temporarily store the packages safely for customer collection, or last-mile delivery, at a convenient time later in the day. This helps to lower the cost of packaging, warehousing and delivery. Warehouse storage efficiency is enabled by Shihuituan’s close to zero inventory model, thereby holding little or no on-hand inventory stock, with suppliers encouraged to supply produce as and when orders are received. It all helps to keep logistics costs to less than 10%.
Shihuituan has its own IT system, but everything else such as the delivery truck fleet is outsourced, so they don’t own any fixed assets. Many of the fresh produce suppliers also supply the local supermarkets, but Shihuituan is able to provide better payment terms and simple, fee-free arrangements. Access to a larger number of customers is also attractive to these suppliers.
Leading From the Front
The community leaders bring significant savings to two of the biggest costs in the standard e-grocer business model, namely acquisition and logistics. This allows Shihuituan to make their prices more friendly to customers living in China’s lower-tier cities, drawing more people to the platform. Over time, as more consumers form a positive perception of the quality of products available from Shihuituan, some start going direct to their app to make their own purchases. In fact, some 30 per cent of transaction traffic now comes not from community groups but directly from consumers.
Growth Set to Continue
By focusing on lower-tier cities and rural areas, and incorporating a highly efficient community leader model, Shihuituan is securing a unique position amongst China’s growing online-to-offline (O2O) grocery businesses. It has evolved the community group-buying concept by thinking more strategically and brought further disruption to the retail environment. The COVID-19 pandemic and continued health concerns have strengthened consumer demand for high-grade fresh fruits and vegetables. Meanwhile, lockdowns have encouraged take-up of online shopping when bricks-and-mortar stores have been forced to shut up shop.Investment of USD 81.4 million in a Series C1 round led by GGV Capital in June 2020, five months after the completion of an $88.3-million round, means Shihuituan is very well placed for the next phase of development. Its successful model is also attracting interest from other markets such as Africa and India where communities residing outside major cities have restricted access to competitively priced quality products.
