On Jan 26, Groupon Inc acquired Malaysian group-buying website Groupsmore — later renamed Groupon Malaysia — as part of its Asian business expansion.

Groupon Malaysia CEO Joel Neoh says the acquisition enables the local start-up to not only scale up its operations throughout the country but also presents “the opportunity to learn from the best — how a two-year-old company can scale so fast to become a US$1 billion (RM3.04 billion) company”.

Launched in November 2008 as Getyourgroupon, Groupon is a group-buying site that offers heavily discounted deals which are activated by a minimum number of buyers. It became profitable within seven months of operations and has since grown rapidly to more than 500 markets worldwide in just three years — earning it the title of “the world’s fastest growing company in web history”, according to Forbes magazine.

Its staggering growth did not go unnoticed — Google offered to acquire the company for a reported US$6 billion in December last year, only to be turned down. Groupon then announced its plan for an IPO this year to raise US$950 million to fund expansion.

In April last year, Groupon had been valued at US$1.35 billion when it raised US$135 million in its fourth round of financing to fund its global expansion. YouTube — now owned by Google — is the only company to reach a US$1 billion valuation faster than Groupon, but it has yet to make its first profit, says Forbes in its Aug 12 article.

On March 1, the online coupon website made a foray into the United Arab Emirates after launching its China venture in partnership with Chinese Tencent Holdings a day earlier.

Hundreds of group-buying websites or “Groupon clones” have mushroomed globally, hoping to cash in on the popularity of the Groupon model.
Neoh admits that Groupsmore — the company he founded with business partner Ng Khai Lee in September last year — was one of the many “Groupon clones” in Malaysia.

He believes Groupon acquired Groupsmore because it had the right people and culture fit. “I noticed that the companies they acquire have similarities in cultural fit where the founders are mostly young adults who are highly entrepreneurial and passionate about what they do,” says Neoh, 28, who describes Groupon founder Andrew Mason as “highly entrepreneurial and hands-on” in his management approach.

Jan Croeni, co-founder of local group-buying site Mydeal.com.my, says that group-buying has been around since 2000 but only took off in 2008 when Groupon popularised it. The trend eventually caught on in Europe in 2009 and in Asia last year, he says in a Feb 16 interview.

Launched in May last year, Mydeal.com.my was the first Malaysian group-buying website, a spin-off from Singapore’s Deal.com.sg launched earlier that month.

Having spent five years in Singapore as a management consultant, Croeni, together with business partner Patrick Linden, founded Dealguru Holdings in Singapore when they saw prospects in the group-buying concept.

“It was very clear this [concept] was going to fly in Asia as the locals love shopping and discounts… but we were positively surprised it worked so well,” he says, adding that social media also helped drive the business forward.

Barely two months after its launch, Dealguru Holdings received a US$1 million investment from Rebate Networks GmbH, a German investment firm that was founded last year. Rebate Networks’ acquisition gives Mydeal.com.my the advantage of financial backing and knowledge sharing — Rebate Networks’CEO Braehm helped start Germany’s largest social network VZNet Networks and co-founder Stefan Glänzer was the former CEO of online music website Last.fm.

Similar to Groupon, Rebate Network acquires companies in different markets that are still run by their founders. Neoh says Groupon focuses on local businesses so as to maintain the localisation of the acquired websites.

A well-implemented group-buying system serves as a conduit for businesses to get new customers, says Neoh. Conversely, a poorly managed deal results in backlash from both merchants and customers, as well as a dent to the website’s reputation. In dealing with merchants, proper business consulting is important to ensure the merchants know what to expect in terms of working hours and additional capacity needed to accommodate a sudden influx of customers.

Neoh says safeguarding the interests of both customer and merchant is of utmost importance, especially when a deal goes wrong. Customer feedback is important in gauging how good a deal is, as well as ideas for future deals. “We only feature deals that we ourselves as customers would want. Then there’s recommendations from friends,” says Neoh.

Groupsmore used to take a 15% cut from deals but it now earns 50% of the deal, thanks to its alignment with Groupon.

Having offered deals as low as RM3.10 to as high as RM600, Mydeal.com.my takes a 20% to 30% commission from every voucher sold. Deals are chosen based on the quality of the goods and services, “gut feeling” and the answer to the question, “Would I buy the deal?” says Croeni.

“We choose who we want to work with to ensure there is quality. The offers also need to fit into our categories. Getting good quality deals is the biggest challenge for us,” he adds.

Users at Mydeal.com.my have an average age of 30, a higher disposable income, are Internet-savvy and like shopping; the rest of the target market falls into the 20 to 40 age group, Croeni says. “We have 50,000 Facebook friends and more than 60,000 email addresses in our user database.” Mydeal.com.my offers discounts at locations in KL, Penang and Johor Baru.

Groupon Malaysia, on the other hand, started out with a younger target market — 70% of its users are from the 18 to 27 age group. Groupon Malaysia is adding as many as 1,000 subscribers a day. As at January this year, 60% of its current customers are aged 25 and above.

Group buying is successful because it is based on a triple-win concept — a win-win situation for all three parties. Merchants
benefit from the “free advertising” to the website’s registered users and new customer acquisition, customers get good offers, and the group-buying website gets a cut from coupon sales.

“From our experience, the merchant hardly or never makes a loss,” Croeni says.

Mydeal.com.my generates RM250,000 in revenue a month, and is looking at hitting RM1 million per month by 2Q2011, Croeni says. “Our goal this year is to cover more locations such as Ipoh and Melaka. The team is growing very fast here, offering different deals such as fashion and travel. Now we’re online but soon, we’ll be on mobile too,” he says.

While Singapore has shown to be a faster growing market than Malaysia, Deal.com.sg earns S$1 million revenue every month — the latter is a bigger market, says Croeni.

Even though the IT infrastructure is more developed in Western markets, the growth rate for group buying in Asia is much higher because of Asians’ receptiveness to deals.

“Every country and market has a different mentality, even within the Southeast Asian markets. In some countries, people do not view discounts positively,” Croeni says.

Will group-buying websites stand the test of time? Croeni believes it will be an enduring trend in Malaysia as the group-buying industry is still at a nascent stage with plenty of room to grow. “The group-buying model will evolve as the market develops. We can increase the number of categories and introduce new price points or varying time limits,” he says.

The group-buying industry in Malaysia is contingent upon the development of B2C online payment gateways and the stigma of e-commerce. “With issues such as online scams, phishing and fraud in the past, we need a technology roadmap for better payment systems,” Neoh says. He adds that the group-buying model may evolve over time to offer personalised deals or form a consumer community.

The low barrier to entry into the market means that Groupon and Mydeal.com.my will not be short of competition.

However, only a few players are expected to outlast the pack because it takes volume, good quality control and profitability to survive in the long term, says Neoh.

“Many who entered the market were able to draw customers with heavy discounts but left as quickly as they came because they did not ensure good quality service for both merchant and customer,” Croeni says, adding that Mydeal.com.my “is focused on building a sustainable company in a fast-moving business where a day feels like a month and a month feels like a year”.

Competition is good for the industry because it ensures that discounts have a quality standard, says Croeni. Neoh agrees, adding that Groupon is more concerned with growing the overall e-commerce market than it is about being the jaguh kampung.

“Our goal is to open up the e-commerce market, as AirAsia did when it began selling flight tickets online,” he says.

Since Groupsmore’s acquisition, Neoh says Groupon Malaysia has been increasing its headcount and will continue to do so over the next six months as it expands its business. “We’re doing consumer research before we start expanding to Penang and Johor Baru, as well as sub-segments — townships and cities instead of states. We hope to be in 10 cities and have 300,000 subscribers by year-end.”

“We used to have a poverty mindset of an entrepreneur, but now we have to be more aggressive [in our expansion]” he says.

This article appeared in Management@work, the monthly management pullout of The Edge Malaysia, Issue 848, Mar 7-13, 2011