Guest author Julia Q. Zhu is a leading expert on international e-commerce in China and the Asia Pacific region. She formerly held multiple management positions for Alibaba Group, China’s largest e-commerce company. Prior to Alibaba, Julia worked for iResearch in Beijing, China’s equivalent to ComScore. Follow Julia on Twitter @juliaqzhu.
Groupon (NASDAQ:GRPN) is plagued with a host of problems leading up to its IPO. In the first half of 2011, the company spent an unsustainable $432 million on marketing, $392 million out of the $681 million in liabilities currently owed to its vendors, according to Yipit’s data.
Its triple-digit growth has slowed, leading to a potential 50 percent decrease in its valuation. And we haven’t even started to talk about Groupon’s soon-to-be failed joint-venture, Gaopeng.com, launched in partnership with China’s internet giant Tencent.
Just two months ago at the end of August, Groupon closed 13 of its Chinese locations and fired over 400 full-time staff. Groupon is just the latest example of a Western Internet company to fail in China. Regardless of whether we look at Google’s defeat at the hands of Baidu, or eBay’s failure to compete effectively with Taobao, in the case of Groupon we can see four typical mistakes Western Internet companies make when entering the Middle Kingdom.
Groupon faced an uphill battle from the very beginning due to its arrogance. Before Groupon even entered China, the US firm proclaimed that it would become “China’s largest shopping site.” In Europe, Groupon had adopted a strategy of using high salaries to poach competitors’ top employees and assumed a similar strategy would work in China as well.
The company also thought that it could just pay huge sums to acquire Lashou, the largest Chinese group-buying site in order to enter the Chinese market, but was shocked when the Chinese site refused their offer.
An assortment of Chinese group buying sites even went further to join forces and issue a formal statement that any employee who left to work for Groupon would not be hired by any company in their alliance should he or she choose to leave Groupon in the future.
2. Lack of Local Understanding
Groupon’s China head seemed to think that all international markets were alike – what worked in Germany would work in China. One example is Groupon’s sales team in China. At first Groupon insisted that its partnering vendors split profits 50-50, without taking into account the realities of China’s group-buying environment. Given so many existing players in the market, vendors have the upper hand when negotiating with group-buying operators and typically leave their partner only 10 percent of the profits instead of 50 percent.
Local vendors were so taken back by Groupon’s aggressive sales tactics that they often told the company’s sales people to calm down and come back later with more realistic expectations. Groupon insisted on using mass email marketing, despite being warned that Chinese people seldom read that type of email. Such an approach had been successful in Germany, but Groupon ultimately found out the hard way that it didn’t work in China.
3. Misaligned Management Structure
Groupon’s failure to draw more heavily on local talent in its management structure limited its ability to adapt to local nuances and succeed in the Chinese market. Out of Groupon’s senior management team in China, only two members were Chinese: one from mainland China and the other from Hong Kong.
Even Groupon’s operations in more remote parts of China were run by foreigners with limited understanding about the local nuances of the Chinese market. Thus a situation arose in which foreign managers were managing Chinese employees in a Western style and in some cases seeing very low efficiency, because employees did not necessarily respect or feel loyal to their managers. As a result, Groupon experienced tremendous employee turnover.
4. Wrong Choice of Local Partner
Groupon made a very smart decision in partnering with Tencent, which next to Alibaba Group, is a true leader in China’s Internet space.
Where Groupon went wrong was not making use of the numerous advantages a partnership with Tencent has to offer. For example, as mentioned above, rather than rely on Tencent’s local market expertise, Groupon instead chose to hire expats to run its operations all over the country. And for Tencent, the Gaopeng joint-venture was the least of its concerns or priorities. The firm already operated a number of other group buying portals in China prior to the partnership – Gaopeng was one of many.
Some analysts say this is the result of Groupon’s overly confident business model. Others say that its failure can be traced to the nature of China’s group-buying industry: with the market already divided among so many companies, even a company as successful elsewhere as Groupon can find its impact limited. No matter which view one ultimately subscribes to, what’s becoming increasingly clear is that Groupon is finding narrowing space for itself in China’s crowded group-buying industry.
See also: What’s wrong with Groupon in China?