A Case Study on International Expansion: Groupon’s Cultural Mistake in China
Last time we learned about Amazon’s attempt to expand into China. This time we will assess how Groupon faired, keeping in mind five key practices that US tech firms must adapt in order to make their Chinese operations a successful venture. These practices are:
1. Partnering with a local Chinese brand with a strong name as method of entry.
2. Adapting a meaningful, easily recognizable Chinese name.
3. Hiring local leadership.
4. Launching a separate service based locally in China.
5. Giving local Chinese operations autonomy to build their own business model and operate independent of US based headquarters.
History of Groupon’s Success
Groupon, a famous e-commerce marketplace connecting local businesses with consumers through discounts and the undisputed leader in social discounts in the United States, entered China in February 2011. Within seven months, Groupon had accumulated $46.4M in net losses with just $2.1M in revenue.
To understand Groupon’s failure in China, we must first understand their meteoric rise to success in the United States, which was due in large part to how well they understood their customers, both local business owners and Groupon buyers.
Groupon partners with small businesses offering effective marketing. Groupon then helps the business owner come up with a featured offer and for a slice of the sales, Groupon delivers an audience of people who are interested in getting deals. Furthermore, Groupon encourages the customers to share the promotion with friends on social networking sites. In the event few people choose to buy a particular deal, each subscriber to Groupon will at least be aware of the small business’ company name, and being featured on Groupon gives the business a degree of credibility.
Groupon’s Big Cultural Mistake
Like eBay and Amazon, Groupon initially made the mistake of assuming their business model was a ‘one size fits all’ model, capable of success regardless of consumer market differences. According to Yinan Du (CEO of 24Quan) and Xing Wang (CEO of Meituan), Groupon failed in China on two fronts: Groupon rushed their entry into China, and failed to embrace the culture (or hire people who could).
Groupon entered China by setting up a Joint Venture with Tencent, where Groupon invested $8.6M for a 40% stake in the GaoPeng joint venture. However, even before GaoPeng began operations, conflict erupted between Groupon and Tencent. The marketing director resigned even before the GaoPeng was finalized. In an effort to be funny at the Super Bowl in 2011, Groupon USA broadcasted a commercial, which included Tibet. In the commercial, Groupon stated that the Tibetan culture was at risk to disappear, but at least Americans can still enjoy a discounted meal at local Tibetan restaurants through Groupon. Due to the sensitivity of the topic of Tibet in China, Groupon not only offended their partner Tencent, but gave themselves a poor brand image in China.
Headwind Recruiting Talent in China
Groupon’s approach to staffing included announcing its strategy to offer employees from competitor’s in China huge salaries to come and work at Groupon to find the best employees the market had to offer. Although this strategy was successful in other countries, competitors in China united to fight back by stating officially that any employee leaving to work at Groupon would never be allowed to work at any other firm within the alliance again.
As a result, Groupon staffed their offices in China with mostly American employees who didn’t speak Chinese. Many Western managers appointed in China were culturally insensitive which led to even more problems with their partner Tencent. Only two members of the senior management team were Asian, and only one member was Mainland Chinese. Because Groupon’s business model relies on selling local deals to local people, Groupon needed to be local in order to appeal to customers. By hiring an American team, Groupon established themselves as an American company. In a way, Groupon had forgotten the crucial element to selling social discount is the social aspect. In order to connect with Chinese customers, Groupon first needed to figure out how to be social and make the customer feel like they are part of the corporate culture and taking part in the brand lifestyle.
In addition, according to one GaoPeng manager, Groupon came into China and tried to expand too aggressively. Within seven months of operations, GaoPeng had some 80 offices around the country and a total headcount of more then 3,000 people before beginning to scale back. This begs the question — where was Tencent in all of this? As Xing Wang says, ‘(Groupon) was focusing on PR rather than the business itself’. Innovation in China means adaptation. Ideally, partnering with a local Chinese company would encourage U.S. tech giants to adapt to the China market. This was not the case with Groupon. Tencent, on the other hand, already operated a number of other group buying portals in China prior to GaoPeng. GaoPeng was just one of Tencent’s many joint-ventures, and one of little concern or priority.
How the Story Ends
Amongst the noted differences in business models are margins. While Groupon happily pulls somewhere around 40% margins on deals in the United States, no competitor in China sees anything above 14%. As mentioned earlier, the Chinese consumer market is particularly price sensitive. Given Groupon’s lack of a name-brand in China and more expensive service, it was difficult for Groupon to capture market share from its competitors.
In January 2012, GaoPeng held an estimated 2.1% market share, behind 13 competitors. In June 2012, not even 18 months after starting its operations, GaoPeng merged with FTuan, another Chinese daily-deal website who held 5.1% of the market, putting them in 7th place. FTuan was also backed by Tencent.
This concludes our three-part case series on international expansion. While eBay, Amazon, and Groupon did not succeed in China, we’ve seen some success stories. LinkedIn and Evernote are two US technology companies that thrive in both US and China markets. As noted in the first case, it is interesting that we’re seeing China’s leading tech firms attempting to break into the US. I’m very curious to see how that will unfold.
If you have any thoughts or questions, please comment. And if you are working on anything in the industrial or mobility space, send me a note at email@example.com — I’d love to connect.