(iChinaStock Analysis) Groupon is infamous for hiring a horde of Harvard Business School students to seed its China operations. What are the odds that the next generation of HBS students will study Gaopeng as a case study in management failure?
Groupon’s recent S-1 filing reveals its China joint venture (JV), Gaopeng, to be a flaming train wreck. In the first nine months of 2011, Gaopeng had $46.4 million in net losses, with only $2.1 million in revenues. Gaopeng.com went online in March 2011.
Commission is dangerously slim, although Gaopeng had made noise that it was going to ‘maintain its margins’ when it first entered the market. The $2.1 million in revenues (the commission Gaopeng negotiates with merchants) comes from $18.4 million in gross billings (the total amount collected from customers). That’s a margin of 11.6% for Gaopeng, which is higher than the 5% some other Chinese group-buying sites charge, but far below the 40.6% commission that Groupon reported in the rest of the world (59% international, 41% US) over the same time period.
Gaopeng also holds $10.9 million in current assets, $6.3 million in non-current assets, and $15.4 million in current liabilities.
To be fair, China’s entire group-buying industry has hit hard times. Many major players are desperate to raise financing to stay afloat. Gaopeng is fortunate to have the support of Groupon’s deep pockets, that will become even deeper with its upcoming IPO. That cash gives Gaopeng a chance to press ‘reset’ one, two, or three times before calling it quits.
Gaopeng Valued at $502 Million — Can I Get a Discount?
On July 31, Groupon upped its stake in Gaopeng to 49% by purchasing an additional 9% from Rocket Asia (run by the German Samwer brothers) for $45.2 million. That implies a valuation of $502 million for Gaopeng.
The Samwer brothers, who also sold their German group-buying startup Citydeal.de to Groupon, reportedly managed Groupon’s woeful entry into China in the first place, but seem to have made away with another rich payday.
The rest of the stakeholders are Tencent (0700.HK) with 40%, the Yunfeng Fund (which includes Alibaba Group CEO Jack Ma) with 10%, and Rocket Asia which retains 1%.
The partnership with Tencent, a Chinese Internet giant with a massive userbase, seems like a coup for Groupon at first glance. But the partnership seems to have been massively mismanaged from the start.
Groupon seems to have neglected to secure a non-compete. Tencent continues to operate QQ Tuan, a leading group-buying site, and invest in others. That makes it distinctly possible that Gaopeng is Tencent’s third-choice horse in China’s group-buying race, behind QQ Tuan and Ftuan.
Groupon’s ‘share’ of Gaopeng’s $46.4 million in losses was $19.9 million for the first nine months of 2011.
Press Kicking the S*** Out of Groupon and Gaopeng
Since its F-1 filing in June 2011, Groupon has come under attack for its non-standard accounting scheme and running a Ponzi Scheme. CEO Andrew Mason pluckily responded in a letter to employees: “
CEO Andrew Mason added a special defence for Groupon’s China operations:
What about our joint-venture with Tencent in China? Did you read the article that Gaopeng’s CEO has kidnapped the first born children of all our employees and is putting them to work building a laser beam he’ll use to slice the moon in half? It turns out that that one isn’t true either.
China is definitely a different market, but every month we inch closer to profitability. As has been our strategy in launching other countries—Germany, France, and the UK, included—our China growth strategy was to hire quickly and manage out the bottom performers. So far, that strategy has improved our competitive position in China from #3,000 to #8. Will we one day reach the dominant status we enjoy in most (come on, Switzerland!) other countries? It’s too soon to tell, but there’s no question in my mind that we’re building a business that will be around for the long haul.
The press still strikes me as right and Mason as woefully mistaken: Gaopeng is nowhere close to profitability, and it’s a matter of miles, not inches. It could be a long, long haul–that is, if Gaopeng further cuts expenses and sticks around to see it out.
The Gaopeng Case Study
To kick off the case study, China Internet watcher Bill Bishop lists seven ‘classic mistakes’ by American Internet firms in “Will Groupon China Expire?“
1. Picked the wrong partner (see Is Tencent The Wrong Partner For Groupon In China?);
2. Hired too many foreigners as top management. Foreigners are not all useless (writing as a foreigner who likes to think he is useful), but Groupon had far too many;
3. Staffed up way too fast; you can not efficiently hire hundreds/thousands of qualified Chinese employees in just a few months;
4. Focused too much on hiring bankers and management consultants. In China especially group buying is a very dirty feet-on-the-street, local sales game, and that requires a very different skill set than what you will find in your average consultant or banker;
5. Allowed a competitor to register Groupon.com.cn;
6. Have inadequate financial controls that have contributed to the losses and probably enriched some, just not the main Groupon and Gaopeng shareholders;
7. Mishandled layoffs, leading meaning potential Chinese job candidates to believe that Gaopeng is a toxic company.
By Kai Lukoff, iChinaStock.com
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