Groupon's China venture posts $46M loss

IDG News Service - Groupon's China venture posted a net loss of $46.4 million for the past nine months, generating only $2.1 million in revenue as it fights to gain dominance in the country's highly competitive group buying market.

The figures were reported in the company's latest securities filing on Friday. Groupon's China business, called GaoPeng, launched its first deals in March, competing against more than 3,000 other rival group-buying sites in the country. GaoPeng is a joint venture that includes Groupon and the Chinese Internet firm Tencent.

The fierce competition has meant high marketing costs and lower profit margins. Analysts and industry executives expect many companies in China's group-buying market will eventually run out of cash and fold.

"This is a market in which most companies have a gross margin of 5%," said Mark Natkin, managing director for Beijing-based Marbridge Consulting. "That's not a viable business. Being able to make a gross margin of 20% or 30% really only happens when you boil the market down to three or four top companies."

China's group-buying companies have yet to make a profit, Natkin added. At the same time, companies including GaoPeng have been forced to lay off employees in order to compensate for shrinking budgets, according to analysts.

Groupon could not be reached for comment. But the company's CEO Andrew Mason defended its China business in August in an email to employees, which was included in the securities filing.

"China is definitely a different market, but every month we inch closer to profitability," he said. "Our China growth strategy was to hire quickly and manage out the bottom performers. So far, that strategy has improved our competitive position in China from number 3,000 to number eight."

Groupon's global operations excluding GaoPeng recorded a net less of $214 million for the first nine months of the year, according to the securities filing. That happened despite its revenue reaching $1.1 billion, up from just $140 million in the same period a year ago.

Part of the reason is Groupon spent a lot more on marketing. For the first nine months of 2010, it spent $89 million, but for the same period this year, it spent $613 million.