Deal focus: China's Benlai takes a different approach to group buying

From KKR’s $40 million investment in Xingsheng Selected to Legend Capital leading a $100 million round for Tongcheng Life, community group buying has emerged as the dominant theme in Chinese retail over the past 12 months. Investors argue that this technology-enabled model – channeled through WeChat mini-programs and marshalled by community leaders – will change shopping habits, replacing the physical experience of the wet market or supermarket with a virtual experience.

For all the enthusiasm, investment in the space has cooled down during the second half of 2019, with many community group buying players shuttering their businesses or being acquired by larger peers. “Without brick-and-mortar stores as a support, community group buying will just be a marketing method or a temporary model,” Huafeng Yu, founder of fresh produce retailer Benlai Group, tells AVCJ.

The company has received substantial VC backing since its founding in 2012, most recently $200 million in the first tranche of a Series D round led by Mingde Holding in October. Existing investors Gaorong Capital and CDH Investments re-upped. CDH has been involved ever since it led Benlai’s $40 million Series A in 2014. Yan Huang, a managing partner at the firm, notes that fresh produce retail platforms have struggled over the years. Benlai is the exception to the rule.

“The fresh produce business model is difficult to operate. There are high requirements in terms of goods selection, inventory condition, and cold chain logistics. As a result, gross profit is low, while customer acquisition costs are actually high and many players buy internet traffic,” says Huang. “Community group buying was introduced to reduce customer acquisition costs, but Benlai has taken a different path – leveraging community outlets to bring traffic online.” 

Online to offline

Benlai turned profitable in the 2018 financial year and Yu expects it to generate income of RMB100 million ($14 million) in 2019. The secret weapon is community stores within foot traffic distance. Benlai was originally an online marketplace, sourcing products from farmers all over China and delivering them to households. It launched a second business line called Benlai Xian in 2017 that now comprises some 400 brick-and-mortar community stores of around 200 square meters each.

The proceeds from the latest round will primarily be used to add more offline stores, focusing on second-tier cities and gradually expanding into first-tier locations. Benlai Xian’s minimum threshold for opening a store is 10,000 residents or 3,000 families. The average break-even period is about 18 months.

“Fresh produce is very time-sensitive. Our online products are ordered today and delivered tomorrow, but for a customer who needs ingredients immediately to cook dinner after work, what can we offer? That’s why we are opening stores at the community level,” says Yu. 

There are several advantages to this approach. First, it makes the jump from offline to online easier. Customers might download the app seeing the ads in stores offering further discounts when buying online. This kind of synergy helps reduce customer acquisition costs. Second, physical outlets serve as staging posts for order fulfillment, which means deliver times are shorter and goods stay fresh longer.

Benlai has already launched its own group buying services in Tianjin and Wuhan, taking advantage of the fact that customers can pick up refrigerated items from stores when convenient. Numerous other platforms require collection from outdoor locations at specific times.

Even though Benlai Xian only represents a small part of the overall business, Yu expects it ultimately to account for 60% of revenue as consumers prioritize convenience over less accessible large-scale retail formats.

“A huge change is happening. It's becoming more and more unrealistic to go shopping three to five kilometers away when preparing dinner after work. Sales at many supermarkets are declining, and some foreign companies are leaving the market – for example, Carrefour and RT-Mart have both sold their China businesses. The trend is clear: for standard commodity items, you purchase online; for fresh produce, you buy it in community stores to save time,” says Yu.

Strategic alignment

The first tranche of the Series D not only provides capital to support Benlai’s expansion plans, but also sees the introduction of a significant strategic partner. Mingde is the largest shareholder in domestic courier company SF Express, which launched its own e-commerce arm in 2012. SF Best has 400 brick-and mortar outlets in Pearl River Delta, an area in which Benlai has no physical presence. SF Best will drive online traffic for Benlai and also provide logistic nodes.

Moreover, there are opportunities for supply chain collaboration. Approximately 70% of Benlai’s goods come directly from farmers and manufacturers, while SF Best has its own sourcing network. Yu believes the companies can leverage each other’s knowhow to cut costs and improve margins.

CDH played a key role in facilitating Mingde’s investment in Benlai. The private equity firm has an established relationship with SF Express, having led a RMB2.5 billion Series A round for Hive Box, a self-service package drop-off and pick-up operator, in 2017. The smart storage player was established by SF Express and several of its peers.

Benlai has developed its own logistics capabilities and now boasts eight warehouses and 2,000 delivery staff. It offers logistics services to third parties – 40-50% of the volume comes from the likes of Alibaba Group’s Tmall platform – to help bring down costs. However, the move was motivated by practical necessity more than economic ambition.

“Benlai built its own logistics team because there were no tailor-made services for fresh produce at that time,” says Huang from CDH. “It didn’t just invest for the sake of expansion, it is not that kind of money-burning company.”

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• Topics
• Greater China
• Consumer
• Technology
• Expansion
• China
• TMT
• CDH Investments Management
• Banyan Capital