Bloomberg News

Groupon China Venture Says Margins ‘Much Greater’ Than 10%

June 10, 2011

(Updates with Tencent shares in eighth paragraph.)

June 10 (Bloomberg) -- Groupon Inc., owner of the world’s biggest coupon website, said margins are “much greater” than 10 percent at its China venture Gaopeng.com, which competes with thousands of clones in the world’s largest Internet market.

Gaopeng offers coupons for group purchase deals in 30 cities and has established operations in 50, Ouyang Yun, chief operating officer, said at a press conference in Beijing today. Groupon started Gaopeng in February with partners including Tencent Holdings Ltd., China’s biggest Internet company.

Groupon, seeking to raise $750 million in an initial public offering, is making “progress” in China, Chief Executive Officer Andrew Mason said at the same event. Sales of Web discount vouchers for services such as dining and spas may quadruple in the Asian country this year, according to research company iResearch.

“Tencent’s scale and user base gives Groupon an advantage, and China’s group-buying market is still at an early stage and has a lot of upside,” said April Su, an analyst at iResearch in Beijing. A main competitor for Groupon will be Alibaba Group Holding Ltd., she said.

Underwriters

Groupon, based in Chicago, promotes discounts on everything from meals to massages in the cities where its customers live. The company asked six more banks to help underwrite the sale, including Barclays Plc and JPMorgan Chase & Co., said two people with knowledge of the situation yesterday.

Mason, in Beijing as part of a tour of China, Japan, and Korea, today addressed reporters for less than three minutes before exiting the event without taking any questions.

“We think we’ve found an excellent partner in Tencent and we’ve been very pleased with the progress we’ve made,” Mason told reporters in Beijing today, before leaving Ouyang to field queries on Gaopeng.

Tencent fell 2.7 percent to HK$205.20 as of 3:24 p.m. in Hong Kong trading. The shares have gained 22 percent this year, compared with a 2.6 percent drop in the benchmark Hang Seng Index.

More than 3,000 group-buying websites operate in China and generated an estimated 1.5 billion yuan ($232 million) of sales in 2010, Su said. Revenue in the industry may quadruple this year, she said.

Rival Alibaba

Alibaba, China’s biggest online-commerce company, operates group-buying site Ju Hua Suan. In April, Lashou.com, a Beijing- based group-buying site, said it raised $110 million of funding from investors including Milestone Capital and Cie Financiere Richemont SA’s Reinet Fund.

Gaopeng, owned by a venture between Groupon, Tencent, and Yunfeng Capital, a private equity fund co-founded by Alibaba’s chairman Jack Ma, has already hired 3,000 workers in China, Ouyang said today.

Gaopeng is seeking an edge in China with “world-class brands,” like Apple Inc., Ouyang said today.

“Our strategy is very strict selection of the merchant deals,” Ouyang said. “It’s not only about discount service but it’s also about being a city guide, a lifestyle.”

Group Market

China’s group-buying market is small compared with online retail, which expanded 75 percent last year to 461.1 billion yuan, according to iResearch’s Su.

Alibaba’s Taobao.com generated estimated sales of about 380 billion yuan in 2010, accounting for more than 80 percent of the online shopping market, according to Su.

Taobao already vanquished one U.S. rival, EBay Inc. EBay entered China in 2002 and shut its China site in 2006, as Taobao cut the U.S. company’s share of the China market by half.

Other U.S. Internet companies have struggled in China, including Google Inc., which shut its China-based search page last year in a clash with the government about adherence to censorship requirements.

Groupon vowed to avoid the mistakes of other U.S. technology companies in China by not simply transplanting the U.S. model to the Asian nation, Julie Mossler, a Groupon spokeswoman, told the briefing today.

“That is why the partnership with Tencent and why Ouyang’s expertise are so important,” Mossler said. “The management team here is Chinese and they are native to the market. They live here, they understand what consumers want and they understand what merchants are looking for as well.”

--Edmond Lococo, Mark Lee. Editors: Terje Langeland, Dave McCombs

To contact Bloomberg News staff on this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Mark Lee in Hong Kong at wlee37@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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