Poor group dynamic

A spa deal from Gaopeng

Fresh from raising $700 million in the largest IPO for a US tech company since Google went public in 2004, Groupon is still riding high. Shares in the group-buying site surged 40% on opening, before settling at $26 a share, or a valuation of $16.5 billion. The two year-old Groupon is already worth more than veteran brands like Xerox or Gap.

In China, things have not been going quite so well. Two scandals involving its joint venture Gaopeng have been making headlines. Last week Gaopeng issued a statement saying it had accidentally sold customers fake Tissot watches. The company later blamed the retailer for forging a dealership certificate and offered compensation to victims.

This week Gaopeng was in the firing line again, after offering a deal to Beijing residents for a McDonald’s two-person meal for Rmb25 ($3.94), compared with a walk-in price of Rmb46. By the end of the day, nearly 1,000 consumers had signed up. The only problem: McDonald’s then denied that it had “cooperated with any websites to promote a group purchase” and warned that the coupons would not be accepted.

Gaopeng was unavailable to comment but the Shanghai Evening Post said the site had not cooperated directly with McDonald’s but with an electronic coupon dealer instead.

It’s not the first time Gaopeng has faced public embarrassment in China. In May, it was accused of fixing a lottery when two winners of iPhone 4 smartphones turned out to be employees. It fired the vice president in charge of the lottery.

Gaopeng is not the only offender in its industry. Hundreds of group-purchase websites have closed this year amid accusations of fake products being sold or the leaking of customer information.

Nor is the business in a healthy financial state. In the first nine months of this year, the joint venture reported a net loss of $46.4 million on revenues of just $2.1 million, according to a Groupon regulatory filing. In August, it closed offices and laid off more than 350 employees, blaming over-expansion into second and third-tier cities.

Internet companies running up large losses often choose to focus on the battle for market share, promising profits once they have established a dominant position.

But Gaopeng seems to have been losing share (it’s declined to 2.2%). After six months of operations it is still considered a minor player, with about a tenth of the monthly visitors of market leaders like Juhuasuan and Lashou in August, according to internet consultancy iResearch. Andrew Mason, Groupon’s chief executive, is unfazed. “China is definitely a different market but every month we inch closer to profitability,” he wrote in an internal memo. “There’s no question in my mind that we’re building a business that will be around for the long haul.”

The problem confronting Gaopeng – and its rivals – is woeful margins in China, says New Century Weekly.

Although Gaopeng charges a higher commission on sales (11.6%) than others (most at no more than 5%), that is still far below the 40.6% commission that Groupon reported in the rest of the world over the same time period.

It may also have been a mistake to pick Tencent as its joint venture partner. At first glance, joining forces with China’s biggest internet company by market cap seems to make sense. Tencent operates popular instant messaging software QQ and is known for cloning other online products and refining them for local Chinese users. What Groupon may not have picked up is that Tencent, which controls 40% of Gaopeng, is developing group-buying sites of its own, operating QQ Tuan, with a 10% share of the group-buying market, as well as holding stakes in other deal sites like Ftuan and SOSOTuan.

Bill Bishop, a long time China watcher, wrote in DigiCha, a technology blog that it was “stupefying” that Groupon didn’t include a non-compete in its deal with Tencent.

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