Groupon therapy – The Economist (blog)
GROUPON seems to be confused. The American e-commerce company, best known for its “flash sales”, recently announced it would soon shutter its Korean subsidiary. Despite vigorous marketing since it entered South Korea’s thriving e-commerce market in 2011, Groupon Korea has remained a laggard behind the three big domestic rivals: TicketMonster—Korea’s first “social” e-commerce provider, launched in 2010—Coupang and WeMakePrice.
The decision to close its Korean subsidiary comes only a couple of months after Groupon bought TicketMonster (known locally as T-Mon, pictured) for $260m—making South Korea Groupon’s second-largest market outside America. Yet the two moves have a common root: the withdrawal is proof of how hard it is to crack the Korean e-commerce market—and the acquisition shows the best way how to go about it.
Groupon is not the only Western internet firm that has lost out to local champions and given up in recent years. In 2012 Yahoo stopped producing content for the Korean market, after years of trailing behind Naver and Daum, two home-bred search engines. Google accounts for a measly 4% of searches there. Auction, Gmarket and 11st Street, Korean hybrids of Amazon and eBay, do far better than its Western models. EBay was the first to take radical action: in 2009 it bought Gmarket for $1.2 billion. Groupon, too, plans to learn from T-Mon, its South Korean acquisition.
Why are local Groupon clones so much more successful than their Western models? Both TicketMonster and Coupang, a newcomer that has swept to number one in Korea in less than two years, were founded by Korean-Americans. They originally copied Groupon, which started out as a site that offers daily deals such as 75% off the regular price of a trip to an indoor hot-springs resort. But “flash-sale” sites are easy to replicate, meaning much competition and low margins.
Whereas Groupon stuck to its guns, both T-Mon and Coupang adapted the business model: they became more like Amazon. Between half and four-fifths of T-Mon’s and Coupang’s sales are now physical goods. Both also went mobile: Coupang launched its first mobile app in 2011; now more than three-quarters of its traffic comes from smartphones.
The country’s super-fast internet speeds, its high smartphone penetration and its appetite for mobile shopping make it ideally suited for Amazon-style e-commerce. What is more, the density of Korea’s cities allows for swift and cheap delivery. According to Rankey, a pollster, Koreans are now even more active on shopping apps (21m users as of January) than on games provided by KakaoTalk, Korea’s leading messaging app.
But Korean e-commerce firms have other advantages, too. They have not only continuously expanded their offerings, but are curating their mobile marketplaces to fit a smartphone screen. Many offer personalised homepages. They have better procurement networks for sourcing popular products and know what Koreans want to buy, says Oh Donghwan, of Samsung Securities. And home-grown sites use a unique Korean mobile-payment system, which allows shoppers to add purchases to their phone bill.
Despite all these advantages, T-Mon, Coupang and WeMakePrice are still making losses. T-Mon, for instance, reported a net loss of 44 billion won ($41m) in the first three quarters of 2013. That is chiefly because the firms spend millions on marketing, for instance by hiring Korean celebrities and investing heavily in TV ads. The firms do not disclose such figures, says Mr Oh, but social-commerce companies are by far Naver’s biggest clients for online ads. By buying T-Mon, Groupon may have shown a new willingness to learn, but financial success is still some way off.