Group-buying companies find trust is not for sale

Honesty is the most precious commodity as customers seek a better deal, reports He Na in Beijing.

Beijing-based Gaopeng.com, a group-buying portal set up on March 1, was going strong until a "lucky draw" saw it become mired in allegations of fraud that damaged the company's reputation and tarnished the booming industry.

The company is owned by US-based Groupon.com and China's Tencent.

Gaopeng organized an online "lucky draw" on May 4, with two popular iPhone 4s to be given as prizes on May 10. Word of the promotion flashed online and more than 110,000 netizens forwarded the news via micro blogs.

The winners were to be selected at random. However, when their names were announced on Tuesday, sharp-eyed netizens recognized that the winners were Gaopeng employees (their e-mail addresses gave them away).

The website denied the fraud at first, but admitted it on Wednesday and apologized. Gaopeng fired the vice-president who was in charge of the promotion and said that to make amends it would give away 20 iPhone 4s.

But by then, the damage had been done.

"I do not want to comment on our peers, but I have to say that credibility is the lifeblood of this new, burgeoning industry," said Lin Ning, CEO of group-buying website Ftuan.com. "Though a low price is most appealing to consumers, it is still high credibility that injects life into the company."

"I am a fan of Gaopeng, and I used Gaopeng group buying for almost everything I bought during the past two months," said Zhang Yingying, 30, who works for an education service company in Beijing. "The lottery fraud really hurt my feelings. I think I may say goodbye to group buying for a while."

How it works

Copying Groupon, thousands of domestic group-buying websites are offering daily deals on a variety of items, ranging from meals and clothes to sauna baths and yoga classes. These websites negotiate huge discounts - usually 50-90 percent off - with popular businesses.

A consumer can buy goods directly online at the price the websites offered. For items or services that would be used offline, a coupon is sent to the consumer's mobile phone and is shown to the business when it is used.

For example, Lashou.com offered 69 items for group buying on Sunday. Among them was a swimming ticket costing 19 yuan ($3), less than half the original price. A buyer receives a message from Lashou that states the seller's name, ticket price, valid period for use of the coupon, and the swimming pool's address and contact information.

The group-buying model is gaining in popularity among young Chinese. The first domestic website was started in January 2010; there are now 4,015, according to a survey released by Tuan800, a navigating site of group-buying websites. The company said 732 new sites were registered in March.

The range of offerings has expanded greatly as well, from just home decorating goods such as furniture and small appliances at the beginning. Now consumers can get group-buying discounts on food, clothing and restaurants, on barbers and entertainment.

Group-buying consumers numbered 18.75 million in March, accounting for 4.1 percent of China's 457 million Internet users, based on a recent report by the China Internet Network Information Center.

Risks of being new

Such speedy growth comes with pitfalls, and Gaopeng is not the only company to stumble, said Zhou Qingshan, deputy director of the information management department at Peking University. "Without exception, all the group-buying websites boast about honesty and integrity, but there is often conflict in their actual operations."

Wang Peng, who works for a real estate company in Northeast China's Jilin province, had a common complaint. "I paid 88 yuan for a sausage group-purchase on 58.com, and after 10 days I got a call from a man who said he couldn't deliver the goods. I asked for the reason and the man hung up the phone and powered off. I called customer service and they said the seller would contact me next Monday, but no one called me about the sausage the whole following week."

"I joined group buying and bought a pair of shoes last month," said Zheng Lili, who often shops online. "The seller claimed that the shoes were made of genuine cow leather, but the pair I got was poor quality and was not cow leather at all."

China's 3.15 E-Commerce Credit Platform received more than 2,000 complaints about online shopping from August to December 2010, it said in a report. About 10 percent involved group buying.

Another report, by the Internet Society of China, said the country's group-buying industry achieved 63.3 out of 100 points on a credibility scale, scoring lower than average.

Those kinds of issues aren't unusual in a new, rapidly expanding industry, Zhou said. He described last year as the cradle age of the group-buying industry, and this year as its teenage period.

"The time has come for the industry to consolidate after over one year's rapid expansion," Zhou said. "However, China's e-commerce laws and regulations still lag behind the swift development of the Internet. The regulatory and legal system is not well established to adapt to the demand of the emerging group-buying market."