GROUPON FAILING MISERABLY IN CHINA, CLOSING OFFICES, FIRING EMPLOYEES BY THE HUNDREDS, IS IT TIME TO CANCEL THAT IPO?

BEIJING—Groupon Inc.'s joint venture in China has closed offices in some cities and laid off hundreds of employees, according to people familiar with the situation, raising questions about the online coupon company's strategy in a big market ahead of its planned initial public offering of stock.

 

Asia Today: Moody's lowered Japan's credit rating, making the country the latest to be hit in the latest round of sovereign debt downgrades. Also, Groupon's joint venture in China is closing offices and sacking staff. WSJ's Jake Lee, Alex Frangos and Jake Schlesinger discuss.

Former and current employees of the Chinese joint venture, which operates the website GaoPeng.com (see below), say more than 10 offices around China have been closed, including one in the northern city of Tangshan where an employee said he and his co-workers were locked out last Friday after their lunch break just after being notified of the shutdown.

 
[Click Image To Enlarge]

James Liu, a staffer and photographer for GaoPeng.

"They've been firing people for at least three months."

A Chinese lawyer representing some disgruntled former GaoPeng employees estimated about 400 people have been fired so far, a number that couldn't be confirmed.

The moves appears to mark an abrupt reversal of Groupon's aggressive expansion into China just eight months ago. Since January, Groupon has invested $8.6 million for a 40% stake in the GaoPeng joint venture, which is also funded by Chinese Internet giant Tencent Holdings Ltd. and private-equity firm Yunfeng Capital.

A woman stops by the closed glass door of Gaopeng, Groupon's Chinese joint venture, in Shanghai on Monday.

Groupon and GaoPeng said Tuesday that the office closures are part of a change in strategy and don't diminish their commitment to China. A spokesman for GaoPeng said it plans "to focus more on the middle to large-sized cities" in China where the market is "more developed," adding that the company "is fully committed to the Chinese market for the long term."

Groupon spokeswoman Heather Dickinson said.

"Groupon's approach to international expansion is to aggressively create a large presence upfront and refine our strategy as we gain deeper insight into the local market.  We view any adjustments to the business as very typical in order to build a long-term foundation for success. Our JV in China is just one example of many new markets where we have fine-tuned our strategy as we go."

GaoPeng said it is still hiring in China, but it doesn't dispute that its total number of employees is shrinking. Groupon said it doesn't disclose its staff count by country, and it couldn't be determined how many employees the China venture currently has.

Tencent and Yunfeng couldn't be reached for comment.

Groupon expects to raise about $750 million in a mid-September IPO that could value the company at $20 billion. China represents less than 1% of Groupon's global revenue, according to a person familiar with the situation.

Foreign Internet companies have long struggled in China, which has more Internet users than any other country.  

• Yahoo Inc., one of the earliest to enter, handed over its China business in 2005 to Alibaba Group Holding Ltd., and has since quarreled with the Chinese company.   
• EBay Inc. sharply scaled back its presence in China after losing market share to an online shopping site owned by Alibaba.   
• Google Inc. has seen its market share slide, to the benefit of rival Baidu Inc. since the U.S. company moved its Chinese-language search engine to Hong Kong out of frustration over censorship and hacking issues.

Groupon's entry into China was turbulent from the start. The company has struggled to gain market share as its legions of local competitors also invested heavily in marketing and geographical expansion.Hundreds of Chinese companies were already offering online buying services in China by the time GaoPeng started offering deals to Chinese users in March. One of those competitors owns the Chinese domain Groupon.cn (see below) which, according to research firm Analysys International, had more visitors in the second quarter than Groupon's own GaoPeng.

[Click Image To Enlarge]

While Groupon is the dominant daily-deals website in the U.S., GaoPeng was No. 8 among such websites in China in the second quarter, with 15 million unique visitors a month—less than 30% the number for the top website in the category, Lashou.com.

One GaoPeng manager, who spoke on the condition of anonymity, said the company had some 80 offices around the country at its peak, and total headcount of more than 3,000 people, before it started scaling back.  He said.

"Groupon came into China and tried to expand too aggressively.  That strategy just doesn't work in China."

Zhao Zhanling, an attorney in Beijing representing people laid off by GaoPeng, said a number of employees have complained about the circumstances under which they were fired and negotiated to receive two months of compensation to settle the issue. Mr. Zhao said he plans to ask for a similar deal in the coming months for 100 other former employees, and knows of at least 300 more that have been laid off.

Groupon's China launch followed a spate of bad publicity from a Super Bowl commercial (see below) pegged to the political situation in Tibet—an extremely sensitive issue for China's government. In the ad, which was quickly translated and circulated on Chinese websites, actor Timothy Hutton narrates a seeming public-service announcement about Tibetans being "in trouble, their very culture in jeopardy"—but the spot then morphs into an ad for a Groupon deal on Tibetan food. Chinese Internet users criticized it, calling the ad offensive and a display of the company's ignorance about China. Many Americans also took umbrage.

 

Meanwhile, the U.S. Securities and Exchange Commission has raised questions about Groupon's use of an unconventional accounting measurement in its filing for an IPO that critics say masked Groupon's high marketing costs. The company has since taken the measurement out of its prospectus, which shows it had a loss of $413.4 million last year on revenue of $713.4 million.

COMMENTARY:   I am not slightest bit surprised that GaoPeng, Groupon's brand in China, is closing offices and firing employees by the hundreds.  I warned my readers that something like this would happen.  

I have been covering Groupon's IPO since my blog post back on December 29, 2010, when rumors began circulating that Groupon's CEO Andrew Mason was planning an IPO.   Those rumors prooved to be incorrect.   In my blog post dated June 2, 2011,  I commented briefly on Groupon's S-1 Registration Statement filing for their IPO, especially the $750 million that Groupon aimed to raise through the IPO at a valuation of $20 billion.  

Accompanying the IPO filing was an unusual letter from CEO Andrew Mason, in which he said.

"Groupon is focused on growth, and measures its success by metrics such as free cash flow, gross profit (Groupon’s actual take from its customer transactions, which was $280 million in 2010) and a third yardstick that is quite a mouthful: Adjusted Consolidated Segment Operating Income. Those kinds of non-standard financial metrics were all the rage in the late 1990s tech bubble."

What caught my attention was Mason's third yardstick for measuring Groupon's growth: "Adjusted Consolidated Segment Operating Income".  I thought Groupon's metric was so unusual, that I contacted the SEC and brought it to their attention.  This non-traditional financial metric stirred a lot of controversy among the financial community, and on July 28, 2011 became the basis for an SEC investigation.  You see folks, the SEC frowns on unconventional accounting metrics that are not generally-accepted among accountants, and which could be double-talk aimed strictly to confuse investors.  On August 11, 2011, it was announced that Groupon had amended its S-1 filing to exclude that controversial non-traditional accounting term.  

I didn't have time to analyze the S-1 thoroughly on June 2, but after reviewing it carefully, in a blog post dated June 3, 2011, I discovered several things about Groupon since it started operations:

• Groupon had never made a dime in profit ($413 million in accumulated loses through 12/31/10). 
• Groupon had an accumulated a working capital deficit of $209 million through 12/31/10, and the deficit was probably well over $300 million by March 31, 2011.
• Groupon was using its creditors cash advances to finance its operations. 
• Groupon had aggressively expanded its worldwide sales force during the time leading up to its IPO filing date. 
• Groupon had raised nearly $1.1 billion in total venture capital, but nearly $950 million or 86% of that amount had been used to cashout earlier investors, CEO Andrew Mason and three other officers, and two retiring board members.

In a blog post dated August 9, 2011, I commented on Rocky Agrawal's June 13, 2011 article appearing in TechCrunch, in which he criticized Groupon's use of float to finance its business (the working capital deficit I mentioned above), pointed out that Groupon's web traffic was not necessarily profitable traffic, and called Groupon's business model "unsustainable".  I agreed with all Rocky's criticisms and added some comments and criticisms of my own, including Groupon's partnership with Tencent, Yungfeng and Rocket Asia to form GaoPeng,  the poor and costly performance of Groupon's worldwide salesforce, working capital deficit and the failure of GaoPeng's salesforce to make a dent in the Chinese market.    

It now appears that my criticism of GaoPeng's failure in China was fully warranted, but I didn't know the depth of the problem until now.  Here's my view of things.  

• Groupon entered China's group buying market very late.
• Groupon simply does not understand the Chinese culture very well (e.g. the Tibet TV commercial and the white caucasian mother and daughter on the Gaopeng website). 
• Groupon did a piss poor job of execution. 
• Groupon completely underestimated the competition.  

What irks me the most about Groupon is the greed demonstrated by Groupon's early investors, CEO Andrew Mason and three other executives, and some of its board members in cashing out to the tune of nearly $950 million, just a few months prior to the IPO filing.  

 

Groupon launched Gaopeng in January 2011

The news that Gaopeng fired hundreds of employees and closed several of its offices in China without notifying its employees, is a cowardly and callous act, so it does not surprise me that those employees are banning together and filing class action lawsuits to recover additional compensatino.  Furthermore, Gaopeng never even bothered to make a press announcement (IPO silent period not withstanding), which can be construed as a lack of honesty, truthfulness and disclosure on the part of Groupon especially after filing its IPO.  That's a significant fact.  Did they expect that nobody would find out?   

I wasn't too shy about saying back on June 3, 2011 that Groupon had severe working capital problems, and on August 19, 2011, The Atlantic, made the same observations, specifically singling out Groupon's working capital deficit and cash flow problems.  Looks like I was right again.

If I were Groupon, I would get out of China real fast and cut their losses, which must be significant considering they were spending money like a drunken sailor to build their salesforce, while using their creditors and vendors to finance their business, and cashing out their key executives, early investors and board members.  

Given all the bad news that has surfaced concerning Groupon since it filed its IPO in June 2011, one has to wonder what the SEC, Groupon's underwriters and early road show investors are thinking right about now.  If the IPO is approved by the SEC, will it be a huge failure or will investor exhuberance rule the day, or is it just time for Groupon to pull the plug?

Courtesy of an article dated August 24, 2011 appearing in The Wall Street Journal Technology 

Comments

[Photo to painting]

I learn lots of things from the groupon. This video is a beneficial for us. Groupon features a daily deal on the best stuff to do, see, eat, and buy in San Jose and a variety of other cities across the United States

[Tommy]

Jen, I recently wrote about Groupon again. This time the SEC made them restate their revenues downward by about $400 million. That IPO is not looking so good. I think at this stage its DOA. Their COO also quite and went back to Google where she came from. This is one of the most incompetently managed companies. Groupon has been growing so rapidly that it has finally caught up with them and you become aware just how corrupt management is too.

[Jen]

that's funny... One of the first things I noticed on garden's homepage were the mother and the daughter, who were not "your traditional looking Chinese citizen"...