At end of the day, daily deals struggle
By Ding Yining |
December 2, 2011, Friday
|
Print Edition
Print Edition
Lashou Group, one of the biggest daily deal websites in China, has delayed the roadshow for its proposed US$80 million Nasdaq initial public offering.
Sources close to the matter were quoted as saying that Lashou needed to clarify some accounting issues.
The delay raised questions again about the profitability of the so-called "group-buying model "in a fiercely competitive domestic market where no less than a dozen other websites are offering the same service.
Compounding the doubts was the fact that shares in US-based Groupon Inc, after a much ballyhooed launch on the Nasdaq earlier this month, fell below their offer price this week for the first time.
Lashou is currently operating in more than 500 domestic cities, offering more than 1,000 deals in each city every day. Some of the deals are valid for only one day while others stretch to a week or longer.
According to the prospectus Lashou filed with the US Securities and Exchange Commission, the website had 16.8 million registered users at the end of the third quarter.
However, less than 20 percent of them were active paying users in September.
Indeed, consumers who look for bargains on group-buying sites like to shop around instead of sticking with just one or two platforms.
In order to retain customers, group-buying websites have to shell out more for marketing or offer deeper discounts. Either way, it's a drain on revenue.
It's not only in China where investors are wondering about the staying power of these sites. Groupon, the world's largest daily deal site, raised US$700 million in its initial public offering in early November, pricing shares at US$20. Its shares closed down 9 percent Monday, settling at US$15.24. The stock closed at US$17.50 Wednesday.
"Unless a merchant can turn customers into repeat business, the deep discounts it offers to Groupon can be damaging," wrote Josh Catone, an editor with US tech blog site Mashable.
High operating costs
Chinese consumers are notoriously picky as well as price conscious.
I have a friend named Jane Dong who loves hamburgers, and prefers the discounts offered by a local fast food chain for a lunch set at around 20 yuan (US$3.10).
"I would rather buy food that is standard instead of going to restaurants I have little or no knowledge about," she said of her aversion to seeking meal deals on group-buying sites.
High operating costs are proving to be the sword of Damocles for many daily deal sites.
Lashou reported that its net loss for the three months ended September 30 widened to 181 million yuan (US$ 28.5 million) from 172 million yuan in the previous quarter. Its marketing expenses alone accounted for one-third of its total billings.
Before it filed for its IPO, Lashou raised US$117 million in two years from private investors, but that wasn't enough capital for the business.
It seems to me the biggest problem for Lashou may not be its ability to expand in such a competitive market but rather its ability to generate more income from each deal offered on the website.
The average commission from vendors was around 8 percent in the first nine months of this year, compared with about 40 percent for Groupon.
It is not a problem peculiar to Lashou. The black hole is devouring revenue at most of China's daily deals websites.
Nuomi, a group-buying website affiliated with New York-listed Renren Inc, has also been suffering net losses because of the huge amount spent to woo more customers.
In the third quarter, Nuomi's loss widened to US$7.4 million from US$4.2 million in the second quarter.
Renren Chief Financial Officer Huang Hui told analysts on a conference call that the average commission rate of deals sold on Nuomi is around 5 percent.
Unlike fellow group-buying operation Dianping, which runs its website by collecting reviews of restaurants from users, and Nuomi, which taps into users from Renren's social networking site, Lashou has to spend huge sums of money to acquire a user base.
The company seems unsure when it will reach the scale that enables it to balance costs and revenues.
Industry watchers fear that cutting back on marketing expenses may plunge Lashou into a revenue decline.
Earlier this month, media reports quoted unidentified sources from the company saying that the website may expand into an online shopping mall beyond just offering daily discount deals.
In the second quarter, Lashou set up its own dispatch team to deliver goods sold at deep discounts. The website said it plans to upgrade its logistics infrastructure.
But moving into online shopping may be no panacea. The online shopping space is already brim full of major competitors such as Taobao and 360Buy.com. Both rivals already have launched discount coupon services and have established logistics systems in place.
It seems to me that Lashou, along with other daily deal sites, needs to reassess the millions they are pouring into the business and come up with more innovative ways to make profits. If they don't, they risk going under.
Sources close to the matter were quoted as saying that Lashou needed to clarify some accounting issues.
The delay raised questions again about the profitability of the so-called "group-buying model "in a fiercely competitive domestic market where no less than a dozen other websites are offering the same service.
Compounding the doubts was the fact that shares in US-based Groupon Inc, after a much ballyhooed launch on the Nasdaq earlier this month, fell below their offer price this week for the first time.
Lashou is currently operating in more than 500 domestic cities, offering more than 1,000 deals in each city every day. Some of the deals are valid for only one day while others stretch to a week or longer.
According to the prospectus Lashou filed with the US Securities and Exchange Commission, the website had 16.8 million registered users at the end of the third quarter.
However, less than 20 percent of them were active paying users in September.
Indeed, consumers who look for bargains on group-buying sites like to shop around instead of sticking with just one or two platforms.
In order to retain customers, group-buying websites have to shell out more for marketing or offer deeper discounts. Either way, it's a drain on revenue.
It's not only in China where investors are wondering about the staying power of these sites. Groupon, the world's largest daily deal site, raised US$700 million in its initial public offering in early November, pricing shares at US$20. Its shares closed down 9 percent Monday, settling at US$15.24. The stock closed at US$17.50 Wednesday.
"Unless a merchant can turn customers into repeat business, the deep discounts it offers to Groupon can be damaging," wrote Josh Catone, an editor with US tech blog site Mashable.
High operating costs
Chinese consumers are notoriously picky as well as price conscious.
I have a friend named Jane Dong who loves hamburgers, and prefers the discounts offered by a local fast food chain for a lunch set at around 20 yuan (US$3.10).
"I would rather buy food that is standard instead of going to restaurants I have little or no knowledge about," she said of her aversion to seeking meal deals on group-buying sites.
High operating costs are proving to be the sword of Damocles for many daily deal sites.
Lashou reported that its net loss for the three months ended September 30 widened to 181 million yuan (US$ 28.5 million) from 172 million yuan in the previous quarter. Its marketing expenses alone accounted for one-third of its total billings.
Before it filed for its IPO, Lashou raised US$117 million in two years from private investors, but that wasn't enough capital for the business.
It seems to me the biggest problem for Lashou may not be its ability to expand in such a competitive market but rather its ability to generate more income from each deal offered on the website.
The average commission from vendors was around 8 percent in the first nine months of this year, compared with about 40 percent for Groupon.
It is not a problem peculiar to Lashou. The black hole is devouring revenue at most of China's daily deals websites.
Nuomi, a group-buying website affiliated with New York-listed Renren Inc, has also been suffering net losses because of the huge amount spent to woo more customers.
In the third quarter, Nuomi's loss widened to US$7.4 million from US$4.2 million in the second quarter.
Renren Chief Financial Officer Huang Hui told analysts on a conference call that the average commission rate of deals sold on Nuomi is around 5 percent.
Unlike fellow group-buying operation Dianping, which runs its website by collecting reviews of restaurants from users, and Nuomi, which taps into users from Renren's social networking site, Lashou has to spend huge sums of money to acquire a user base.
The company seems unsure when it will reach the scale that enables it to balance costs and revenues.
Industry watchers fear that cutting back on marketing expenses may plunge Lashou into a revenue decline.
Earlier this month, media reports quoted unidentified sources from the company saying that the website may expand into an online shopping mall beyond just offering daily discount deals.
In the second quarter, Lashou set up its own dispatch team to deliver goods sold at deep discounts. The website said it plans to upgrade its logistics infrastructure.
But moving into online shopping may be no panacea. The online shopping space is already brim full of major competitors such as Taobao and 360Buy.com. Both rivals already have launched discount coupon services and have established logistics systems in place.
It seems to me that Lashou, along with other daily deal sites, needs to reassess the millions they are pouring into the business and come up with more innovative ways to make profits. If they don't, they risk going under.
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