JP Morgan: Social shopping is for the young and rich – Hot in China too [Download]

Use of ‘social shopping’ sites such as Groupon and LivingSocial (group-buy) is heavily skewed to the younger (18-34yr are 10x more likely to buy from such sites than 55+), and skewed to high earners ($100K+ earners over-represented, only 10% of <$50K earners use such sites). Overall 33% of US online shoppers have signed up to and 17% have bought from them. These are the findings reported in J.P. Morgan’s latest Nothing But Net: 2011 Internet Investment Guide (not freely available yet, but details below shared with eConsultancy).

So group-buy sites are for the young and the rich – interesting.

One section of the report is freely available (embedded below), and that’s the section that covers Internet investment opportunities in China, and focuses on the growth of group-buy as a key trend in 2011, along with the fusion of social networking sites with retail. In China, there are now 1,664 group-buy sites generating $148m, set to grow at an eye-watering 68%.

In a slightly imperialistic fashion, the report credits the US for starting the online group-buy trend, but note that the group-buy trend itself has been popular for decades in China – known as Tuangou. Relevant excerpts are below, and maybe worth a quick scan as they summarise the general business case for group-buy and more broadly social commerce – in China and elsewhere – from a plain investor perspective without any marketing hype and spin.

“Group Buying: A Hot Trend in China Too

Group buying market size grows from zero to Rmb980M in one year

The group buying eCommerce model originated from the U.S.’s GroupOn and became popularized in China in 2010. We have seen the emergence of hundreds of independent group buying sites, as well as sites launched by China’s key internet players such as Tencent, Baidu, Sina, and Sohu. According to Analysys, a leading internet industry research firm in China, the group buying market size is around Rmb980M in 2010 and is expected to reach Rmb3,800M in 2013.

• • Classification of group buying categories: Location-based Group Buying Sites and Products-based Nationwide Group Buying Sites。
  • Main customers: Young, white-collar workers and college students aged 20-35, who would like to try fresh things.
  • Major products: Entertainment products such as movie tickets and karaoke coupons, restaurant coupons, beauty & hair salon coupons, travel & hotel coupons, etc.
  • Major cities: Tier-1 cities, such as Beijing, Shanghai, Guangzhou, Shenzhen, Changsha, Xi’an, Hangzhou, Chengdu, Wuhan and Tianjin.
  • Select Players: Lashou (100+ cities)…, Meituan 12 Cities (leading group buying site in China)…, Dingping Tuan (7 Cities)…, QQ Tuan 11 Cities… Juhuansuan (part Taobao [ran the Mercedes group-buy deal)

Factors driving growth of group buying market in china

1. 1. Cheap price. Many small- to medium-sized merchants use group buying sites as a promotion channel and offer high discount price to attract customers. The 60%-90% discount price is very attractive.
   2. Attractive products. Group buying sites offer products that are attractive to young people with low prices, such as cake-making class coupons, laser gun game coupon, etc.
   3. Customer’s adoption of online payment method. Online banking payments and third-party online payments are the major payment methods for group buying sites. Chinese customers, especially the ones in tier-1 cities, have increased their trust in online payment with their online shopping experiences.
   4. A new promotion channel for small- to medium-size merchants. With increasing internet usage, group buying sites can help small- to medium-size merchants to attract new customers from internet users. The promotion cost of using group buying sites is relatively smaller than that of print media.

2011 Outlook for group buying market

1. 1. Consolidation. We believe we will see consolidation in the group buying sector. Because of low entry barriers, hundreds of group buying sites emerged in a short period of time. We observe that the group buying market is in disorder and the user experiences are poor. We think that the group buying sites serving low-quality products will be acquired by bigger sites or go bankrupt.
   2. Combination with Portals, eCommerce Sites, Living Social Sites and SNS Sites. Group buying sites and other internet sites could complement each other’s advantage. Portals and SNS sites have large user basees. eCommerce sites can provide products for group buying. Living social sites have the networks of local merchants. Vise versa, group buying services can improve user experiences for the above sites.

More generally, JP Morgan the broader trend of social commerce as key in 2011, particularly for social networking sites

Key trends for 2011: social commerce

“Social commerce. Expect social sites to be an emerging and important traffic generator for eCommerce companies. Synergistic relationship between social networks and commerce merchants will fuel growth for both segments.

…We expect social networking companies to be a key beneficiary of the rising eCommerce trend in China. With increasing time spent on social networks connecting with friends, these sites would be increasingly important traffic generators for eCommerce companies.

In addition to basic brand advertising and friends referrals, social network companies help promote products through integrated product marketing such as themed games to promote products or onsite avatars to build brand awareness.

Revenue generation for SNS websites can be broken down into three types:

(1) Banner advertising: Nearly half of the advertising revenues are generated from putting up banner advertisements on various locations on the site: e.g., profile pages of the users.

(2) Integrated marketing: Many companies promote themselves by putting virtual items associated with their brands in game applications.

(3) Fan pages: Another way of advertising on social networks is through fan pages. We estimate this accounts for nearly a quarter of social network advertising in China.”