The Gold Rush Mentality

Local news broke last week that 360buy is looking to outsource its group buying business while 55Tuan appears to be one of the bidders as the two were rumored to be in discussion about the possibility.

Now It’s 360buy’s Turn

The 360buy move followed 55Tuan’s taking over of Ganji group buying business two weeks ago. And Ftuan has already been taking care of kaixin001’s daily deal sites since last year. More and more Internet companies who jumped into the group buying arena now after second thought were considering closing down or outsourcing their group buying ventures. We’re expecting to see more similar deals in the near future.

According to people familiar with the matter, 360buy would only contract its “local life services” business to 55Tuan while retain the “physical product” effort. At the end of the day, the latter is more in line with Jing Dong Mall’s operation since it could be deemed as another channel of promotion and market campaign.

The Gold Rush Mentality

In The God of Gamblers, a recent piece that appeared in the New Yorker about Macau, the author Evan Osnos touched on something interesting. Chinese people see themselves as being more cautious than Americans, but in reality they are far most willing to bear risk. Osnos argues that is in part because Chinese see themselves engaged in a game of chance, so they are willing to take a flyer just in case they get lucky.

This psychology explains why Chinese Internet companies always move in packs. There is safety in numbers. These companies also like the tread in paths that have been established in [by?] others, especially if such paths have achieved tremendous success overseas. Again, nothing is safer than a proven hit. In a sense, it’s just like in a gold rush. Judging by appearance, nothing is safer: how could anyone starve while digging for gold where we know there is gold, and everyone is coming for it?

This is what happened to the business of group buying. Groupon, a site that came out of nowhere in late 2008, had by 2010 rejected a 6 billion dollar offer from Google. This, of course, is nothing new in the Internet era. What’s different, what’s special about Groupon, is that its business model actually makes sense, in the sense that it actually makes money.

For Chinese Groupon wanna-bes, there are also additional benefits. Group buying thrives on thrift and efficiency instead of profligacy and wastefulness, two values that the most traditional of businessmen can identify with. Furthermore, the barrier to entry seems low, while first mover advantage seems high.

Therefore, it is no wonder that there would be a group buying mania last year in China. Everyone and their cousins were starting a site offering deals. To fend off competitors, all of them spent more than they took in, and most of them were losing money hand over fist. There, of course, would be justifications, gold diggers need their tools, or it takes money to make money.

This year, the dream is deflating like a true fiend’s weight, in part because many of them have ran out of money and have to either sell their operations or close down. Another reason is that the buzz surrounding Groupon have died down after its much publicized IPO. With growing concern regarding its accounting practice (not only did the accounting smell fishy last quarter, but the real concern is that it was the FIRST quarter Groupon ever had to report earnings to the public and it couldn’t pull it off), group buying doesn’t seem to be so revolutionary and profitable after all.

Are there lessons to be drawn from all this? As always, Fools rush in where angels fear to tread. What most of the companies didn’t dwell on was what group buying really is. They saw a golden opportunity from afar and jumped at it.

By doing this, they have forgotten that, in reality almost nothing is more risky than joining the gold rush. Time and time again, we see that in a gold rush, everyone think they are going to get a piece of the action, where in reality only a few strike it rich while other come back empty handed.

This year, clearer heads seem to prevail. Many companies have admitted to themselves that there is no synergy between its main business and group buying, and that group buying operation by itself it’s a money losing business. That’s why they are increasing selling and outsourcing the effort to third parties.

This is not to deny that group buying does offer something to businesses and consumers. This is why after all the fuss, giants like Dianping.com and Nuomi.com who have deep pockets will survive. Smaller operations will be forced to cut their loss by either selling their business or simply fold if there are no takers.