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Wednesday, January 19, 2011 4:33 AM

Groupon's Marketing Disaster in Japan

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In a nice break from news about the Euro, China, or pensions, Mike "In Toyko" Rogers sent me an interesting email the other day regarding huge mistakes Groupon made in Japan.

Take a look at the New Year's dinner Groupon advertised, vs. what was delivered.

New Year's Dinner as Advertised

New Year's Dinner as Delivered

Those images are from Mike's article Groupon CEO Insults Japan With Simple Minded Apology

Over the New Year's holidays, Groupon Japan sold traditional New Year's dishes to the Japanese. It didn't go well. In fact it went so badly that dozens upon dozens of people complained about fraud and then the Japanese government actually stepped in and is currently investigating the situation. So, I guess I should say it was a disaster.

This has been very damaging to Groupon's reputation in this country. I think the Japanese are not forgiving when it come to this sort of fraud - especially when it deals with food.
Learning the Ropes

The Wall Street Journal commented on the marketing disaster in Groupon Learns Japan Ropes
Doing business in Japan can be a, well, tricky business. Just ask Andrew Mason, CEO of exponentially expanding online discount specialist Groupon, who ended up posting a personal apology video to customers here on YouTube (in English, with Japanese subtitles) after a flub in orders for Japan’s prized traditional new year’s meal.

“We featured a deal in Tokyo recently that we really messed up,” said Mr. Mason, who goes on to explain how the overflow of orders hamstrung the restaurant that offered the initial deal to successfully fill the orders, “delivering the food late to many of our customers and in terrible condition to others…So what I really want to say is how terribly sorry I am and everyone at Groupon is. We know how important the New Year’s holiday is in Japan.”
Groupon's Apology

Mike Rogers was more than upset, citing among other things

  • "The problem was not only late deliveries and damaged product, the biggest complaint was people getting a product that doesn't look anything like advertised."

  • "If you do not understand Japanese culture and common business practices and norms in Japan, you shouldn't be doing business here."

Mike asked me what I thought about this, and I approached it from a different angle....

What's Groupon Worth?

In December, Google offered Groupon $4 billion, then upped it to $6 billion when Groupon balked. Groupon walked away from $6 billion as well.

I cannot conceive of rolling the dice on a $6 billion offer.

Look at Groupon’s Model. They tell clients that if they make money, their offer is priced too high. That's does wonders for Groupon's phenomenal margins, but how much repeat business will there be and for how long is the model sustainable?

Let’s sidetrack for a moment. Look at the offer Microsoft made for Yahoo, $32 a share. Yahoo turned it down. Yahoo’s share price is now $16.50.

Look at MySpace. It collapsed under the rising star of Facebook.

Might not Groupon do the same? My point is ‘Things Happen’.

Marketing wars in this space will become immense. With competition comes decreased margins. I guarantee it.

Look at the disaster in Japan. Those restaurants advertising the New Year’s deal wanted to make a profit but couldn’t, at least based on the images shown. So they offered something they could make a profit on, and look how it turned out. Customers are furious and Groupon did not even understand Japanese culture to know how to respond.

On a basic level, ignoring the disaster in Japan, Groupon is not doing its clients any favors if it bankrupts them in the process. Deals need to be win-win or clients will eventually tell Groupon to go to hell.

In the US, we see pictures of the classic sub sandwich or something like this.

What businesses can afford to offer 90% off and survive? Is that what happened in Japan?

As with all social trends, people (and businesses) will try the latest and greatest thing. However, struggling businesses won’t be social butterflies forever.

What happens after a majority of businesses lose money on it? What happens if competition offers better deals? How quickly might better offers catch on via Facebook or Twitter?

Those are significant risks to Groupon.

Bear in mind, I do like Groupon’s model. However, those margins are not sustainable. Of course Groupon can lower its margins, but then what is it worth? The answer is nowhere near as much, yet far more than if it suffers more disasters like we saw in Japan.

For that reason, I thought Google offered way too much. Yet Groupon turned it down.

Why Groupon Said No To Google's $6 Billion

The Business Insider discusses Why Groupon Said No To Google's $6 Billion
Each and every Groupon board member stood to gain millions, hundreds of millions, or even more than a billion dollars by accepting Google's $6 billion offer to acquire the company.

Groupon cofounders Brad Keywell and Eric Lefkofsky might have made as much as $600 million and $1.8 billion, respectively.

So how in a sane world could these people have told Google no?

How do you turn down hundreds of millions of dollars in personal wealth?

a source close to Groupon board members tells us that anti-trust concerns ultimately forced Groupon to turn down Google's $6 billion offer.

This source says the view on Groupon's board was that a Google-Groupon merger would draw more regulatory scrutiny than any other deal Google has ever done.

Because of this view – that Google-Groupon might not be allowed to go through and that it would take months and months to find out the bad news – board members decided they would need a significant break-up fee if they were to accept Google's offer.

How significant?

We don't know the number, but our source says the board wanted a break-up fee akin to the one Google gave DoubleClick.

Whatever the number Groupon's board wanted, Google balked.

The reason you've seen so many different numbers for Groupon's revenue run-rate in the press – $500 million, $800 million, $1 billion, and $2 billion – is that it keeps inflating at a non-linear rate.

A source close the company tells us Groupon added 4 million email subscribers in the last week. Groupon has 40 million subscribers total – up from 1.5 million this time last year and 400,000 the year before that.

Groupon employed 124 people in December 2009. In November 2010, it hired 190 in Chicago alone, raising its worldwide headcount to 3,100.

"Groupon is a spectacular company," says this source, echoing the board's sentiment.

"It's literally defining a new form of interaction with the Internet. It has created perhaps the greatest form of advertising ever conceived. It is perfect."
The Perfect Company?!

I think Groupon is perfect in the same sense Yahoo was perfect before Google came along, MySpace was perfect before Facebook came along, Netscape was perfect before Microsoft embedded free browsers, and dare I say it ... Google directly attacks Groupon's model with a competing product.

Had Groupon accepted the offer, I doubt Google would have let Groupon make rookie mistakes like it did in Japan, or if it did, there would have been a bigger, more sincere apology must faster.

I also think Google would be smart enough not to run its clients into the ground.

I cannot comment on the antitrust aspect except to say it seems to be a poor reason to turn down $6 billion. After all, if "Groupon is Perfect", it would no doubt still be perfect if the deal fell through.

Time will tell just how perfect Groupon is.


I struck the word "Eve" from the above post in several places. Mike Rogers informs me that in Japan, the New Year is a three day religious celebration, quite different than the big night before New Year's Eve celebration in the US.

For an update from Mike, please see Groupon CEO Insults Japanese People With His Callous Apology - Pt. 2

Mike "Mish" Shedlock
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