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Groupon sticks to its winning ways

We are the only deal site now that is profitable globally: Ankur Warikoo, Groupon India CEO

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Not so long ago, the online ‘deals’ industry, estimated at Rs 1,000 crore, was touted as one of the more successful and exciting plays around.

Today, the landscape is dramatically different. In the last few months, at least three internet deal sites —, and —have gone up in smoke after consuming significant amounts of venture capital investment. The number of serious deal sites in India has dwindled to just about four or five, from around 40 in 2010. In another sign of the times, industry leader Snapdeal has decided to alter its format after finding its earlier model unsustainable.“Back in 2010, it was cool to run deal sites, but now the format isn’t so cool anymore,” says , founder and CEO of Mydala, a Groupon-like deal site launched in 2009.

<a class=Ankur Warikoo" title="Ankur Warikoo" class="" />Instead, Groupon, which has entered India under the name ‘Crazeal’ (for crazy deal) since its original name had already been snapped up by someone else, is chugging along at what the company says is a 30 per cent growth rate per month since November 2011—a stark contrast with the fortunes of most other deal sites. “I don’t want to sound pompous, but we made profits when nobody expected us to,” says Groupon India CEO Ankur Warikoo. “We are the only deal site now that is profitable globally,” he adds, referring to the Groupon group.

That may be so, but the company is not without its controversies. In the US, it was under flak for using a non-standard accounting metric called Adjusted Consolidated Segment Operating Income, which critics say, was a misleading indicator of profitability. Groupon's original IPO filing with ACSOI accounting showed a positive operating income of $60.6 million for 2010; after substituting the ACSOI metric with standard accounting ones, Groupon's IPO filing reported an operating loss of $420 million for 2010.

Warikoo, however, shrugs off the criticism as something that every successful company must face. “When the iPhone was launched, there were critics. But it did not stop people from buying it,” he says “I wont say we are perfect. We have made a lot of mistakes but we have rectified them," adds Warikoo.

What can account for Groupon’s self-proclaimed success in India while the others have either struggled or shut shop completely? A lot has to do with its decision to stick closely to its original business model. Like its parent in the US, the India arm is a deal-of-the-day website that features discounted gift certificates. This is how it works: The site features one deal a day in each of the market it serves. For instance, it could be a 10-minute helicopter ride over the city of Bangalore for Rs 2,399. Although in the global Groupon site a minimum number of users must sign up for a deal to go live, Groupon India has done away with that requirement. So, as soon as a deal is featured on the Groupon India (Crazeal) site, it goes live. In the US, when the pre-determined minimum user number is not met, nobody gets the deal that day.

Meanwhile Snapdeal, the leading deal site till recently, decided to customize the Groupon model. For one, it did not ask for a minimum number of buyers for the deal to go live, quite like Crazeal. But around six to seven months ago, Snapdeal migrated from a services format to a combination of services as well as products, vice-president of marketing, Sandeep Komarvelly, says. However, “we haven’t shut out deals on our site,” says Komarvelly.

Products now account for 80 per cent of Snapdeal’s revenue against 20 per cent from services deals (like on movies or spa treatments). In fact, Snapdeal is more aligned to the model followed by Flipkart, the poster boy of online retail. At around Rs 500 crore revenue, Snapdeal is chasing the $1-billion (Rs 5,500 crore) target by 2015, very similar to Flipkart’s publicly announced aspirations.

There are several reasons why deal sites are transforming themselves into regular e-tailing sites. “Deals may not really be loyalty drivers for retailers or e-tailers,” according to , principal consultant, retail, . “Indians are deal seekers but a retailer offering a deal can end up with only bargain-hungry consumers who use the coupon and never return,” explains Singh.

Yet, Warikoo says that 45 per cent of Groupon customers in bargain-crazy India come back to purchase a voucher within 30 days. “These numbers are unheard of in not just deal sites, but e-commerce. Repeat purchase is what everyone is looking for. Usually, the customer just goes away.”

Warikoo thinks that deal sites in India have been unsuccessful because their whole approach is flawed. “We are a marketing platform and not an online discount store,” says Warikoo, and that, he says, is the difference between a successful deal site and one that has gone out of business.

While Groupon was seeking customer loyalty, other deal sites remained focused on increasing the transaction volumes. “We told the customer, you make the payment to the merchant. Others were taking part-payment themselves—which distorted their image,” says Warikoo. “In our case, we are getting loyal customers. Others seemed to suggest: ‘tomorrow you can shift to another if you get a better deal,’” he adds. In essence, other deal sites ended up turning merchants against each other and offered multiple deals with hardly any differentiator, says the Groupon CEO.

Still, Groupon says it tends to be selective on the merchant front. “We may sound snobbish but we don’t talk to every merchant. In a month we would work with 150 to 250 merchants,” says Warikoo. “And many of our merchants are repeat merchants. On an average, we get about 35 merchant requests every day from across the country. We select one to two,” he adds.

Groupon’s strength is its ability to work closely with its merchants to market their products. For example, when hotels have unsold excess inventory, Groupon creates a structure for them. “Our sales guys are called marketing consultants. We are consulting the merchant for what is best for the customer,” says Warikoo.

Essentially, the discount is possible as the merchant is saving on the marketing expenditure that he or she would otherwise have to bear. “At the end of the day, it’s a marketing opportunity for the merchant. We are not creating a discount store, we are not giving a 40 per cent discount to everyone who’s walking in 365 days,” says Warikoo. The company has worked with 2,500 merchants so far and splits its fees with them by as much as fifty per cent. Warikoo suggests that if you get top quality merchants, customers will follow.

And they have, he says, in droves, the most loyal ones being women. In the US, which is the biggest market for the group, this cohort constitutes 70 per cent of the total customer base, versus 30 per cent in India, who buy when they like something. Not surprisingly, wellness and spa top the list of most-sold categories in the US, whereas in India, it is the food and beverages section that’s the biggest hit. The latter contributes 30 per cent to the company’s total Indian revenue.

Business, Groupon says, has been good. Its margins are twice the industry average, proof, it says, that its methodology works and is sustainable. But its anybody’s guess if the company has a winning formula for the long haul. As Pragya Singh of Technopak points out, while deals can be a “loss leader”, they are difficult to sustain a business. “And given that most deal sites are now offering regular products, too, this is an indicator of the investor push towards this direction.” Groupon, however, wants to be in a league of its own.

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