Web & communication software

China Group Buying Sites Say Groupon Must Adapt to Succeed

While Groupon continues to say little about its plans for China, local group buying sites in the country already expect the U.S. company to arrive, but not without facing a host of challenges.

"Groupon can't use the same mentality when it comes to China," said Feng Xiaohai, the CEO of Manzuo.com, a popular group-buying site in China. "If they don't execute well, then they will be at a disadvantage."

Websites and Chinese microblogs have been abuzz for weeks now with reports on the company's moves to enter the group buying market in China. Still, Groupon's U.S. offices have not responded to the reports, while a public relations firm for the company's Hong Unit could neither confirm nor deny the company was expanding to China.

Now the big question has been whether Groupon will succeed in a country where many other global Internet companies have struggled.

Group buying, a hot new online shopping trend, works by offering discounted deals on products and services like restaurant meals or attending a health spa. To attain the discount, enough users have to buy into the deal. Once the threshold is reached, the deal is given out to all those who participated.

The group-buying model became popular in the U.S. with sites like Groupon. But starting in 2010, China began to develop its own group-buying market. Now the country is filled with competitors, with the number of group-buying sites reaching more than 1,000, according to research firms. About 18.7 million Internet users in the country visit group-buying sites.

The stiff competition, however, is just one obstacle the company will face. Groupon's profile as an international company could be it's largest weakness, said Feng.

The rules and regulations in China are different than in other markets, which usually cause grief for international companies that have yet to understand the way China operates, he said. "A lot of business-making here depends on having good relationships," Feng said. "Just because you sign a contract, doesn't mean the other person will carry it out."

Already Groupon has seen some resistance from its competitors. Manzuo and several other group-buying sites in China agreed they would not re-hire employees who have gone to work for Groupon, Feng said. The companies took the strict measure as a way to prevent Groupon from poaching their staff.

"We thought they were not competing fairly. Groupon was hiring headhunters and calling our staff," he said. "This made us upset."

Groupon has not responded to the allegations of poaching.

China has one of the most important Internet markets, with more than 457 million users. In 2011, the value of the country's group buying market is set to expand 10 times compared with last year, said Hu Chen, the co-founder of Tuan800.com, which aggregates Chinese group buying sites.

But the group-buying market in China is far different from the one in the U.S., Hu said. For one, the competition is expected to be much more fierce. The company estimates that at the end of 2010, there were 1,700 group buying sites in the country, all with varying sizes. Chinese users also have come to expect a different level of service with their group buying. Many of the sites in China already offer deeper discounts at 66 percent, versus the 50 percent Groupon generally offers, he said.

"Group buying is an Internet business that really focuses on localization of the experience," Hu added.

Other U.S. Internet companies that have entered China like eBay, Google and Amazon have all faced difficulties in securing a bigger hold of the country's market. Strong domestic rivals have been part of the reason. In other cases, China's prevalent censorship of the Web has also played a role, with sites such as YouTube, Facebook and Twitter now all blocked by the government.

But analysts say Groupon has made a key move that will likely boost its prospects in the country and help the company better understand the market. Analysts point to the repeated news leaking out that Groupon is partnering with Tencent, one of China's largest Internet firms. Tencent is most popular for being the operator of QQ, a Chinese instant messaging program that has more than 655 million active accounts, according to Beijing-based research firm Analysys International.

"Groupon is coming in with the same set of challenges so many foreign companies come in against," said Mark Natkin, managing director of Beijing-based Marbridge Consulting. "Choosing a good domestic partner is a savvy move. Tencent is a company that's well established, has a strong brand and a strong reputation."

Tencent, however, has yet to respond to reports of the partnership, only saying it does not comment on rumors.

Groupon has already acquired a Hong Kong unit following the purchase of three group-buying websites that operated in Asia. Hong Kong has been considered as a jumping off point for foreign companies wanting to enter China. Earlier this month, Facebook opened a new sales office in the city, setting off speculation that it was preparing for a new entry into the Chinese market.

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