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  • Published on: 14th September 2019
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Groupon is an American daily deals website that offers “Groupons”, or “group coupons,” for a limited amount of time which will only become active once a pre-determined number of people commit to purchasing the advertised product or service. Since its founding in Chicago in 2008, Groupon has entered many international markets including Germany, India, Singapore, the United Arab Emirates, and South Africa. Naturally, Groupon tried to build up its global presence by deciding to enter the Chinese market, believing that they could acquire a local competitor, LaShou. However, LaShou rejected, and Groupon proceeded to start a joint venture with Tencent called Gaopeng, which struggled for one year before deciding to merge with another local company, FTuan.  In this paper, we will discuss the overall business environment then analyze the ineffective management practices, structure of joint ventures, and differing consumer behavior that led such a large multinational company like Groupon to fail at entering the Chinese market.

BUSINESS MODEL

To be featured on Groupon, merchants must commit to turning 50% of their profits from the advertised deal back to Groupon. In turn, Groupon provides these businesses access to its user base and a method for marketing. Since these deals are normally time sensitive, once the required number of people purchase the Groupon, it will bring in a rush of customers and serve as a means of viral marketing. Groupon also suggests information about deals and businesses that the users may be interested in, in exchange for the user's personal information being registered on its website. Groupons can start anywhere from 50% to 90% cheaper than the standard price and is easily accessible online, which makes it highly attractive to customers.

SWOT ANALYSIS

To provide a brief overview of Groupon as a whole, we have conducted a SWOT analysis to determine which strengths and opportunities Groupon needs to maximize and the weaknesses and threats it needs to minimize, regardless of which market to enter. Groupon mainly partners with local merchants across diverse product and service offerings which enables Groupon to personalize its deals to over 35 million registered users all over the world. However, these users come at a price. Despite the high customer acquisition cost of cutting such steep deals, many of these users who purchase the Groupons end up being one-time customers for these merchants, becoming a loss leader. In addition, Groupon's aggressive merger and acquisition strategy has enabled them to gain new technology, markets, and customers, both domestically and internationally. However, with the low technology cost barrier, many markets are becoming saturated with similar platforms, especially in China. This means deals must be priced competitively, leading to smaller margins for both Groupon and merchants.

PEST ANALYSIS

There are many factors a foreign company must be aware of doing businesses in China, especially for tech companies. Government censorship of large multinationals like Facebook and YouTube helps local companies monopolize the market, especially with the government heavily investing in research and development of local tech companies. For economic factors, China's GDP is characterized by its large fixed asset investment and exports, through there is some growth in consumption. Foreign companies also must be aware of the large demographic differences within China: For Groupon, this means that they have a greater need to localize their daily deals to each region. Foreign companies will also need to protect its intellectual property from local companies and fight in a country with a large e-commerce presence people are already adapted to.

PEST/CULTURAL FACTORS

Different companies around the world employ drastically different management practices based on both the culture of the company and the region they operate in. Though culture is a big component, other factors, such as the legal, economic, and political environments, are equally important, and in some cases, these can even be more important than the cultural differences when it comes to a company succeeding in a certain country or region.

There are a number of legal and political differences between China and the U.S., where Groupon first succeeded. The first major difference is the fact that while the U.S. may have more developed laws and regulations, once a company has met the requirements and as long as they continue to follow the rules, they do not have to worry about the government suddenly deciding that it is not enough anymore. In China, the government has more power and is able to shut down operations when an authority declares that that it is necessary to do so. For example, when there was a fire killing 19 people in Beijing, bars, restaurants, and clubs in a separate neighborhood were shut down under the pretense that it needed to be rechecked that they were up to code. While nearby businesses may be shut down for a few hours if something similar were to occur in the U.S., businesses several miles away would not be affected, and the nearby businesses would not be affected for more than a day or two.

One of the more obvious differences between China and the U.S. is that while the U.S. is a first world, developed economy, China's economy, while rapidly growing, is still not fully developed in many areas. In general, goods and services are cheaper in China than they are in the U.S., and doing business in the Chinese market requires pricing goods and services competitively. This extends to group buying, and one of Groupon's major faults was that their prices could not compete with other, cheaper, options that are available in China, so consumers had no reason to buy their coupons.

Among other differences are the ways in which people communicate in their day to day lives. One major difference between Americans and Chinese people is the use of email in the U.S. versus WeChat in China. In general, Chinese people do not check their email very often. As a result, Groupon and its American marketing methods did not fit into the social lives of Chinese people well.  One of the mistakes Groupon made was that their executives insisted on sending out mass email marketing campaigns even though they were warned of this fact (source: TechInAsia).

Groupon failed to effectively manage their operations in China, and this was the primary reason they failed. Rather than hiring Chinese managers, Groupon hired mostly foreigners to run their operations in China. In an industry such as the one Groupon is a part of, understanding the market is critical, and having the operations run by foreigners does not work too well, because they do not have a deep understanding of the way the Chinese market works. In order to be successful, Groupon needs to hire Chinese managers and listen to the insights these managers have on Chinese consumers and the market.

HOFSTEDE'S FIVE DIMENTIONS OF CULTURE

Hofstede's Five Dimensions of Culture can be used in order to analyze and measure the differences in culture between the U.S. and China.

“The Hofstede theory asserts that, because of intrinsic cultural differences between nations, no universal management method exists which can be considered globally valid. For any company that deals in international commerce, Hofstede management theory can mean the difference between failure and success in the international marketplace.”

A. Power distance

B. Individualism

C. Uncertainty avoidance

D. Masculinity

E. Long-term orientation

F. Indulgence (is this relevant? Hofstede's 6th cultural dimension)

II. One more cross-cultural measurement

A. Workplace differences

1. Headhunting doesn't go over well in China

2. Vendors typically only give group-buying companies around 10% of profits rather than 50% like Groupon wanted (source: TechInAsia)

GROUPON AS A JOINT VENTURE

The notion of a joint venture for Groupon was strange at first, considering that their usual strategy is to acquire existing clone sites when entering a new market, like they did for India, Singapore, and Taiwan (Wee, 2011). However, to penetrate into a market where many foreign companies have been defeated, partnering up with China's Internet giant, Tencent, seemed an ingenious idea. Tencent's instant messaging service, QQ, at the time, had over 630 million active users in China, a number that proves how large Tencent and the potential market Groupon will be trying to breach is. Despite Tencent's backing, Groupon still struggled to break through the Chinese market's numerous clone sites and rise to the top for two main reasons: poor knowledge of the culture and insufficient support from their local partner.

CULTURAL CLASH

Unfortunately, Groupon's road to the ever-growing Chinese market had a rocky start, with the release of a controversial Super Bowl advertisement in 2011, amid rumors that they were planning to enter into a joint venture with Tencent. Running an ad with the politically sensitive topic of Tibet while negotiating with one of China's biggest companies did not bode well for Groupon, amassing negative publicity even before the confirmation of the collaboration (Chao, 2011). Consumers would look to online reviews and recommendations, and even word of mouth and when making decisions. Therefore, having a taint on the brand image, especially in regard to an issue that is heavily censored by China's Internet filters is very disadvantageous to Groupon and certainly was an unpleasant surprise for Tencent.

     In addition to this, Groupon's performance when it finally entered the market was not as successful as initially thought. Surely, having an international brand and Tencent as a partner would have guaranteed victory over the copy-cats? Groupon's biggest mistake, like most failed western Internet firms, was failing to adjust their strategy to fit the mindset and habits of the 18.75 million group-buying consumers (CCNIC, 2010). Mr. Song, chief executive of Didatuan, one of the biggest competitors at the time, gives an excellent example, observing that “in the US, people are used to making a reservation in a restaurant, but Chinese rarely ever do that” (Hille, 2017).  For Groupon, who relies heavily on deals for services such as restaurants and entertainment, this was one of the critical factors of their unpopularity, along with charging high margins of up to 50%, in an attempt to retain its international standard, even though it's Chinese competitors were only charging 10% or maybe even less. Such aggressive tactics offended local businesses.  

     Not only the assumption that their business strategy will work in every country they enter but also assuming that China is still a highly collectivist society was a mistake. The majority of China's purchasing power is comprised of the “young generation” – those under 40 years of age. Compared to the “last generation”, who have lived through uncertain economic conditions and, therefore, are very conscious about spending their money, the young generation is more conscious about brands and are more willing to pay for full-priced luxury goods. The reasons for this range from the desire to display their status to guaranteeing the quality of the products and services they buy. Therefore, group-buying may not necessarily be appealing to the tech-savvy young generation who are the more likely consumers for such an app-driven industry.

CONFLICTS OF INTEREST

Another mistake Groupon made was not including a non-compete clause in their deal with Tencent. Tencent continued to operate their own leading group-buying site, QQ Tuan, and invested in many more, such as FTuan, which meant that the joint venture's Gaopeng was the least of their priorities (iChinaStock, 2011). Without the full support of Tencent, Gaopeng, had a meager market share of 2.7% in the first quarter of 2012 compared to Alibaba's Juhuasuan with 33.6% and Meituan with 17.8%. Failing to rise above the others in China's highly competitive group-buying industry, Gaopeng was eventually merged with FTuan in the second half of 2012 (Millward, 2012) to create a new company called GroupNet. Although the merger continues to operate today, now under the Gaopeng name, it seems Tencent is still unsatisfied. In 2015, Tencent invested in the multi-billion dollar merger of the two leading group-buying sites in the market, Meituan-Dianping (Osawa and Carew, 2015). This investment further nailed the coffin for Gaopeng.

COMMON FACTORS OF SUCCESS IN JOINT VENTURES

To analyze the factors that contribute to a success or failure of a joint venture in China, we have broken down the reasons into external and internal forces of the business.

EXTERNAL

While success or failure is up to how partner companies execute the joint venture, external factors can also play a role to an extent in how easy or hard it is. Political factors that can influence an outcome of a joint venture includes the stability of government and its policies, development of economic and legal systems, and efficiency of government agencies. Economic factors include consumer confidence level, actual income increase, and development of industrial infrastructure. Cultural differences like geography, tradition, values, social norms, beliefs and organizational structure can also impact how well a multinational joint venture does in a new market. Societal factors include guanxi and relationship building with government agencies and understanding the structure of governmental chain of command and exact government agencies.

INTERNAL

In addition to suitable external conditions, joint ventures must make good internal management decisions. One of the most important things a business must do is to select a business partner for the venture. Many foreign executives look for well established companies or local businesses to partner with in order to access the local and national government, but this political approach does not seem to be successful with many companies. No matter the size or relationship to the government a company may have, the first and foremost priority should be that the partner company has aligned goals and priorities as the parent company, such as profitability versus growth. This means that companies can partner with smaller or less established businesses, leaving doors open for opportunities for privately owned, faster growing businesses.

Successful joint ventures require both partners to align priorities. Many companies spend too little time building a shared understanding of its future business, like Groupon. Groupon was unable to maximize the local expertise Tencent had to offer, and Tencent had so many operations that their joint venture, Gaopeng, was not a priority for the local partner.  

For a successful joint venture, it is also important to match the needs between foreign investors and Chinese partners. This means that companies need to take into consideration the differences between the managers. American managers tend to make their decisions based on legal, logical, situational, and personal, in that order, but Chinese managers, on the other hand, in general decide first based on personal, then situational, logical, and legal. In addition to managers,

Safeguarding intellectual property is key when starting a joint venture with weaker legal infrastructure. The norm for American or western businesses to protect their intellectual property would be through legally binding agreements enforced by law, but since in China, the legal system can be lengthy and inadequate, it is important to keep in mind pragmatic approaches such as bringing only older technology, leaving the blueprints of key technology at home, keeping critical intellectual property out of the venture, or charging for intellectual property upfront.

Joint ventures that fail are unsuccessful in managing their talent. Many companies solely dispatch available executives, often not top performers but average employees looking for a new challenge, to its overseas operations. In Groupon's case, the joint venture did not seek heavily on Chinese talent in its senior management structure, as it only included one member from mainland China and one from Hong Kong. Foreigners ran Groupon's operations in remoter areas of China, which held them from understand the regional nuances of the market. This meant foreign managers were to manage local Chinese employees in a foreign style, leading to low efficiency and large employee turnover from cultural clashes.

Preparing for breakup is also crucial for a successful joint venture. Many joint ventures often get restructures within a decade of being set up. With a market as volatile as China, this can mean that partnerships being negotiated today may be ineffective in just a few years.

CONSUMER BEHAVIOR

One of the most crucial reason for Groupon's failure in China is its lack of due diligence research on the Chinese market and consumer behavior. It is well known around the world that Chinese consumers love buying, and more importantly, they love deals. Chinese consumers' obsession with purchasing and deals can be seen all across the world with headlines emphasizing their buying frenzy in both international and domestic news. Thus, Groupon, being the pioneer in the group buying business model would naturally establish its biggest market in China which it has predicted prior to its expansion.

Unfortunately, just like previously mentioned, Groupon's inability to adapt itself in a new environment which now demonstrates to be a common theme, caused a significant cost as it loses its customers.

Although there are several mistakes that Groupon made that drove away its customers, the core issue that determined Groupon's downfall was its shallow understanding of the Chinese consumer. Groupon neglected some of the key characteristics of modern Chinese consumers while its local competitor Meituan investigated heavily, including researching the online versus offline shoppers.

If Groupon's executives have done a simple Google search, they would have been able to recognize the drastic spike in the percentage of active online shoppers in China. Up to 75% of the Chinese consumers admitted to shopping online at least once a week while the global average for active online shoppers is only 21%. Hence, as opposed to distributing its marketing efforts and advertising expenses to appropriate online channels where its target consumers are present, Groupon conducted the same offline marketing campaign in China as it did in the US like bus shelters and billboards. Groupon's only online marketing effort was its usage of email advertising which was already warned by experts that it was a futile action as Chinese seldom read marketing email. Groupon's local competitor on the other hand, Meituan, only used online advertisements to boost brand awareness. Although this concentrated marketing campaign limits its reach of customers to solely online and does not convert offline customers to an online platform, Meituan made a clear statement in its focus of minimizing costs while maximizing output. By focusing its marketing only on the online target market, Meituan has been able to save the high marketing costs which can then be returned back to consumers as greater discounts and to merchants to higher margins, satisfying both parties

From the different marketing strategies between the two companies, it is clear to see that Groupon's approach was vague and costly as it tries to capture all possible customers through a larger but less targeted marketing campaign. Meituan, however; had a clear and precise business goal, of which it focused its budget on events yielding the highest customer return while giving consumers what they want the most – the largest discounts.

Although it is almost human nature that people want the cheapest price for the biggest deal, Chinese consumers are especially the case. Chinese shoppers are not the most loyal customers to a particular brand if the item quality appears to be the same. This brings up the previous point with the discounts offered by the two companies. Since Meituan has a much lower operating cost in comparison to Groupon, it is no question that Chinese consumers would choose the cheaper alternative to make its purchase when there is no brand loyalty.

Nevertheless, with increasing consumer sophistication in China, the importance of product price in group buying seems to be at a decline while the offerings and services became a much more focused topic.

82% of Chinese consumers stated that product availability and customized service is the number one reason for the choice of a group buying app. While Meituan maintains a good relation with all its vendors by charging low fee/split for every purchase made in the app. Groupon continues bargain for 35% split with the vendor, which led to short or no collaboration with many popular vendors.

Although Groupon is a classic example in regards to the difficult entry of a group buying company in China, it is important to note that it is not the only one. In fact the VP of Meituan, Wang Huiwen said, “99.9% of group-buying company would die, only remaining 0.1% would live.” Hence, it is clear that group-buying is one of the most competitive industries in China due to the continuous change in consumer preference and local competitors.  

CONCLUSION

The Chinese market with its growing middle class showed immense potential for groupon to succeed. Nonetheless they have been consistently losing market share since 2011. So where did the company go wrong?

Fueled by their success in America, Groupon aimed to become the market leader in China at all costs. Initially, it followed a cold buyout strategy; to enter China, they planned on simply buying the popular group buying website LaShou. However, the purely transaction based approach fell through, and LaShou decided to reject the offer and follow their own path.

The first strategic mistake: Growth at all cost

As their purely monetary offer was rejected, Groupon embarked on their joint venture with Tencent. Motivated by their new cooperation with one of China's tech giants, the joint venture called Gaopeng did its first operational mistake while entering the Chinese market. Backed by seemingly endless funds from the US headquarters, it tried to expand rapidly with no regard towards the cost. As one former employee describes it, “We were pushed to create mind-boggling growth rates, but nobody ever asked about profit.” By the end of 2011, Gaopeng's sales team therefore had to account for 46 million US dollars in losses, while making only 2.1 million US dollars in revenue. This is a ratio of earnings and expenses which is unsustainable in a highly competitive market with low profit margins and proves that Gaopeng failed to monitor their internal expenses appropriately.

The second strategic mistake: Copying the “American Model”

Gaopeng's management structure was not tailored to the country. “Out of Groupon's senior management team in China, only two members were Chinese: one from mainland China and the other from Hong Kong.” The methods of the partly foreign salesforce to accomplish high growth was therefore directly taken from the American model: Standardized mails were sent to retailers and a high commission was tried to be charged by Gaopeng. Gaopeng was staffed by too many foreigners and failed to rectify it during their recruiting. Gaopeng tried to adapt the same hiring strategy as Groupon US and Groupon Europe: Hiring talents through bigger salaries directly from competitors. They did not take into account common market courtesy at that time and underestimated employee loyalty. Their strategy failed and alienated the company further from the market.

The third strategic mistake: Taking on a new name

One of the big mistakes which groupon made in their endeavour was copying their model of operations, but deciding on taking on a new brand name, Gaopeng, instead of keeping the established brand name GROUPON. In that, the joint venture disregarded external competition and copycats, such as groupon.cn, an unaffiliated group buying platform. Gaopeng decided that the expenses to acquire the domain and its copycat competitor groupon.cn was a wasted expense. In that gaopeng showed a failure to built on their established brand trust and brand reputation, things which are crucial to distinguish oneself in a market with many players.

Groupon not only faced external, but also internal competition.

The joint venture did not turn out to be ideal, as Gaopeng was just one of many group buying platforms developed or supported by tencent. An example is tencent's own platform QQ group

buy, and the market leaders maituan-dianping. WE WILL ANALYZE MAITUAN'S SUCCESS IN A LATER CHAPTER

GROUPON WAS NOT THEIR PRIORITY, their success not essential.

But the uneven JV was not the only reason for failure.

The mistakes can be attributed to general management miscalculations.

The fourth strategic mistake: Mismatched organizational design

Gaopeng operated through three regional offices in Beijing, Shanghai and Southern China. In theory, having regional offices makes sense, as Gaopeng needs to negotiate with local businesses directly to offer deals. Unfortunately, this organizational design did not align with the growth-driven expansion strategy, as the regional sales forces started competing with each other for large corporate accounts, driving down the profit margins for each division further.

Chinese culture itself cannot be blamed for Groupon's failure, but more to the inadequate management practices and goals set by Groupon. For the most part, the unprofitability of the joint venture boils down to inadequate performance measures, which promoted cannibalism of profit between the regional offices and disregarded cost.

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