Groupon in China — why it could succeed where others have failed

A lot of articles have been swirling around over the past week about Groupon’s entrance into China and a possible partnership with China’s biggest internet service portal, Tencent. They’ve all said things like “China is a tough nut to crack”, “foreign companies come to China to die”, and “Groupon will be no different”, but few offered insights into why Groupon may or may not be different.

Let’s be clear on one thing, China doesn’t kill foreign companies, foreign companies commit suicide in China (Dr. Kevorkian not required). Pundits often point to Google, eBay, PayPal, Yahoo and Facebook as examples of foreign tech companies failing in China. They ignore the successes such as Starbucks, KFC, Wal-Mart, Apple, Nike … Okay, you got me, none of these are tech companies, but is Groupon’s core business that different from a traditional brand/retailer?

You can group foreign companies into two very general categories: 1) services and products primarily driven by social behavior and cultural preferences, 2) services and products primarily driven by quality and fundamentals where user behavior and preferences are largely universal. Most online tech companies fall into the first bucket, whereas most successful foreign companies fall into the second.

Why behavioral and socially driven companies fail in China

A large part of the reason these companies fail is due to the lack of cultural understanding. eBay failed in China because it assumed Chinese consumers would behave similarly to US consumers. Chinese auction site TaoBao won the market by waiving listing fees, creating a chat service so buyers and sellers could communicate and offering a cash-on-delivery payment option, which is important in a country where few people have credit cards.

Facebook and Twitter would’ve had a hard time in China because their core growth drivers are social behavior and cultural preferences (although that’s up for debate, since both sites are blocked). However, we don’t have to look overseas to see examples of social-behavior-driven companies struggling. MySpace got left in the dust in the US because Facebook understood the user behavior of his target audience better. In China, even the mighty Tencent is playing catch up in the real-name social networking space targeting high-end users.

Why traditional businesses succeed in China

Traditional retail businesses, such as Starbucks, rely little on social behavior when compared to most web companies. Starbucks and KFC built their success on taste and branding. Their menus in China are largely the same as those in the US with the exception of a few localized items. Wal-Mart’s value proposition is low prices and a large selection, both of which are easily palatable concepts — at the core, Wal-Mart is a supermarket with a customer experience that’s no different than a Chinese supermarket. Apple doesn’t have to change the iPhone for the Chinese market, and Nike markets many of the same product lines there. Shoes and phones aren’t used that differently across international borders.

How Groupon might be different

At its core, Groupon is more of a retailer than a technology company. The hundreds of Groupon clones in China deviate little from Groupon’s product design and user experience. In fact, most of the dominant clones are exact replicas of Groupon. Group buying is also a familiar concept in China, whereas eBay, Paypal, and social networks were not. At the end of the day, a customer looking at the homepages of Groupon vs. a clone is going to purchase the more attractive deal regardless of which site they’re on.

Amazon is a good example of a company like Groupon that had done well in China (disclaimer: I work for Amazon). Amazon is ranked among the top 3 B2C e-commerce sites in China because the business is driven by product selection, prices and customer service. Better compatibility with local social preferences can drive higher conversion rates, but the viability of the business doesn’t hinge on this.

Groupon certainly has a tough battle ahead of it. But let’s not write it off so quickly, particularly with Tencent in its corner.