For several months this year, Chinese smartphone app Car8
delivered carwash services to users in Beijing for the low price of
10 yuan ($1.57), a hefty discount on the usual 20 yuan to 30 yuan
price.
The cost to Car8 for each carwash was 17 yuan, but the hope was
to build a base of loyal customers and then to be able to phase out
the discounts.
But in July, Car8 folded—as have scores of similar apps in
recent weeks—after it ran out of cash and failed to raise more
funds. "You need a huge user base to cover the costs of operating
the business," said Car8 founder Liu Qiang.
The failure of Car8 reflects the shakeout that is hitting one of
the hottest segments of China's booming startup scene. Dubbed
online-to-offline, or O2O for short, these businesses offer online
booking of services as diverse as manicures, food delivery and taxi
rides—similar to what is known as on-demand services in the
U.S.
But while the lure of such services in the U.S. is largely
convenience, in China, it is bargains. A Subway tuna sandwich and
drink on food-delivery app Ele.me, costs nine yuan including
delivery, versus 31 yuan at the nearest Subway shop. A karaoke room
can be reserved on group-discount site Meituan at just 58 yuan for
eight hours of singing, a 90% discount off the original 560 yuan
price.
In most cases, when apps connect users to brick-and-mortar
services, the merchant gets paid full price, while the app covers
the difference, often with venture-capital funds that until
recently were pouring into Chinese startups. The huge bargains made
O2O apps a feature of life for many Chinese. On an average Friday,
Beijing news editor Yu Xi, 25 years old, says she uses phone apps
to hail a ride to her office, order dumplings for lunch and coffee
during the afternoon, and hunt for deals for dinner and a
movie.
In a McKinsey & Co. survey in February, 71% of Chinese
online consumers reported that they use O2O apps.
But the recent Chinese stock-market swings and increasing
concerns over slow economic growth have made venture capitalists
nervous about the high rate at which O2O startups have been burning
through cash, and some investors are pulling the plug.
Venture-capital firm Gobi Partners Inc., which has invested in
apps across sectors including real estate, auto repair and food
delivery, estimates that 30% to 40% of O2O startups have shut down
in the past few months. Ken Xu, a partner at the firm, said roughly
half the money such startups raise has been used for subsidies to
attract consumers.
Lists of dozens of failed O2O startups are circulating in
Chinese media. Websites of the companies named carry error messages
or notices announcing that services have been suspended.
To be sure, for a number of apps and businesses that still have
funding, what is an unprofitable business model now still holds
promise well beyond China's larger cities. Meituan.com, a leading
competitor, expects to raise more than $2 billion in its current
round of funding, valuing the company at more than $10 billion,
said Wang Huiwen, a vice president at the startup.
China's deep-pocketed Internet companies—Alibaba Group Holding
Ltd., Baidu Inc. and Tencent Holdings Ltd.—have all staked claims
in the sector and continue to see great potential for growth.
"In terms of the market that hasn't been grabbed yet, it's a
blue ocean," said Zeng Liang, Baidu's vice president in charge of
its group-buying platform Nuomi. Baidu, too, has spent on
subsidies, Mr. Zeng said, but the search company also draws on
user-behavior data and its own mapping tool to make better
recommendations to users.
Baidu has invested in apps for dining, delivery and
entertainment services and estimates the total value of the O2O
market at 10 trillion yuan this year. It expects the market to
double in four to five years, and plans to invest more than $3.2
billion in services apps over three years.
Alibaba and its financial affiliate said in June they were
investing nearly $1 billion in Koubei, a food-delivery platform.
Alibaba's vice chairman, Joe Tsai, said Alibaba's payment platform,
Alipay, as well as its shopping service Taobao give it an
advantage.
"We have natural traffic entry points," he said.
Tencent's strategy has been to back "high-frequency" apps, such
as ride sharing and food delivery, via minority stakes, which lets
it keep some distance from the heavy spending on discounts,
according to the company.
A weeding-out process seems to be under way to identify the apps
with the most sustainable business ideas.
A Shenzhen car-repair app, Xiuyang, attracted more than 120
repair shops to its platform, but ran through one million yuan, or
one-third of its initial capital, on discounts and promotions in
just three months. Its co-founder Liu Le said that in Shenzhen
alone, more than 15 mobile apps offer car-repair and maintenance
services. "They all give huge discounts," he said. The app folded
in late August.
"What we're seeing is that the smaller ones are failing, while
some of the bigger ones are holding up," said Jixun Foo, a managing
partner at GGV Capital, which invests in ventures in the U.S. and
China.
But eventually, even the best-funded apps must turn a profit to
survive.
Tencent-backed Ele.me—whose name means "Are you hungry?"—has
backed off subsidizing sharp discounts in recent months, a
spokesman said. Instead it is striking discount deals with
restaurants to make sure the apps still offer lower prices, the
spokesman said.
Wang Bowen, a 23-year-old gadget dealer in Shenzhen, used to get
more than half off on his Ele.me orders, a significant incentive
when the app didn't have many restaurants to choose from. Recently,
he paid 35 yuan for a 38 yuan meal of steamed chicken and rice from
a Chinese fast-food chain. Despite the small discount, Ele.me was
still his preferred service because of the range of restaurants on
its platform.
"It's not so cheap anymore, but I still use it because it's so
convenient," he said.
Write to Gillian Wong at gillian.wong@wsj.com, Laurie Burkitt at
laurie.burkitt@wsj.com and Juro Osawa at juro.osawa@wsj.com
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(END) Dow Jones Newswires
October 04, 2015 20:55 ET (00:55 GMT)
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