February 28, 2011 6:28 pm

Groupon set for Chinese challenge

Groupon’s Chinese site went live on Monday and will start offering daily deals this month, the online coupon company said, marking its long-awaited entry to the world’s most populous internet market.

The start of GaoPeng.com has triggered curiosity among some Chinese industry incumbents and fear among others as Groupon is entering an already fiercely competitive market.

By the end of 2010, the number of groups buying websites in China had ballooned to 2,612 and total industry revenues were Rmb2.5bn ($380m), according to tuanlab, a web portal that links to online coupon sites.

“You have to ask how they think they can carve out a niche and distinguish themselves,” said George Song, chief executive of Didatuan, China’s third-largest coupon website according to tuan800, another aggregator portal.

In China, the online group-buying boom started in early 2010. “We all got excited when we saw what Groupon was doing,” said Mr Song, former head of sales at Google China, referring to the website’s success in the US. He and a team of colleagues quit their jobs and started Dida-tuan in June last year. They are a rarity for this segment in China, with their years of experience in online marketing and advertising.

Industry executives said Groupon was in for some drastic adjustment in such a market environment. In its home market, Groupon sells deeply discounted coupons for goods and services, keeping half the cost of each coupon sold.

“They will have to say goodbye to the 50 per cent margins they are used to in the US – here, margins at the strong companies are maybe about 10 per cent, and for many smaller firms they are in the single digits,” said Ding Yongxin, head of the group-buying site of Sohu, China’s second-largest online news portal. Mr Ding said Sohu did not need the group-buying operation to make money, but saw it as a tool to attract and retain more young, consumption-ready users to its portal and complement its other offerings.

While Mr Zhou and Mr Ding said he wished Groupon luck, others were not so sanguine.

Several Chinese coupon sites are eyeing investors for new rounds of fundraising and eventual IPOs, and are jittery that a strong new rival in the market could spoil those plans.

Lashou, China’s largest group-buying site with a turnover of Rmb68.9m in December according to tuan800, is embarking on an expansion into China’s smaller cities, because Groupon is hiring in Beijing and Shanghai, the two cities where it plans to start offering its daily deals.

Observers also said Groupon should look to the failures of other western internet companies in China as a lesson. “No western internet firm has really succeeded here, many of them have just tried to impose strategies they use elsewhere,” Mr Ding said.

Chinese group-buying executives said an often chaotic business environment, with widespread fraud and different consumer habits from those in the US, could be challenging for Groupon. “In the US, people are used to making a reservation in a restaurant, but Chinese rarely ever do that,” Mr Song said.

Groupon appears to be heeding that advice, and has teamed up with Tencent, China’s largest internet company, for the China site. A fund run by Tencent is a co-investor and another fund which counts Jack Ma, the founder of Alibaba, China’s largest e-commerce empire, among its investors, also has a stake.

“GaoPeng aims to introduce a sophisticated group-buying business model and an international service standard to the market,” said Yun Ouyang, head of GaoPeng and vice-president at Tencent’s strategy department.

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