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From its birthplace in China to such far-flung locations as the USA, the Czech Republic, Kenya and South Korea, group buying has been a huge hit with consumers. However, the long-term sustainability of such deep discounting remains a significant issue.
Group buying utilises the online channel to give consumers the benefits of buying in bulk, while sellers benefit from higher volume sales. It can be used to offer products and services at significantly reduced prices on condition that a minimum number of buyers make the purchase.
Although the best-known group-buying company globally is undoubtedly Chicago-based Groupon, the practice is actually thought to have originated in China, where Tuángòu (which translates as team or group buying and is also known as “store mobbing”) developed from the Chinese tradition of bargaining for the purchase of goods of all types. According to the Chinese Ministry of Commerce, there were more than 1,200 group-buying sites in the country by August 2010.
With internet retailing value sales more than doubling during the 2005-2010 period, there is huge potential for growth in group buying as bargain-hunting consumers find their spending power coming under downward pressure from higher prices and slower income growth.
Source: Euromonitor International from trade sources/national statistics
Founded in 2008, “Forbes” magazine last year called Groupon the fastest growing company ever, with some now valuing the company, which has yet to turn a profit (it lost US$413 million during 2010), at around US$2 billion. What it lacks in profitability, it has so far made up for in eyeballs: According to Reuters, the company more than doubled its subscriber base, to 115 million, during the first half of 2011.
The success of Groupon has sparked a flurry of me-too sites, such as Groupola, kgbdeals, Crowdity and Incahoot, which offer money-saving deals on everything from skincare treatments to home insurance. Meanwhile, the likes of Google and Facebook are seeking to leverage their huge online presence by entering this increasingly crowded market. Some of these rivals are becoming increasingly specialised, such of Coupawz, which offers both local and national deals on pet care products.
The recent acceleration of food price inflation globally has given even greater impetus to the growth of group buying. For example, in South Korea, the price of samgyetang (ginseng chicken soup – a traditional summer dish) jumped by around KRW2,000 (US$1.90) in restaurants during summer 2011. As a result, local consumers have flocked to group-buying sites for coupons that give discounts of between 30% and 50% in restaurants. During June 2011, one of the major South Korean group-buying sites, Coupang, offered 2,000 coupons that lowered the price of the soup by KRW6,000. They sold out in a single day.
The concept of group buying has also proven hugely successful in South Africa, where in addition to offering deals in the country’s largest cities, Groupon is also operating in smaller urban centres, like Nelspruit and Stellenbosch. Wayne Gosling, CEO of Groupon South Africa, says that its most popular deal, in terms of numbers, was a nationwide offer at Sandwich Baron that was selling coupons for ZAR5 (US$0.75) for a chicken mayonnaise sandwich that normally costs ZAR17. More than 16,000 of these coupons were sold. According to Gosling, most of the Groupon SA database is female (65%) and aged between 24 and 34 years, a pattern that is replicated in many other markets.
Elsewhere in Africa, a near ten-fold surge in smartphone value sales during the period 2005-2010 has provided an environment for group buying to flourish in Kenya. A study conducted during May 2011 by Kenya-based research firm Consumer Insight found that 49% of young Kenyans used their mobile phones to access the internet.
According to Euromonitor International data, the number of internet users in Kenya grew from 1.1 million to 4.5 million between 2005 and 2010. This growth was largely due to the fact that smartphone prices are falling, as are the data tariffs offered by mobile telecommunication companies: Safaricom currently offers virtually unlimited mobile internet access for as little as KES10 (US$0.12) a day.
A local group buying site called Rupu was launched in December 2010, offering discounts of between 50% and 90% to consumers, with restaurant deals particularly popular. As credit card penetration is extremely low in Kenya, transactions are completed using mobile phone credit via such payment systems as M-Pesa or Zap.
There are now thought to be around 200 such sites operating in the Czech Republic, with pioneer Slevomat the undisputed market leader. According to its founder, Tomáš Cupr: “If I’m a restaurant owner and I give CZK150,000 (US$9,000) to radio advertising, I would get very few customers. If I offer discounts on Slevomat equal to that amount, I can guarantee customers will walk in and I will actually have the opportunity to work with them. This is what I need to reiterate constantly to businesses.”
However, not everyone agrees with this assessment. Well-known Prague chef Zdenek Pohlreich says that he hates such offers “with a passion!” According to Pohlreich, “They [owners] are just happy to see the restaurant is full of people, but they’re too stupid to realise they’re not going to make any money.” He adds that “Good food has its costs, and I don’t know why I should share my profits.”
This raises the crucial issue of whether offering consumers deep discounts is a sustainable business practice in the long term. According to one skeptical internet poster, group buying “employs the discredited idea that spending an unlimited amount on marketing to achieve lots of eyeballs, subscribers or other publicity is an idea that ‘works’ just great.”
Another potential pitfall for group buying can be the failure to set a maximum number of buyers. In June 2011, Crowdity’s reputation in the UK was dealt a blow when the site offered a deal from online supermarket Ocado (£40 or US$65 worth of groceries for the price of £20). It proved so popular (with thousands signing up) that Ocado eventually withdrew the offer, creating frustration and anger among consumers.
According to one disgruntled consumer, “What a shambles. No counteroffer or gesture to apologise. I shall not be returning to Crowdity again, or Ocado, and I shall stick with Tesco.com to deliver my food. Whoever the blame lies with, it’s not good enough.”
With internet access becoming increasingly pervasive and hard-pressed consumers increasingly bargain hungry, group buying is here to stay. However, as the industry matures out of its current frantic grab for market share and is actually forced to turn a profit, the size of the discounts on offer may well become more modest, which could lead to a cooling of consumer interest.
As smartphone use increases, location-based group buying is likely to come increasingly to the fore, with Groupon teaming up with Foursquare to enable users to find location-based deals.
Consolidation also appears inevitable: For example, in spring 2011, local media were reporting that Groupon was preparing to enter the Hungarian market. It has also been rumoured that local market leader Bónusz Brigád (Bonus Brigade) might team up with other regional players, like Czech company Slevomat, in order to better compete with the American giant.