Tongcheng Life, a Chinese online community group-buying platform backed by Bertelsmann Asia Investments, has filed for bankruptcy just three years after its inception in August 2018.
The startup, which secured an investment of $200 million last June, failed to stay afloat in an increasingly competitive market fuelled by heavy subsidies.
Its parent firm, Suzhou Xiancheng Technology Co Ltd, said in an announcement last week that the business suffered from “years of poor management” and “could not be revived from floundering operating conditions despite several attempts by different stakeholders.”
Fall of a well-funded unicorn
The shutdown of Tongcheng Life, once a high-flying unicorn valued at over $1 billion, comes after it raised hundreds of millions of US dollars from high-profile investors.
In its largest funding round, it raked in $200 million last year in a Series C round led by Nasdaq-listed Chinese social media platform Joyy Inc and Engage Capital, a venture capital (VC) firm that counts Joyy as a key limited partner (LP). In August 2019, it closed a Series B round at $100 million led by Legend Capital, an investment arm of Chinese conglomerate Legend Holdings.
Its group of top-notch investors also includes Chinese government-linked investment firm Oriza Holdings; early-stage venture company GSR Ventures; Bertelsmann Asia Investments (BAI), part of Germany’s Bertelsmann; and Welight Capital, which is helmed by former Tencent executive Wu Xiaoguang.
Incubated by Hong Kong-listed Tongcheng-Elong, Tongcheng Life also raised funding from the Chinese online travel service’s VC unit, Tongcheng Capital.
Before it went broke, Suzhou-based Tongcheng Life operated an online community group-buying business, a model that enables groups of local residents to get discounts by buying in bulk together. The firm ran a nationwide network of over 80,000 community pick-up stations mainly across cities in eastern China’s Yangtze River Delta and the Pearl River Delta in the south, shows its website.
It allowed customers to order fresh produce and other home appliances through chat groups on WeChat, a ubiquitous social networking app developed by Chinese tech giant Tencent, and the app’s built-in mini programme function.
Up to 70% of its offerings were fresh produce, a merchandise category with a lower profit margin than other packaged household goods as vegetables and fruits are more vulnerable to logistics damage and are harder to preserve.
The collapse of Tongcheng Life came only one day after the firm announced a rebranding plan as part of which it was planning to increase investment in the live streaming supply chain and building an ecosystem supported by the so-called “key opinion consumers (KOCs).”
“In the past few days, the management team and I tried all we could but still failed to save the company,” He Pengyu, the founder, chairman, and CEO of Tongcheng Life, wrote in an internal memo on July 8 that was seen by DealStreetAsia.
“We hoped for a while to navigate through this difficult situation in the community group-buying market through the planned rebranding and business iteration. However, we were left with no chance to push forward this plan as our business partners all pressed for payments, driving us into a liquidity crunch,” he wrote.
A scrimmage around funding, price subsidies
The soured business was once a strong rival in China’s hyper-competitive community group-buying market, which is forecast to be worth 88 billion yuan ($13.6 billion) in 2021, according to an April report by Chinese market researcher iiMedia Research.
It faced fierce competition from well-funded domestic market participants, including Nice Tuan, a grocery app backed by e-commerce giant Alibaba and DST Global; Tencent and JD.com-backed Xingsheng Selected, which is also known as Xingsheng Youxuan; Chengxin Youxuan, owned by ride-hailing firm Didi Chuxing; food delivery firm Meituan’s unit Meituan Select; and e-commerce platform Pinduoduo’s Duo Duo Maicai.
In a separate letter that He wrote on July 6, he said that Tongcheng Life had entered into a phase of steady development in the middle of 2020 before “the dynamics in China’s community group-buying industry drastically changed that September.”
“The market shifted from a competition of innovations and business execution to a scrimmage around funding and price subsidies,” he said.
The arena had a few years of unrestricted growth before the Chinese regulator stepped in to tighten oversight of what it said was “improper pricing behaviour” in the market. China’s State Administration of Market Supervision announced in March its decision to fine five platforms, including Chengxin Youxuan, Duo Duo Maicai, Meituan Select, and Nice Tuan, 1.5 million yuan ($231,638.8) each, and Tencent-backed Shixianghui, 500,000 yuan ($77,212.9).
These platforms were found to have issued a large number of price subsidies since the second half of 2020, which led to market order disruption, said the regulator. Some of them were named and shamed for using false or misleading price tactics to “trick” consumers into using their platforms.