Shake-up in store for O2O sector

As huge demand drives the nascent market, big-ticket investments point to a bright future

Without stepping out of your home, China's online-to-offline applications can almost deliver everything you need to your doorstep, be it a delicious meal, a massage or even a bath for your pet.

Big-ticket venture capital investment has rapidly expanded the size of the industry in China in a relatively short time and attracted a large number of entrepreneurs who rolled out new applications one after another.

But industry observers said that the industry is going to consolidate further after the period of wild growth and those applications which cannot stand out in the market will find it difficult to survive.

O2O, the model of "ordering online and being served offline", has been blooming in China since late last year. Statistics from Beijing-based Internet consultancy Analysys International projected the O2O market is expected to exceed 400 billion yuan ($62.16 billion) this year, up from last year's 248 billion yuan, a rise of 61 percent.

The growing demand for better services and the huge amount of capital betting on the rosy future of the Internet industry are the two major forces behind the rise of the O2O market, which is eventually expected to be worth as much as trillions of yuan, said Sun Mengzi, a senior analyst with Analysys International.

"As soon as the news got out of an O2O company being set up, venture capital would be chasing it eagerly," said Hou Guopeng, who launched an app providing O2O services at the beginning of this year.

"But this is now no longer the case. If you cannot be the best player in your market, it is likely you cannot survive in the end," he said.

Hou's application, Momoda, provides services to help pet owners wash and dry their beloved pets at home.

A list of dying O2O companies has been circulated inside the industry and has been growing longer since the second half of the year. More than 300 companies in 16 categories, including food delivery, door-to-door massage and healthcare, have gone bankrupt this year.

Some insiders said the winter of venture capital has arrived as China's economy is slowing down.

But some other industry observers said that after tremendous growth, investors are simply becoming more rational.

Huang Yuanpu, an independent analyst, said that about one in four O2O projects successfully landed series-B investment in the second half of the year. "The majority of the projects are very likely to die due to a lack of funding," he said.

He added many of the projects have no business model to make a profit from and they simply burn money to gain users via offering significantly cheap services.

"This unhealthy development simply cannot last," he said.

Sun Mengzi of Analysys International, said that no investors would accept cash－burn for a long time just to gain market share.

"We've seen a number of cases this year that merge the No 1 and No 2 market players into one company, because investors cannot stand their cash burning competition," she said.