The party is over for China's group-buying websites

Wed Nov 30, 2011 10:48pm EST

* Majority of open group-buying sites losing money

* Those with most money to lose will win-consultant

* Counterfeit coupons plague industry, consumers

By Melanie Lee

SHANGHAI, Dec 1 (Reuters) - Faced with accusations of selling fake goods and competition from thousands of copycats, China's frenetic group-buying sector is sobering up, with dozens of websites reportedly shut and venture capital shunning the industry.

Group-buying websites provide daily deals to consumers by offering discounts on goods and services at rates that are pre-negotiated with vendors.

China has almost 6,000 group-buying websites, most of them backed by venture capital firms. The country saw 456 shut in October, taking the total of shuttered websites to 1,483 this year, group-buying website aggregator Lingtuan said in a report last month.

Nearly all of the sites still operating are losing money, analysts say.

"No investor with the goal of making money is wasting additional money on group buy right now," said Michael Clendenin, managing director of Shanghai-based consultancy, RedTech Advisors.

"Even e-commerce overall is losing its appeal because of the hypercompetitive nature of the Chinese market in which only those with the most money to lose will eventually win," Clendenin said.

The success of Groupon Inc's business model and the industry's low barriers to entry led to a creation of the thousands of group-buying clones in China who found themselves advertising heavily and slashing their portion of the revenue-share with vendors to survive.

Lashou Group Inc, China's top group-buying website, earlier this month delayed its U.S. listing, citing "corporate developments," while Groupon Inc, the world's largest group-buying website, is now trading below its initial public offering price.

"There is very little, if any, liquidity in this sector now and with Groupon now below 50 percent of its peak, you can expect virtually no new investments in this sector particularly in China," said Gary Rieschel, managing director of Qiming Venture Partners. "There was over $700 million invested in Group buying sites in China in the last 18 months. Eighty percent of that money will yield no return."

FAKE COUPONS?

Gaopeng, the joint venture company set up by Groupon and Tencent Holdings, came under fire last month after it unwittingly sold fake Tissot watches to customers.

The firm, which shut 10 offices in August and laid off hundreds of staff, most recently sold McDonald's coupons that were not endorsed by McDonald's, leaving consumers holding the bag, according to local media reports.

The sale of fake goods is a common problem in China due to unreliable supply chains and vendors who forge documents, not so much due to the malicious intent of some website, analysts said.

There is little future for companies that only operate group-buying websites and the winners will likely emerge from those with other operations, such as Renren Inc's Nuomi and Taobao's Juhuasuan, which have more cash to spend, they said.

"I expect these independent companies to continue weakening in the first half of 2012, at which point the integrated firms like Renren's Nuomi and Taobao's Juhuasuan will launch fresh marketing campaigns that will help them snatch market share from weakened independent competitors," said Clendenin.