Surprises in Emerging Chinese Consumer Market

Surprises in the Emerging Chinese Consumer Market highlights the Internet-powered practice of consumer collaboration and group buying for discounts.

“Chinese Consumers Overwhelm Retailers with Team Tactics,” The Wall Street Journal, February 28, 2006 is a perfect example of how mature market assumptions can lead to surprises in emerging markets. Chinese consumers increasingly meet on the Internet chat rooms to plan and coordinate a group buying strategy for a type of good or even brand. Then they go to the retailer as a group to extract significant group discounts. This practice is known as tuangou, or team purchase, and can play havoc with companies’ pricing strategies and margins, to say the least.

Imagine the group leverage: motivated buyers find each other easily on dedicated websites like http://www.51tuangou.com. They collaborate on researching high-ticket durable items, they plan the approach, and they show up at the retailer and use their body of knowledge about margins, features, competitor pricing and product quality to wear down the retailer and extract significant discounts.

Of course, many “collective buying” ventures were tried in the U.S. and Europe during the Internet boom to try to aggregate demand through group discounts, but none of them proved to be viable due to western consumers’ relative impatience and individual focus. However, several elements of Chinese culture could combine to produce a paradigm-changing trend in this case: the collective nature of China’s culture, the importance of group identification, the pent up appreciation of consumer goods, and rapidly rising wealth in concentrated city centers.

Smart retailers will monitor the tuangou trend closely and experiment with using it to their advantage. It doesn’t have to be a win-lose situation. The retailer could be at a significant disadvantage in the current scenario because most assumptions and costs are built into the product by the time it gets to the store and showroom: marketing, tariff, transportation, etc.

However, let’s say the retailer were to partner with these groups and aggregate their demand before receiving the goods. S/He could then push the collaboration up the supply chain to gain efficiencies in several areas. Theoretically, some buying groups could be rather large and could represent large demand, and the practice could significantly lower transaction costs. Companies with agile supply chains and flexible business processes could gain from the trend. Dell showed that supply chain can be a company’s chief competitive advantage.