(This article was co-authored by Ahn Seunghae and Jason Lin. Ahn is the founder and CEO of LetYo.com, China’s first group buying search provider while Jason is a student of Political Science at the National University of Singapore who is now stationed in Beijing doing Business Development at LetYo.com.)
Despite incurring massive losses of US$654 million, Groupon succeeded in achieving IPO on 4 Nov 2011. Groupon, the first firm in the group buying industry to go for IPO, has sparked discussions on the highly debated topic: what does this entail for the future of group buying? Speculations about Groupon’s post-IPO performance have been strife; but it is probably too early a time to make any form of constructive evaluation, especially when Groupon has been racking up massive amounts of losses. Besides attempting to smash allegations that the group buying industry will fail, Groupon’s IPO move may well trigger a domino effect in encouraging others in the same industry to do the same.
Lashou – Chinese Group Buying Firm with Highest Net Loss to be First to IPO?
Lashou is one of the first group buying firms to be launched in China when the industry started in March 2010, and has acquired a total funding of US$165 million. It has consistently been one of the top 10 group buying sites by domestic market share. Having published its F-1 document to the Securities and Exchange Commission on 28th October 2011, it seems that Lashou (one of the group buying firms with highest net loss), is en route to IPO as well. Before we embrace this and derive any verdict, let us first take a look at the Chinese group buying scene and some of the figures released by Groupon and Lashou prior to their IPO.
Lashou’s Losses are 15% that of Groupon, but Groupon Earns 77 times More!
Lashou was launched in March 2010, about 16 months after Groupon’s inception in November 2008. As such, the most relevant way to compare them is to place their average financial data in juxtapose to compare and develop some performance indicators to better illustrate the differences. Some financial figures are as follows:
One thing is definite; both companies have been making huge losses since their inception. Referring to the table above, Lashou’s average monthly revenue of US$769,542 accounts for only 1.9% of Groupon’s average of US$41,307,200. Using the same method of comparison, the average monthly operating expense of Lashou was 8.0% that of Groupon, and the average amount spent by Lashou on operations as a fraction of revenue was found to be 4 times as much as Groupon. This means that for every US$6.19 that Lashou spent on operations, it gained just US$1 in revenue; Groupon’s revenue was US$1 for every US$1.44 spent. On top of that, Lashou’s net loss/net revenue comparison is 12 times that of Groupon. Lashou is earning at a far from sufficient rate to cover its expenses at the moment, and significantly, the expenses of Lashou are proportionally much more than Groupon. Why is this so?
Lashou’s Huge Losses Indicate Intense Competition in China’s Group Buying Market
Lashou is one of the top group buying companies in China and has great potential to be the first firm in the Chinese industry to go for IPO. Then why does it seem that the company is performing so badly in comparison to Groupon(which is already making huge losses)?
Both companies are working on a different scale and time, and this just goes to show the competitiveness of the Chinese market. Fundamentally, Lashou entered the market 16 months later than Groupon(Lashou launched its website in March 2010), and some may argue that there is much room for improvement and expansion within a span of 16 months. With Groupon’s earlier inception and infiltration into the international market, its absolute revenue, expenses and losses are naturally higher than Lashou. Furthermore, higher operating expenses can be attributed to the initial stages of starting a company, where there are sunk costs incurred, that can be diluted over time.
Groupon Competes with Living Social, but Lashou has 20 Challengers!
Groupon has expanded its reach into more than 40 countries, and due to the market structure, there are normally 2 to 3 large competitors in each of the markets.
However, the Chinese market is much more competitive. Since the inception of the first few group buying firms in China (Lashou being one of them) in March 2010, the industry has witnessed explosive growth, with about 2000 group buying websites emerging by the end of the year. Following that, more than 5000 group buying sites have sprung up in China by mid-2011, with numbers projected to reach more than 10,000 by the end of 2011.
In the United States, Groupon and Living Social are the two largest players in the market, having a combined market share of more than 70% in September 2011. Comparatively, with the exclusion of Taobao.com(which plays many different roles in the e-commerce market on top of group buying), there is no dominant player in China, with the top 20 group buying sites taking relatively equal shares of the market. This shows the competitiveness of the Chinese market, and as such, in order to build brand recognition and remain relevant, companies need to have huge advertising budgets to expand rapidly.
On top of that, the group buying market in China has evolved. The group buying business model is now not unique to pure group buying firms. There is an increasing trend of major e-commerce firms integrating group buying into their services, with big players in the different sub fields such as 360buy.com(Electronics), Vancl(Clothes & Apparels) and Ctrip(tourism) integrating group buying as one of their sales models. This expands the playing field for the entire industry, therefore driving further competition.
Relatively Higher Reach Promises Better Future for Lashou?
Conducting a comparison between the operational statuses of both companies, the most distinct difference can be observed in the average revenue earned per active customer; Lashou’s figure is 6% that of Groupon. This can be attributed to the different purchasing powers of the customer base of Lashou and Groupon; Groupon has covered more than 40 countries and has a strong influence in many European markets where general income levels are relatively high. The Consumer Price Index in China is also lower than countries in the West.
Results also indicate that the global reach of Groupon at 2,364,000 unique visitors per day is about twice the amount of Lashou’s 1,038,000. However, when comparing other indicators such as the average monthly number of registered users and active paying users, Lashou has just about than 10% that of Groupon. Looking at the average monthly completed transactions, Lashou’s number stands at 41% that of Groupon. With the global influence that Groupon has, why does Lashou seem to enjoy much better sales performance?
Lashou Concludes Twice the Number of Deals per User than Groupon
Groupon’s market reach has spread internationally. Varying standards in terms of location, company structure, personnel and localization, all these need much time and effort to master. Lashou can afford to concentrate resources in an area, but Groupon has to deal with multiple markets at the same time and stretch its resources across different countries. This sometimes results in poor performance, for example the poor results of Groupon’s entry into the Chinese market(Groupon’s firm in China is named Gaopeng), the reasons which may require another article to give a clear explanation.
However, considering the monthly average number of deals bought per active user, Lashou concludes twice as many deals bought. This means that every active customer of Lashou purchases an average of 6 deals per month, while every customer of Groupon purchases an average of just 3 deals. Lashou has a higher rate of customer retention, despite the wide array of group buying firms available for consumers to select from in China.
China’s Group Buying Future Banks on Sales of Products over Services Deals
Lashou’s higher number of completed transactions can be attributed to the changing behavior of Chinese consumers. With the stabilization of the group buying market, the trend seems to show that Chinese consumers are spending more on products instead of services.
Referring to the graph above, consumers are increasingly favoured towards purchasing products, because of the rapidly developing e-commerce market and convenience of local delivery systems in place. Purchase of products has reached up to 67% of total completed transactions, the highest since the inception of Lashou. With the gradual integration of group buying into the e-commerce market in China, more firms seem to be less inclined towards providing service deals, thus increasing the total number of completed transactions at a faster rate as well.
Groupon’s IPO Leads the Path for China’s Group Buying Firm Lashou
- China’s Leading Group Buying Firms Incur More Losses than US Firms Due to Intense Market Competition
It is a force to be reckoned with. In comparison, Lashou’s financial figures are not as favourable as that of Groupon, despite having much lower net revenue. Operational expenses are crucial especially in the form of advertisement and building brand recognition in China. This also further proves the high barriers to entry for foreign firms, with Groupon seeming to follow the footsteps of Google and Ebay in the Chinese market.
- Chinese Purchasing Power Still Growing Steadily
The Chinese market grows at an alarming rate, as proven in the rapid expansion of the group buying industry. On top of that, the average purchasing power of the Chinese may be much lower for now, but with China slated to become the world’s largest economy in a few years to come, this growth can actually be explosive.
- Group Buying Model to be the Most Popular E-commerce Channel for Chinese Consumers
With more firms providing services that were once unique to traditional pure group buying companies, it seems that e-commerce has become more diverse, offering a myriad of services. China has the largest internet user base in the world, and with proper development, group buying and e-commerce definitely have the potential to expand.
The comparison of the 2 companies may seem to conclude that Lashou’s financial future seems bleak. However, Groupon had a head start of 16 months in the market, and if Lashou were to sustain its current trend for another 16 months, we may possibly see another giant in the global group buying arena. On top of that, Lashou’s business model seems to be shifting gradually towards the provision of product deals and integrating group buying into the e-commerce spectrum. With an entirely different market and playing field, especially considering China’s e-commerce market potential, many of these Chinese group buying firms may well go for the IPO in the near future.