HONG KONG -- Alibaba Group Holding, Tencent Holdings and other Chinese internet companies face growing regulatory scrutiny over one of the country's hottest e-commerce battlegrounds -- the attempt to digitize fresh produce sales through so-called community group-buying.
The practice, in which neighbors purchase groceries and fresh produce in bulk at discounted prices through a leader recruited by internet platforms, became popular during the coronavirus pandemic, as people avoided going out.
But Beijing is becoming increasingly concerned about the potential risks to jobs and economic stability.
Fresh produce was a largely untapped part of China's vast e-commerce ecosystem. The segment was previously divided between small street vendors, local grocery shops and supermarkets.
However, online demand for fresh food remains robust as more digital-savvy shoppers adapt to the trend even after China had managed to control the virus and life had returned pretty much to normal.
Besides Alibaba and Tencent, major e-commerce groups Meituan, Pinduoduo and JD.com, as well as ride-hailing company Didi Chuxing, have launched services or invested in startups in the segment.
Just this week, JD.com agreed to acquire a 5.37% stake in agricultural wholesale operator China Dili Group for 798 million Hong Kong dollars ($102.9 million) to shore up its supply chain, Dili said in a filing to the Hong Kong Stock Exchange, where both companies are listed.
Dili owns 10 large-scale wholesale markets for agricultural products in seven cities and operates more than 400 community retail outlets.
As in previous areas of e-commerce, the conglomerates are expanding aggressively with generous subsidies to shoppers and suppliers -- but doing so has raised eyebrows in Beijing, where regulators have started to take a tougher line on technology companies.
Last week, the State Administration for Market Regulation, or SAMR, China's market regulator, summoned representatives from the six operators mentioned and unveiled guidelines banning anti-competitive practices such as selling below cost and signing exclusive sales agreements to gain dominance.
The SAMR said community group-buying services provided by internet platforms are eroding local employment with unfair competition tactics.
"We hope the internet platforms will... shoulder bigger social responsibilities," the regulator said in a statement.
In a news program produced by state broadcaster CCTV on Sunday, a number of street market vendors and grocery shop owners complained about their reduced income because many clients have turned to online platforms for cheaper products.
One shop owner in the southern Chinese province of Anhui said she lost half of her revenue. "The product prices on these platforms are even cheaper than what we've paid for the suppliers. How can we survive?" she said.
Other vendors cited extra charges and ignorance of how to use mobile systems for their hesitation in joining the internet companies' platforms.
While the low prices help lure customers, Danny Law, an analyst at Guotai Junan International Holdings, said such practices are running the risk of breaking China's anti-monopoly law.
"The [SAMR] meeting aims to remind internet giants to avoid over-aggressive subsidies" as they expand their community group-buying businesses, and to ensure they grow "under a fair and competitive market basis," Law said, as he believes that the regulators' intention is not to resist the development of a new business model.
Beijing is getting increasingly wary of the power of big tech companies, whose influence has penetrated most aspects of life in China.
Since early November, Chinese regulators have rolled out a series of new rules aimed at regulating online financial services and anti-competitive practices of internet platforms. Shares of internet companies have tumbled, and analysts expect Beijing's effort to rein in big tech companies' influence to continue.
The recent actions "suggest that the government is worried that the community group purchase will impact the profitability of offline operators, like mum-and-pops, wet markets, supermarkets and hypermarkets, as well as suppliers. This could become a social issue," analysts at Jefferies said in a report published on Dec. 22.
Despite the potential negative social impact, the analysts believe the business model is here to stay and offline players will need to collaborate with the internet companies to survive.
The community group-buying market in China is expected to double its revenue to 72 billion yuan ($11 billion) this year from 2019, and reach 102 billion yuan by 2022, according to Chinese market consultancy iiMedia Research.
Unlike the traditional e-commerce platforms, which tend to attract younger customers, community group-buying services draw a large number of price-sensitive elderly users as well as those from lower-tier cities. Improvements in logistics have lowered costs.
Many market observers believe that community group-buying is the next growth engine for internet giants. But for Beijing, it is just another cash-burning game to dominate a market instead of creating something new.
"Only a few companies can win by giving out subsidies. Most will be forced to exit. We have learned our lesson from the competition in bike-sharing and ride-hailing," China Economic Times, a newspaper under the State Council, said in an editorial published on Dec. 24.
From a regulator's perspective, the operators of community group-buying services create little extra value to the overall economy, said Ernan Cui, China consumer analyst at Gavekal Dragonomics.
"People need to buy vegetables anyway. Do they really buy more because of the community group-buying services? It's difficult to prove," Cui said. "But at the same time, it hurts the interests of many people."