Online group buying is finally proving popular in China, according to a report released on Monday by China Internet Network Information Center (CNNIC). According to the report, Chinese market witnessed an increase of 244.8% in online group buying in the year 2011. Despite a massive blow to Groupon and others last year, Chinese online group buying is finally seeing some light at the end of the tunnel.
If you’ve ever been to a Chinese market or even better, if you’ve ever been to China, you’ll know that bargaining for the Chinese is not only essential but also a fine art, a skill passed down through generations. So it’s no surprise that group bargaining has been a trend over the last few years. It’s an outlet for people to express a collective power in a nation where there are a few ways to openly do so. Locally known as tuangou, what it entails is a group of Chinese buyers coming together at a set location and bargaining with a seller for huge numbers of a particular product or set of products. Because tuangou is both a life-skill and art, whenever the bargaining would reach a fervent pitch, the participants would hoot and clap.
Tuangou is more than just a quirk that tech-trend observers can note and forget, it is a vital piece of information to keep in mind while analyzing Groupon’s launch in one of the world’s fastest growing markets. And tuangou is not purely an offline trend. Groups congregate using online networks and some tunagou meetings even happen online.
Compared to China’s tuangou trend, social buying arrived in the US through Groupon only in 2008. So, unlike fast food or supermarkets, Groupon isn’t really taking anything new to the Eastern market. More importantly, China’s penchant for imitation has led to not one or two but 4,000 group buying sites. How can Groupon compete or create a niche for itself in the Chinese market? Back home, Groupon faces deal fatigue from the user-end, and dealers are tired of salespeople from deal sites knocking at their doors.
Asian bargaining is more nuanced than offering a few vouchers. Besides, in a nation of where generations have been big savers, urging impulse buying may be harder than it is in the West. In fact, the draw of tuangou in China isn’t necessarily the discounted prices; the real appeal, some say, is the range of rare products offered in tuangou sales.
Given the intense competition, group-buying profits in the Chinese market are not as great as what Groupon sees in the U.S., which roughly works out to a 40 to 45 % margin, with revenue shared with dealers on a ratio of 1: 1. Compare this to the Chinese profit margin, which only works out to a meagre 15 to 18 percent. What’s worse is that the economic slow down in China (much slower compared to the West) has affected all industries, including the social-buying sector, and sales have further dipped by 5%.
Reports about profits and gains are conflicting, to say the least, with some CEOs saying that close to 20% of the market is operating at a loss and Renren CEO Joseph Chen saying that all group-buying companies are functioning at a loss. Renren, which is the Facebook of China, also operates a group-buying site that earned US $900,000 in revenue but had operational costs of $4.6 million!
Isn’t this an absolutely dismal scenario for Groupon? Perhaps. Many group buying sites in the country are expecting to stay the course and still be around after the market has suffered heartbreak, nudged out small and weak players and consolidated well. Meanwhile, the sites are trying to market as hard as possible and are spending seemingly disproportionate sums on marketing. Multimedia ad campaigns for Groupon are visible, and early this year it was disclosed that the five major group-buying sites were spending as much as US$90 million. Will these aggressive marketing techniques nudge up impulse buying and complete the transition of tuangou to the online world? Only time will tell.
Earlier last year, when Groupon China, locally known as Gaopeng, entered the market, there was a great positive reception. However, towards the end of the year, non-performing offices were closed, and employees were laid off. Not a good start for the first year. However, it is obvious that the company will except to earn back the losses and more in the long run. While customer-led revenue has not been very forthcoming, companies are trying all possible means to stay afloat and raise the funds that are desperately needed for growth. It hasn’t been easy. Some companies have been able to attract investments and get listed on the U.S. stock market. However, many first-time entrepreneur-led business have been rejected by major banks due to concerns of poor financial booking. Certainly sounds like a drop in an ocean of downsides in the ailing social-buying industry.
Preetam Kaushik is a freelance technology journalist covering all things business, technology and internet. He is a beat and opinion writer for Daily Deal Media. His Twitter handle is @kaushikpreetam.