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Will the Death of Groupon Be its Lookalikes?

Groupon

A corporate strategy article by Thunderbird students.

In 1887, Mr. Asa Candler was faced with a distribution dilemma. [1] The Atlanta druggist had spent $2,500 on a formula for a sweet-tasting drink and was looking for a way to promote the sale of this little-known beverage named Coca-Cola. [2] His solution: handwritten tickets offering customers a free sample. To Mr. Candler’s surprise, the offer was a huge success. So was born the coupon. By 1913, an estimated 11% or roughly 8.5 million Americans had received a free coke. [1] One could argue that Mr. Candler’s invention of the coupon is the reason Coca-Cola started on its path to becoming one of the most iconic global brands - ever.

Fast forward to 2008, when an internet start up based in Chicago, IL created one of the largest shake ups in the marketing world since Mr. Candler’s first hand written ticket; that company - Groupon. The novelty of Groupon was this: through the power of the internet, select “daily deal” coupons could be offered and if a big enough “group” agreed to purchase the deal, then the deal would become valid. [3] The program was used by participating companies as a way to reduce the risk of losses, increase customer traffic, and drive promotions. Now four years since its launch, the Groupon business model has come under attack and faces many strategic obstacles, including competition from lookalike websites.

Groupon

A corporate strategy article by Thunderbird students.

In 1887, Mr. Asa Candler was faced with a distribution dilemma. [1] The Atlanta druggist had spent $2,500 on a formula for a sweet-tasting drink and was looking for a way to promote the sale of this little-known beverage named Coca-Cola. [2] His solution: handwritten tickets offering customers a free sample. To Mr. Candler’s surprise, the offer was a huge success. So was born the coupon. By 1913, an estimated 11% or roughly 8.5 million Americans had received a free coke. [1] One could argue that Mr. Candler’s invention of the coupon is the reason Coca-Cola started on its path to becoming one of the most iconic global brands - ever.

Fast forward to 2008, when an internet start up based in Chicago, IL created one of the largest shake ups in the marketing world since Mr. Candler’s first hand written ticket; that company - Groupon. The novelty of Groupon was this: through the power of the internet, select “daily deal” coupons could be offered and if a big enough “group” agreed to purchase the deal, then the deal would become valid. [3] The program was used by participating companies as a way to reduce the risk of losses, increase customer traffic, and drive promotions. Now four years since its launch, the Groupon business model has come under attack and faces many strategic obstacles, including competition from lookalike websites.

Coca_Cola

In the U.S. market, heavy hitters like Facebook, Google, and Amazon have challenged Groupon’s first mover advantage. At the heart of Groupon’s success is an easily imitated product. A product any web designer with an M.B.A. could duplicate and move into an untapped market overnight. As Groupon goes global, it may need to differentiate itself by redefining its product offerings and business model to remain a market leader or risk becoming one of the biggest dot com busts since Pets.com.

Since its inception, Groupon CEO, Andrew Mason, has remained committed to investments in marketing to ensure the company stays at the forefront of the coupon business. [4] With more than 650 daily deal sites in the U.S. alone, the market is constantly evolving. Industry analysts in support of the business model expect that Groupon will ultimately be the beneficiaries of the “network effect,” attracting more customers than competitors due to their already established social network. [5] Those less optimistic about Groupon’s future believe internet giants such as Google or Amazon are well positioned to make a successful run at this business. While some big players such as Facebook Deals and Yelp have scaled back operations or pulled out all-together because of an oversaturated market, “me-too” products, and the prospect of declining revenues, there are multinational daily deal companies such as Living Social that remain strong competitors.

Facebook was the first major site to exit the daily deal market after testing its product in eight different cities over a period of four months. [6] While Facebook did not give a reason for exiting, some believe it was because they lacked commitment or concluded that there was little upside. Groupon, the industry leader, had taken a 420 million dollar loss on their IPO in their first year of business and a 220 million dollar loss in the first half of 2011. [7] Following the exit of Facebook, Yelp scaled back their daily deals and laid-off 50% of their workforce due to poor revenues. Yelp stated that customers had signed up for multiple coupon services and were becoming disengaged with the amount of emails in their inbox.  A survey conducted by PriceGrabber supported this conclusion, stating that 52% of US consumers felt overwhelmed by the number of email deals they received. [8] New competitors continue to enter the market with niche products, but it’s still not clear whether companies exiting the daily deal business will outpace the newcomers. [8] The market may not be as large as everyone once thought.

One factor making the ride a bumpy one for investors is the threat of local competition. In a letter to investors, preceding Groupon’s initial public offering, Mr. Mason foreshadowed some of the ups and downs that should be expected. “As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us.” [9]

emergingmarkets

In region after region, local lookalike sites are taking away Groupon’s subscriber-base and providing more attractive alternatives. One leading site from Brazil, Peixe Urbano (Urban Fish) has almost 5 million registered users versus Groupon’s 3.5 million. Building on the business strategy construct of “thinking global but acting local,” competitors in Latin America are tailoring their products to fit local and regional preferences and addressing cultural differences. Understanding this concept will be important to Groupon’s future success. Market dynamics vary by region and country, and the needs of customers and their purchasing patterns differ as well. For example, Latin American shoppers prefer quick, instant deals whereas American shoppers are willing to wait longer before using a coupon. Looking beyond Latin America, Groupon faces other challenges.

In China, there are already 4,500 group buying sites. Although Groupon’s Chinese site, GaoPeng, receives lots of hits, visitors rarely take advantage of deals. Launched in March 2010, Groupon’s biggest competitor in China, Meituan, already has 10 million users. In the Middle East, not only is Groupon facing local competition from GoNabit and Cobone, but they are getting inundated with complaints about late deliveries and a lack of customer service. In a span of one month, Cobone has sold twice as many coupons as Groupon and has turned over three times Groupon’s revenue. Local lookalikes are also doing a better job of leveraging social media with a broader reach through sites like Facebook and Twitter. In South Africa, Cityslicker, a local player, is one of Groupon’s biggest competitors. While Groupon’s entrance into the South African market has helped to raise awareness for daily deal sites, it ironically has also created an opportunity and business environment for local competitors to thrive.

Although the threat of lookalike sites is strong in emerging and developed foreign markets, one of the greatest challenges Groupon faces in these markets is developing a loyal customer base. Shoppers make purchasing decisions based on the lowest price, which also extends to the cost of doing business and competing locally. Spears Marketing, an independent strategy firm, offers this perspective about local competition and why it suggests the Groupon model is bad business: “Bargain shoppers base their purchasing decision solely on price, so they will never be loyal customers. As long as you offer the best price, they’ll stick with you, but when the business down the street (or across the country) can beat your lowest price, they’re gone.” [10] In essence, it is the value of the “deal” that attracts buyers and repeat customers. If Groupon cannot consistently provide the best deals, then regardless of whether it connects with local customers or not, it too will lose market share to lookalike sites.

As an example, consider Groupon’s on-going struggles in China. In August 2011, Groupon decided to close several of its offices in China, which resulted in the termination of roughly 400 employees. Even though Groupon did not issue a press release, such a move made it clear that Groupon was facing significant challenges in the Chinese market. It also raised questions about the business model in general. To be effective, a company needs to establish a significant presence in the local area that it plans to serve by creating tie-ups and partnerships with local stores, merchants and small businesses. This requires local knowledge, connections, a grassroots marketing campaign, and the effective deployment of resources. As Groupon’s spokeswoman Heather Dickinson stated, “Groupon’s approach to international expansion is to aggressively create a large presence upfront and refine our strategy as we gain deeper insight into the local market.” [11] Groupon had invested roughly 8.6 million dollars for a 40% stake in the GaoPeng venture. However, due to heavy competition and other factors, such a significant upfront investment may result in a lower return on investment. Should Groupon stay committed to its strategy for global expansion, there is a growing concern among analysts and investors alike that Groupon will not be able to compete as successfully in global markets. They point to the Chinese experience as an indicator of what the future holds.

With the rate of global competitors increasing daily, Groupon has an immediate strategic issue to address in order to stay relevant to consumers around the world. As seen in China, local competitors have distinct advantages over Groupon. These include better knowledge of regional preferences, greater access to the local labor force, and more flexible operations. While these benefits are enough to ignite some concern over Groupon’s ability to conquer global markets, they are not enough to stop the daily-deal kingpin…yet.

Economies of scale provide Groupon access to capital and resources far beyond what is available to local competitors or lookalike sites. Moreover, heavy investments in marketing have built the brand to be a household name – an attractive quality to merchants and new daily-deal consumers. The buzz factor for Groupon is also helpful when it comes to forming large-scale business partnerships. The company has already formed alliances with the likes of global giants Visa, Nokia and Ticketmaster. These strategic partnerships have allowed Groupon to not only expand their subscriber base, but to also market new products and services specifically for consumers of these partner industries. The right alliances can help Groupon overtake key regions in which their partners already have a strong reach.

Groupon relies heavily on its capacity to acquire local sites that are already showing signs of success in key regions like Asia and Latin America. A strong acquisition strategy has worked well for other dominant websites, like Facebook and Google. However, Groupon cannot rely solely on this strategy for entering new markets, as the cost is immense, and it can take years to reap the payback from each investment. Its aggressive outreach has already started to scare away some investors who are weary of such large expenditures when returns are lagging.

Groupon page

There are lessons to be learned and global strategies to consider. First, Groupon might consider the logic behind a global product company in sourcing emerging market deals and comparable talent at a lower cost basis. In China, rather than hiring local talent, Groupon looked external and brought in a team of expatriates, international MBAs and consultants to help build their site. [12] Second, the success of any joint venture is measured by the shifts in competitive strengths to each partner. Despite lacking a clear vision or strategy for developing business in local markets, Groupon has done little to nurture these important relationships. Finally, Groupon’s push to expand globally has put the brand at risk. A strong reputation builds strong brands, and in the rush to acquire market share and access to new markets, Groupon failed to grasp that competitive advantage in domestic markets is derived from local knowledge. This, in particular, is why lookalike sites and other competitors have succeeded where Groupon has not. A more thoughtful approach may be to move more cautiously into challenging markets.

Lookalike sites exist and many have been successful at building a business in niche markets. Are local rivals going to overtake Groupon? Not this year. But if Groupon doesn’t take action now to solidify its position in existing markets and learn from the success of local rivals, then it very well could lose its footing and start sinking just as fast as it rose up.

Sources:

1. Tuttle, Brad. “The History of Coupons.” http://moneyland.time.com/2010/04/06/the-history-of-coupons/. 6 April, 2010.

2. Pollack, Kenan. “Clip And Save.” /U.S. News & World Report/ 119.11 (1995): 28. /Business Source Complete/. Web. 8 April, 2012.

3. http://www.groupon.com/about

4.“Facebook ditches its Deals product following a major privacy overhaul and a similar scrapping of Places. Is the company trimming fat to focus or is daily deals losing its appeal?” http://www.digitaltrends.com/mobile/facebook-gets-rid-of-deals/. 9 March, 2012.

5. Reklaitis, Victor. “ Groupon: Sitting Tight For A Network Effect Company gets more powerful as it attracts users.” Investor’s Business Daily. ABI/ INFORM Globa. Web. 5 March 2012. 9 April, 2012.

6. Mitchell, Dan.  “The truth behind Yelp and Facebook bailing on deals.” http://tech.fortune.cnn.com/2011/08/31/yelp-facebook-stop-daily-deals/. 9 March, 2012.

7. Constine, Josh. “Facebook Discontinues Deals, After failing to make Daily Deals Social.” http://www.insidefacebook.com/2011/08/26/discontinues-deals/. 11 August, 2012.

8. Giles, Tom. “Yelp Follows Facebook in Scaling Back Daily-Deal Service.” Bloomburg, http://www.bloomberg.com/news/2011-08-29/yelp-scales-back-deal-service-as-competition-rises-for-internet-coupons.html. 9 March, 2012.

9. Ha, Anthony. “Groupon CEO to shareholders: Get ready for a bumpy ride” http://venturebeat.com/2011/06/02/groupon-ipo-bumpy-ride/. 2 June, 2011.

10. Spears, Seth. “Competing Locally – Why the Groupon Model is Bad Business” http://spearsmarketing.com/1235/competing-locally-why-the-groupon-model-is-bad-business/. May 18, 2011.

11. Chao, Loretta. “Groupon Stumbles in China, Closes Some Offices” http://online.wsj.com/article/SB10001424053111904279004576526283328853022.html. August 24, 2011.

12. Lacy, Sarah. “An Open Letter to LivingSocial: Learn from Groupon’s International Mistakes” http://techcrunch.com/2011/06/27/an-open-letter-to-livingsocial-learn-from-groupons-international-mistakes/. June 27, 2011.