Gaopeng, Groupon’s Flagging Effort in China, May Be Headed For A Merger with FTuan

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This post is contributed by Ben Jiang, editor of TechNode, a bilingual blog based in China.

Gaopeng, a joint venture between Groupon and Tencent, may be headed for a merger by the end of next month with FTuan, according to reports from local Chinese news agencies. Notably, FTuan is a rival Chinese daily deal service that Groupon’s local partner Tencent invested in. If such a deal happened, it would underscore Tencent’s increasing control over the venture and Groupon’s retreat in the Chinese market. Gaopeng’s constant losses have apparently made Groupon think twice about its China venture.

Groupon did not immediately respond to requests for comment.

Gaopeng’s Downfall

Here’s the history: Groupon and Tencent set up Gaopeng with $100 million ($50 million from each) in February of last year when there were already countless competitors fighting for the market. At first, upon hearing that Groupon was coming to China, local copycat Groupons were worried that the company’s experience and expertise combined with Tencent’s money and local knowledge would pose a big threat.

However, in this case, one plus one doesn’t equal two.

Gaopeng’s decline in China can be boiled down to a few reasons: a) blind expansion before understanding local market b) hiring too many expat executives who had little knowledge of local markets or couldn’t even directly communicate with local staff because of language barriers and c) failure to acknowledge differing market conditions.

At its peak, the Chinese subsidiary of Groupon boasted a headcount of more than 3,000 and operated in more than 70 cities in China. As of now, it operates in fewer than 20 cities, according to people familiar with the matter. After several rounds of downsizing, even people remaining at the company have found nothing serious to work on, according to an employee who used to work in the Beijing office. It also hired an army of expat executives who were not able to communicate with local salespeople since they hardly speak Mandarin. Now, nearly all the expats have left.

Groupon’s strategy of hiring foreign talent, spending aggressively on marketing and quickly amassing as many users as possible may have worked well in other international markets. According to Groupon’s fourth quarter earnings report, revenues outside of North America made up 63.5 percent of the company’s $492.2 million in revenues.

But it failed in China.

The company believed that its e-mail marketing strategy would work as it did in other markets. But in China, e-mail is far less popular than instant messaging services like Tencent’s QQ, which Chinese consumers use almost everyday. Secondly, there’s weaker customer loyalty here as people always flock to the best deal.

Merge with FTuan

It is probably a smart move for Tencent to merge Gaopeng with FTuan, since the company invested in both of them. It doesn’t make sense for Tencent to retain stakes in three nearly identical businesses. (Yes, you read it right. Along with Gaopeng and FTuan, Tencent also operates a QQ Tuan.)

Local media quoted a Gaopeng staff claiming that Tencent wasn’t happy about Gaopeng’s operation, so its stakes in Gaopeng will be transferred to FTuan and the latter will consolidate Gaopeng and QQ Tuan’s operating.

Some Gaopeng people now worried about their job, a new round of downsizing seems inevitable during the consolidation.

After a frenzy around group buying last year, the once bloated market (which had nearly 6,000 Groupon clones) is cooler. There are still north of 3,000 struggling to make it past the spring. Even with the number of daily deal sites falling by half in less than a year, there are still too many for the market. Realistically, only 5 to 10 can survive.