Internet & Tech

Launch problems

Groupon in gaffe as it enters China market

Launch problems

Regrets that fish curry: Hutton

If you were about to launch a business in China, would you air a TV ad that makes a jibe about Tibet? In all likelihood, probably not.

But Groupon, the US-based company that helps group buyers get discounts, decided that it would give it a go, spending millions on a commercial broadcast during this year’s NFL Super Bowl. In it, actor Timothy Hutton mused that the “people of Tibet are in trouble”, before going on to make a crass joke about them still whipping up an amazing fish curry.

The ad certainly triggered a stir in China, with many slamming it as a bad business move. “Groupon is going to pay for it,” warned one Sina Weibo blogger.

The timing of the commercial was truly baffling. This week Groupon partnered with Tencent, China’s largest provider of instant-messaging services, to start a Chinese group-buying site called GaoPeng. “The collaboration combines Groupon’s global group-buying experience with Tencent’s in-depth knowledge of Chinese online communities,” was the spin. Pity Tencent didn’t have right of veto over that Super Bowl ad (which has been panned as unfunny by many Americans too).

WiC first reported China’s appetite for collective buying back in issue 83. The way it works is that group-buying sites partner with local businesses in major cities to offer discounted items like movie tickets to yoga lessons. Once a certain number of people sign up for the deal or service, the site collects payment from the members and sends out a voucher (a “groupon”) in return, taking a small commission on the transaction.

Chinese internet users have proved receptive to the idea of group-buying. In 2010, the number of domestically run group-buying sites climbed from none to 2,162, and analysts estimate that the sector will surpass Rmb16.5 billion ($2.5 billion) in sales this year, says portal

Groupon says that will offer discounts at shops in China via daily emails. The service, which is only available in Beijing and Shanghai at the moment, will likely expand to other first tier cities like Tianjin, Guangzhou and Shenzhen soon, says Southern Metropolis Daily.

Will Groupon succeed in a market where so many American internet companies have failed? Industry insiders are sceptical. Many say Groupon is in for a culture shock in China. In its home market, Groupon keeps up to half the value of the discount coupons sold, but that margin is significantly lower in China.

“They will have to say goodbye to the 50% margins they are used to in the US – here, margins at the strong companies are maybe about 10%, and for many smaller firms they are in the single digits,” says Ding Yongxin, head of the group-buying site of Sohu, China’s second-largest online news portal. Ding also told the Financial Times that Sohu did not need the group-buying operation to make money, but saw it more as a tool to attract younger, affluent users to its portal, as a complementary product to its other offerings.

That probably explains why Taobao, which already controls over 70% of China’s e-commerce market, is also tweaking its approach to group-buying. China’s largest online shopping site (see WiC94) has an existing group-buying site called Juhuasuan.

However, it has focused previously on offering products that can be shipped anywhere in China (for example, a sweater). Now it seems to be having a rethink, going more for Groupon’s more local model. It announced last week that it will now offer more targeted services on its site (like a restaurant deal to the first 20 Shanghai residents who respond to the offer).

Unlike Groupon, Juhuasuan lets merchants submit their promotional offers free of charge (it earns revenue from premium services for merchants such as keyword advertising, says the Wall Street Journal.) If that strategy sounds familiar, that’s because Taobao used the same commission-free model to overtake eBay’s Chinese site, leading the US internet giant to pull out of China in 2006. Groupon is going to have to flex some serious muscle to beat China’s e-commerce giant on its home turf.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.