CHINA'S popular group-buying websites are expected to face serious restructuring, with as many as a third going belly-up, as competition heightens and the government considers regulating the industry.

The websites are patterned on an Internet business model pioneered in Chicago in 2008 by Andrew Mason, founder of Groupon. Under the concept, a retailer will offer a meal, a movie, an outing, a massage or some other service in a deal-for-a-day at a discount rate of up to 70 percent. The deal becomes void if a minimum number of people don't sign up for it.

China e-Commerce Research Center said in a September 19 report that there were 1,215 group-buying websites in China at the end of August. The center estimated that up to 400 of them won't survive through the end of this year.

Domestic group-buying websites burst on the scene earlier this year, peaking between June and July.

The items sold on the sites have expanded to include cosmetics, daily consumption items and even coupons for other online shopping platforms, with discounts up to 90 percent.

Internet shopping

The boom in group-buying websites has been helped by more sophisticated online payment systems, attracting a wider range of consumers to Internet shopping.

Online shoppers accounted for about a third of China's total Internet user base at the end of June, according to the China Internet Network Information Center.

Group-buying websites attracted 46.26 million visitors in July, or 19 percent of the total number of visitors to online shopping websites, iResearch said in its latest report.

According to one survey of more than 2,700 frequent visitors to group-buying websites, about a third visited one or more websites every day, while 46 percent visited once or twice a week.

According to industry watchers, existing group-buying websites in China fall into two categories: those that are subsidiaries of large web portals and social network sites and those that are new stand-alone, independently owned websites set up for that express purpose.

The popularity of the websites has caught the fancy of some investors. Eight independent group-buying websites have received venture capital ranging from 20 million yuan (US$3 million) to more than 100 million yuan.

Among them is Lashou.com, which secured the venture capital it needed to quickly expand business operations to more than 100 cities in China, putting it ahead in the competition.

In June, the website received US$5 million from Taishan Investment AG, a Beijing-based venture capital firm. The capital infusion came only months after it secured US$5 million from GSR Ventures, a venture capital fund focusing on high-tech start-ups.

Many of its competitors hoping to expand into second- and third-tier cities face much heavier capital pressures.

"The websites with rich capital support will pose a direct competition to social network sites and portal websites that have added group-buying features to their existing services," wrote Fang Yingzhi, an analyst with the China e-Commerce Research Center.

A radical reshuffle of the industry may take place in the next few months as more and more social networking sites and online classified advertisers add group-buying functions to their existing services.

Their clout may be considerable. They have financial support and a customer base provided by their parent firms. Customers may be more likely to trust an established website over a newly established unknown.

Venture capitalists are looking for group-buying websites with experience in e-commerce business and a strong customer base.

China International Electronic Commerce Center, an e-commerce regulator under the Ministry of Commerce, is inviting industry players to assist in drawing up a draft plan to verify and regulate group-buying websites. The regulation would be aimed at eliminating fraudulent websites or other unqualified operators.

The websites face their tightest scrutiny from price-sensitive customers who shop around and are rarely loyal to any one website.

Coolest places

Social networking sites operate differently. People log onto them two or three times a day to see what's going on with friends and to check out the coolest places to hang out.

"Group buying may turn out to be a new way for social network sites to make profits," iResearch's analyst Su Huiyan said.

"Website operators need to do more research into what consumers want rather than just providing what everyone else is offering, like coupons for coffee bars and movie tickets," she added.

Unlike traditional online shopping platforms, group-buying websites act as intermediaries between consumers and suppliers of products or services. Attracting target customers and getting them what they need at the lowest possible price is the key to success. "Group-buying websites will definitely undergo a period of restructuring, and those with capital support may well have a better chance to survive," Su said.

Social network sites have little problem attracting target customers in the prime consumer age range of 18 to 35 years.

Brand-name companies are well aware of the potential purchasing power unleashed when social network sites are set loose on the group-buying model.

In early September, 200 Mercedes-Benz Smart cars were sold on Taobao's group-buying platform within four hours of a deal being announced. Car buyers paid a deposit of 900 yuan to get a 34 percent discount on the price of the vehicles. The price after the discount was 135,000 yuan.

Mercedes-Benz obviously seized a perfect marketing opportunity to target young, fashion-conscious buyers who were willing to spend on an impressive set of wheels.

Other group-buying websites with less market impact often have trouble persuading sellers, much less an up-market supplier like Mercedes-Benz, to offer discounts on their sites.

"Some smaller websites may have to throw in the towel because they lack the resources, the customers and the retailers to make a successful go of it," Analysys International's researcher Chen Shousong said.