Clubbing together

GROUP buying—in which discounts are offered on goods and services once a certain number of consumers have signed up—may be falling out of fashion in many countries, with even America’s pioneer, Groupon, slashing over 1,000 jobs last month, but it is still doing well in China. According to Analysys International, a research firm, bargain hunters there rang up 77 billion yuan ($12.1 billion) in sales through group-buying websites in the first half of this year. That is a rise of 168% on a year earlier. Even more striking is news this week of a merger between the two biggest Chinese firms in the business, which may herald a broader consolidation in China’s internet sector.

Groupon has flopped in China, just as many other Western internet firms have done. This has left the field clear for local businesses. On October 8th two Chinese companies which between them have about four-fifths of the local group-buying market said that they would combine: Meituan, with about half of the market, will join forces with Dianping, which has about 30%. The combined business will be worth perhaps $15 billion.

It will quash competition on one front of a costly proxy war now being fought by China’s big three internet firms—Alibaba, Baidu and Tencent. Alibaba has a stake in Meituan, while Tencent backs Dianping. The merged entity would dwarf Nuomi, which has a mere 14% share of China’s group-buying industry. It is fully owned by Baidu, which said in June that it would invest $3.2 billion over the next three years in this sort of e-commerce business.

The deal marks an escalation in what seems to be an effort by Alibaba and Tencent to squeeze out Baidu and turn the Chinese internet’s big three into a big two. They have already joined up to try to create a dominant company in the online taxi-hailing business. At first each had backed a different startup in this area, but when Baidu gave financial backing to Uber, an American taxi-app giant, to expand its presence in China, Alibaba and Tencent merged their proxies into a firm now called Didi Kuaidi. The combination is valued at $15 billion.

All of the big three firms have invested heavily over the past two years in everything from online-video services to travel portals. On one estimate, there have been nearly $60 billion in internet deals involving Chinese firms so far this year. Some consolidation is needed: in many corners of the industry there are too many competitors, most of which are unprofitable. But China’s antitrust authorities, which have been soft on local internet firms, ought nonetheless to be vigilant. Otherwise there will surely be more mergers like this one, as the industry’s giants seek to create monopolies.