| OPINION
China's group-buying websites are facing an uncertain future. Lashou has suspended its initial public offering on the Nasdaq because the U.S. Securities and Exchange Commission questioned its accounting practices. The frustration signals a darkening outlook for other coupon websites seeking to raise financing.
Weak profitability has been an acute headache for the entire industry. In the first half of 2011, Lashou reported a net loss of 391 million yuan ($61.77 million), nearly seven times its revenues. Meituan is also spilling red ink, with monthly losses amounting to around 40 million yuan ($6.32 million).
The media has been flooded with reports about failures of group-buying sites. Gaopeng, the joint venture between Groupon and China's Internet giant Tencent, has reportedly laid off more than 400 employees and closed down 13 local branches. Meanwhile, larger firms like 55tuan and Tuan800 also shut down some local branches.
Worries are proliferating about future of the emerging sector. Even Groupon, a pioneer of the industry, is vulnerable to the market downturn. It had incurred a net loss of at least $500 million by June 2011. In response, the company decided to take only 37.2 percent of revenues collected from deals in the third quarter of 2011, down from 45.7 percent.
So what are major factors dragging down Chinese group-buying websites?
First is over-dependence on advertisements to attract consumers. Due to a lack of customer loyalty, the websites have to recklessly increase spending on advertisements, which led to severe cost inflation. In the first half of 2011, Lashou spent 326 million yuan ($51.5 million) on marketing, 5.6 times its revenues.
Second is heavy reliance on human resources. As they push into new markets, the websites need to hire a large number of salespersons. That means a heavy burden for the firms, especially those that have yet to break even.
Third is the low entry threshold and simple business model led to cutthroat competition. Worse still, Chinese websites can only earn less than 10-percent commission from the deals, barely one fourth that of Groupon. The slim profit margin is unlikely to cover surging marketing expenses.
To find a way out of the gloom, the websites need to specialize in smaller fields. It is also necessary to innovate their business models so as to spark customer interest and also wean off reliance on ads and human resources.
There are already a few successful innovation cases in the sector. Juhuasuan, a group-buying platform of the C2C giant Taobao, has achieved a sales boom by taking advantage of Taobao's solid customer base and reliable payment tool. The website now boasts daily transaction value of around 20 million yuan ($3.16 million), comparable to the total amount of its five largest competitors.
Meanwhile, Gewara is gaining a foothold in the movie ticket group-buying market in Shanghai. The website provides user convenience by allowing customers to choose cinemas and seats online. This strategy saved the website huge marketing expenses and personnel costs.
This is an excerpt from an article in Business Review dated December 2011
Email us at: yushujun@bjreview.com
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