Inside Groupon South Africa

By: Mandy J Watson
Posted: 21 September 2012
Category: Features Comments View Comments


Groupon South Africa recently moved into new premises in Cape Town. Take a peek "behind the green curtain" to find out more about the company and its operations in South Africa.

Earlier this week I was invited on a media tour of Groupon South Africa's new offices in Newspaper House on St George's Mall in Cape Town. We were given an overview of the local company's history; the brand's operations and services; the global brand's achievements and the expansions of its product offerings and services; a tour of the local office and some of its operational units; and insight into what's coming next.

Inside Groupon South AfricaDaniel Gausco and Wayne Gosling, the joint CEOs of Groupon South Africa, met in 2008. Daniel Gausco has a background in startups and Wayne Gosling has a background in consulting and although neither can "write a word of code" they started looking for business opportunities in the tech space. Buoyed by the entrepreneurial spirit they witnessed at the launch of the Silicon Cape Initiative in 2009 and having investigated the market overseas, they decided to start a web-based group-buying operation as the space was still very much up for grabs in South Africa.

Launching initially as Twangoo, they worked with a developer in France who had a coding team in Moscow ("it was a truly international operation") and in June 2010 the site went live. At that time there were numerous competing operations in South Africa all fighting for partners that could offer discounted products or services and consumers who would be willing to take part in those deals. This resulted in quite a confusing marketplace for consumers faced with an overabundance of deals sites, many partnered with or subsidiaries of recognisable local brands, vying for their attention. However Twangoo managed to establish itself and Daniel Gausco, who was tasked with finding a buyer for the startup, began to target Groupon aggressively as it had launched in Chicago in 2008 and was fast becoming the dominant global player. After four months of negotiation a deal was reached and it was announced in January 2011 that Groupon had bought Twangoo for an undisclosed amount, with Daniel Gausco and Wayne Gosling staying on as joint CEOs. At the time the local company was still running out of a small office in Woodstock and had five employees.

The Business
Groupon acts as a middle man between a partner, which offers a product or a service at a discount to entice customers, and a consumer, who buys that product or service. It provides the platform to offer the deal, as well as much of the behind-the-scenes fulfilment processes. It generates income by taking a portion of what the partner makes, which varies depending on the type of offer and the volume.

Consumers benefit by getting a great deal on an offering that may otherwise be viewed as too expensive or by trying something new (a restaurant, say, or an outdoors adventure) without the risk of paying a fortune only to discover the experience isn't for them.

Partners benefit by gaining increased exposure - deals are advertised on the Groupon web site and pushed in email newsletters, and, depending on the deal, Groupon's social-media platforms, such as Facebook and Twitter, are sometimes rebranded with the partner's branding if the deal is particularly interesting or attractive. Partners can monitor their campaigns in real time to see heat maps of uptakes and get an idea of the campaign's reach and success, which provides useful analytics for future offerings as well as future business plans. Additionally, there is no upfront cost involved in setting up a deal - Groupon only takes a percentage once the deal has concluded - so there's no risk of spending a huge amount of money on a marketing effort that could fail.

If used effectively Groupon can be a great marketing tool for a small business as, through exposure, a deal can kick-start a business that's otherwise lost in noise and unable to find customers. The business also doesn't need to have a web site or social-media presence as it gains exposure through Groupon's social-media platforms, which have a much wider reach. Once the deal is concluded it's then up to the partner to work to retain those new customers, by offering an experience that results in repeat business and word-of-mouth exposure, and to upsell products and service to generate additional income.

However, that's not to say that large businesses can't benefit either. One of Groupon South Africa's most successful campaigns was in collaboration with cinema chain Ster-Kinekor. The deal, offering movie tickets at R15 [?], went live one day at midnight and by 10:30 that same day 30 000 tickets had been sold (that's R450 000 [?] generated in 10-and-a-half hours). While this ticket price may have been a loss leader for Ster-Kinekor (though I doubt it, since it would be filling seats that are usually empty), the company would have more than made up for it with the exorbitant prices it charges for snacks, drinks, and popcorn.

Where there is risk, however, for small and large businesses alike, is in the percentage of customers who may be one-time bargain hunters that cannot be converted to long-term customers. There is also the issue of capacity management (the UK cupcake disaster from last year springs to mind), which I discuss later in the article.

Inside Groupon South Africa

Groupon South Africa
The company has grown quickly and now has about 160 employees. Its operations are headquartered at its new, larger premises at Newspaper House in Cape Town, although there are smaller operations elsewhere in the country. Whether or not it is profitable at this stage is up for debate - when asked, Daniel Gausco talked around the issue and wouldn't give an answer. Similarly, when asked about the percentage the company takes from a deal and how many deals it would have to run in a month to be profitable, he dodged the questions and gave vague answers so, it seems, time will tell, though I found his lack of openness disconcerting.

(For wider context, CNN noted last year that the company had never turned a profit and had actually incurred a US$420 million [?] operating loss for 2010. The Wall Street Journal reported at the end of last year that the international company's growth was slowing. Since then it's been noted that the company's growth has been unstable, with the share price dropping heavily since the initial public offering last year of US$20 [?].)

From an operational perspective, Groupon South Africa has various units that oversee different business processes and we saw some of them in action during the media tour. One of the most important is the sales team, which negotiates deals with partners and sets things in motion. We passed a group of new sales people being trained and were told that they participate in an induction course that runs for three weeks.

The Q&A department checks the quality of the offers (which can include physically examining products intended to be offered) to ensure that customers will receive a product or take advantage of a service that is of a high standard as problems can, of course, damage Groupon's reputation.

The partner-admin department educates partners in the process.

The customer-service team, which is a large group of people that we observed working in a glass-enclosed section of the office, deal with queries and complaints received from customers via email, phone, and social media.

The data centre is housed in Germany - this is true of all the Groupon subsiduaries worldwide - and, I was told, Groupon South Africa has limited access to the data so a local employee can't access much of the private information associated with a customer. Having said this, however, earlier this year, internationally, a flaw was discovered in how email links are encrypted, which exposed the email addresses of a handful of international users. This flaw seems to have been fixed but the fact that it ever existed is worrying.

The logistics of product fulfilment are handled locally. This has been one of the learning curves that Groupon South Africa has had to deal with. Previously problems have arisen with stock that exists when the deal is made with the partner (Groupon checks this) and then when the deal goes live suddenly there is no more stock left (result: angry customers who need to be refunded). Groupon South Africa now takes control of the stock beforehand and uses two courier companies to send it out from its depot once the deal concludes (the volume being so excessive that there isn't one local courier company that can handle all of it). This ensures that only products that actually exist will be sold and deal caps are set in place to prevent oversubscription of an offer.

Capacity management was talked about a lot and it seems that this is something that the company is really focussing on, and is an area in which it has learnt much in the past year. My only previous experience with Groupon was a purchase a group of us from made about a year ago, which resulted in a capacity-management issue as the offer was hopelessly oversubscribed, which seemed quite obvious to all of us but not to Groupon or the partner involved. Subsequently there was some scrambling on Groupon's side to try to remedy the situation for those who still wanted to take advantage of the offer (refunds were also offered but we weren't interested in going through the whole process simply to end up where we started so we decided to go through with it). We haven't yet written about that adventure experience - we continue to debate whether or not it was worth covering for the site - but all six of us came away feeling completely dissatisfied with what we ultimately got and I personally vowed never to use Groupon again, which is an excellent example of how things can go wrong if the partner process isn't managed effectively.

Encouragingly, throughout the media visit Daniel Gausco spoke a lot about how the company has been learning and continues to become wiser and more effective. Other challenges Group South Africa has faced have included problems with the banks, in that the company might issue a refund to a customer but a bank doesn't put the money back into the account, and delays encountered due to EFT payments, which have a seven-day grace period to give customers a chance to make the payment and for it to reflect on Groupon's side. Customers have also committed fraud by, for example, complaining that a product is unsatisfactory, getting a refund, and not returning a product so now the standard practice is to ensure that the customer first returns the product so that it can be examined by Groupon before the refund is issued.

Inside Groupon South Africa

A Quick Tour Of Other Services And New Offerings
Locally travel offerings have been doing well and Wouter Nel, who is in charge of the travel division, is overseeing expansion in this area: a new platform, Groupon Getaways, is expected to launch soon in South Africa. Seventy per cent of the travel offerings so far have intentionally been local (a maximum of two hours' drive from a main centre to allow for an accessible, quick getaway) but international locations are also offered, often at very attractive discounts. The travel deals run for longer than a normal Groupon deal and the travel section sends two newsletters a week that go out on a Thursday and a Saturday in order to give couples time to discuss a deal on the weekend. The result is that uptake is especially prominent on Mondays.

Inside Groupon South AfricaA mobile app is available for iOS, Android, BlackBerry OS, and Windows Phone, along with a mobile web site, that enables customers to browse, purchase, and redeem offers via phone. Internationally it also provides the facility for location-based deals to be offered, based on parameters set by the user. This functionality has been available in the US for about a year and has just rolled out in Europe. Groupon South Africa is hoping to see it here within a few months.

Groupon Shop has been rolled out in various locations internationally (in some areas it's known as Groupon Goods) and experts from Europe were brought in to consult with Groupon South Africa, which is preparing for a rollout of this service in time for this year's Christmas shopping season. Groupon Shop is a more traditional e-commerce platform that allows shoppers to browse for goods and services that are offered with a modest discount by Groupon's partners, with the fulfilment process then handled by Groupon South Africa. Deals will be offered both with a "push" factor (sent via email to a customer's inbox) and a "pull" factor at play. (A "pull" factor would be changing a person's mindset so that s/he opts to visit the site to look for a specific kind of product, such as a set of speakers or a yoga mat, rather than get in the car and visit a local bricks-and-mortar store). Internationally this initiative has helped to boost Groupon's earnings so it will be interesting to see how it fares locally as it's entering a sector that could possibly be oversubscribed, with, Loot, WantItAll, and all prominent, trusted brands that share the market.

Groupon South Africa tries to run at least one corporate-social-investment offering a month, called Groupon Grassroots, in which it doesn't charge a percentage once the deal is concluded and all proceeds go to the charity running the deal (sample deal here; a local example we were shown during the presentation was a R15 [?] donation to a rhino charity that tags and monitors rhinos). A similar initiative runs in other countries. Groupon South Africa researches potential local charities very carefully to ensure that they are legitimate enterprises that are doing the work that they claim to do and the purpose is to get customers to engage with charities by spending a modest amount that collectively can make a huge difference for that charity's operations. On a marketing side it's also a good way for local corporates with social projects to engage with South African consumers and gain some positive brand recognition in the process.

Final Thoughts
Groupon South Africa has grown rapidly, which means employment for South Africans (directly and at the courier companies). The local operation also seems to have learnt from past mistakes, as well as mistakes that the international operation has made in other territories, and has put measures in place to mitigate similar problems happening again. Whether or not the company is financially sound and can sustain itself in the long term remains to be seen. If it can, this will be another local tech startup success story and a boost for the SiliconCape Initiative.

Tags: #technology

On The Internet
Groupon South Africa: Official Site | Official Blog | Facebook | Twitter

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