Shop till you flop

Chen Xiaoyu returned home from dinner still hungry, annoyed with how little she got from a four-course meal at a small Italian restaurant in Shanghai’s downtown Jing’an district. She immediately began rummaging through her e-mail, looking for a complaint hot line for the group purchasing website where she bought her dinner coupons, but found nothing.

“I bought a pair of four-course Italian meal coupons for 128 yuan ($19.88). The site’s advertisement claimed that the meal cost 450 yuan per person without a coupon. But I only got a salad, soup, half of a steak and a scoop of ice cream,” Chen grumbled. “My colleagues recommended the site – woyetuan.com, which was launched in June.”

Chen is not the only consumer with an axe to grind over the exaggerated advertisement on group purchasing websites. The increasing number of complaints from group buyers illustrates just one of the problems inherent in this booming, but fledging industry in China.

Slowing growth

The first group purchasing website, Groupon, was established in the US in November 2008. In short, it is a deal-of-the-day website, offering its users a different product or service each day at an eye-poppingly deep discount. If enough of its users sign up, Groupon makes a deal with the vendor and issues coupons to its customers.

According to its annual financial report, Groupon was valued at $36.8 million and generated $33 million in 2009, its first year of business. In 2010, its revenue soared to $760 million.

Chinese entrepreneurs quickly jumped on the business model, hoping to clone its success. They targeted young Internet users, focusing on food, health, fitness and beauty products.

According to an industry report released on August 1 by the Beijing-based e-Commerce Research Center, China has 5,500 group purchasing websites, compared with 2,612 in late 2010. It means that nearly 17 new group purchasing websites open each day. More than 52 million people on the Chinese mainland have at least one account with a group purchasing website. E-commerce transactions have grown 31 percent to 2.95 trillion yuan in the first six months of 2011.

But e-commerce analysts warned an early winter may be on the way. At least 20 percent of small-scale group purchasing websites on the Chinese mainland are expected to fail in the second half of 2011 because of the ongoing credit tightening, said Feng Lin, a senior analyst for the e-Commerce Research Center.

“Although the number of group purchasing websites is still growing, the growth is slowing,” Feng told the Global Times. “In May 2011, the monthly growth rate of those newly-opened group purchasing sites slowed to 9.95 percent, a record low.”

Coming consolidation

One major issue many group purchasing companies must confront is their out-of-control spending on marketing. “Any company that fails to come up with a healthy balance sheet will see it closed very soon, when little capital will flow in,” Feng said.

The top 10 group purchasing websites, according to iResearch Inc, an online consumer research center, include ju.taobao.com, lashou.com, meituan.com and the mainland-based groupon.com. “Ju.taobao.com is a subsidiary of taobao.com, an online shopping platform established in 2003 by Alibaba Group,” said Feng. “They have the best chance to survive the industry’s ‘economic winter’ on the mainland.”

Meituan.com, which is backed by Groupon, raised $60 million in April. But its chief executive officer Wang Xing said at a press conference on July 16 that the funds are still sitting in the bank. Wang believes its cash is the company’s best bet for weathering the so-called winter.

A former operations manager of ganji.com, who declined to be named, told the Global Times the massive success of group purchasing websites in the US is unlikely to translate into success on the Chinese mainland market.

“I am pessimistic about the group coupon model in China,” he said. “We only copied the American model, but we don’t have America’s commercial environment, judiciary system, market maturity and service in place.”

He said the group purchasing market in China is plagued by fake goods and dishonest sales tactics, which will eventually “doom” many smaller websites.

“I will be very surprised if half of the group purchasing websites survive 2011,” he added, “especially when the government is calling for greater supervision over these business-to-consumer websites.”

Low barriers for entry

It is estimated that it costs only about 4,000 yuan to set up a group purchasing website and 10,000 yuan per month to keep it running, according to iResearch Inc. The low threshold for entry is considered the major reason behind the current chaos, said Meng Hui, business manager of the mainland’s leading social network Kaixin, as well as a major player in the industry.

“Larger group purchasing sites have their own sets of rules and guidelines, some have their own quality control departments to make sure goods advertised on their sites are not fake,” Meng told the Global Times. “But smaller ones are struggling to keep up with their competitors, and their rules are lax.”

Meng suggested that a more comprehensive set of guidelines must be in place to regulate the industry, but a higher threshold could wipe out the late entrants to the market. “More regulations mean a higher cost for those who want to get a piece in this lucrative market,” Meng said. “Then smaller sites will not make the cut. Offering lower-than-average packaged prices is the only tool that smaller websites have, and that will no longer be feasible.”

Meng suggested smaller group buyer websites should reorient themselves by adopting a stronger business-to business approach.
“Group coupons can become an affordable advertising channel for smaller retailers and entertainment providers,” Meng said. “It can help smaller local group purchasing sites differentiate themselves from the major players.”

Zhou Jun, the producer of the “Laughing Meatball Troupe,” a theatre group in Beijing, said they rely on group purchasing websites to attract audience members to their productions.

“We look at the group coupons as method of mass dissemination. The group tickets account for approximately 80 percent of our audience since we opened in June,” Zhou told the Global Times. “But we don’t recommend using them long-term, because consumers can get used to the low prices and consequently, it becomes difficult to raise them in the future.”

Xu Jingyi contributed to the story

Leave a Reply