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Gaopeng cutbacks signal trouble for Groupon in China

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Just a few months ago group buying website Groupon decided to set up operations in Kunming on what seemed to be an extremely hurried schedule. Judging from a recent wave of layoffs in Kunming and elsewhere in China, Groupon has taken a big step toward joining the club of US internet companies such as Yahoo!, eBay and Google who have failed in mainland China.

The US company's mainland venture Gaopeng is reported to have laid off 15 of its 22 staff at its Kunming office last week, part of a broader nationwide downsizing in which the recently launched site has laid off more than 400 staff and shut down 13 local offices, according to a report on Chinese business site nbd.com.cn.

Gaopeng has reportedly cut back on staff in 18 larger first- and second-tier markets including Shanghai, Wuhan, Hangzhou and Kunming while completely shutting down operations in 13 mostly third-tier cities including Nanning, Yantai and Qinhuangdao.

The cutbacks would appear to be a sign of increasing difficulties for Gaopeng, which entered the mainland China market in February of this year.

A PR spokesperson for Gaopeng said on Monday that the site was undergoing a "moderate business optimization" in which more resources would be funneled into more mature large- and medium-sized cities, according to the nbd.com.cn report. The spokesperson added "We fully recognize the contributions of the staff that are leaving and have decided to give them more than the legally required compensation."

The group buying website phenomenon is new to China. The first website addressing this market - Meituan - was launched in March 2010. By the end of the year, there were 1,960 similar sites with mainland operations.

Despite having teamed up with Chinese internet giant Tencent's investment fund to launch Gaopeng this year, Groupon's success in China is far from guaranteed. A confrontational attitude taken by Groupon's international business director on a visit to China may have actually increased the desire of China's top group buying sites to annihilate Gaopeng.

Beijing-based Caixin reports on Groupon's example of how not to enter the Chinese market:

Groupon laid the groundwork for its China expansion last October when Oliver Samwer, the company's international business director, met with heads of China's five leading group-buying companies, including Lashou and Meituan, in Shanghai.

One of the Chinese executives present told Caixin that Samwer "did not mince words" while pitching for a Chinese partner. He quoted the Groupon executive as saying, "You can either accept us as the controlling shareholder or choose destruction."

Samwer's presentation was a declaration of war, not an invitation to cooperate, the executive said, and every Chinese company turned him down.

Since then, Chinese websites have prepared to fight Gaopeng, headed by CEO Ouyang Yun. Lashou, for example, has increased its workforce to 2,000 from 1,000 over the past three months while expanding to nearly 200 cities, doubling its operating budget and boosting advertising, Wu said. He blamed "Groupon provocation" for the growth spurt.

The February launch of Gaopeng itself was a mini-debacle, with Tencent taking Gaopeng servers offline hours after launch, reportedly because it felt Groupon was rushing Gaopeng to market.

Shanghai-based internet investor Marc van der Chijs tried to see things from both sides of the early Groupon-Tencent rift, writing on Business Insider:

"I guess they have different incentives: Groupon wants to get their Chinese operations up and running to justify a higher IPO valuation, but Tencent knows that in order to win in China being too fast may not be the best strategy. Throw in some culturally ignorant non-Chinese managers and you have a recipe for disaster."

Groupon's IPO prospects stateside are looking increasingly bleak as its overall profitability has come into question and its much-ballyhooed entry into the Chinese market that was supposed to increase its appeal to investors has so far been marked by an early stumble followed by last week's backpedaling.

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