A scandle at Gaopeng.com, a group-buying website, has aroused debate on whether or how to regulate online markets. Provided to China Daily

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."

Some suggestions

"Seen as a business with great potential, it's inevitable that group-buying websites met with various kinds of problems," said Feng Xiaohai, CEO of the popular group-buying website Manzuo.com. Feng mentioned "vicious competition", expansion to new locations, recruiting people without a specific plan and "rampant poaching" of more capable employees from other companies.

The business model is easily copied, he said. Anyone can establish a group-buying website without demonstrating financial strength to carry out business properly or to guarantee its products and services.

"It would be helpful for the industry to introduce a credibility rating system, but the evaluation process must be fair and transparent," Ftuan's CEO Lin said. "It must be enforced by authoritative institutes, departments or staff."

"Raising the industry entry threshold and introducing a deposit for compensation costs are considered to be effective ways to regulate the industry and protect consumers' rights," Zhou said.

But three group-buying CEOs - Feng, Lin and Wu Bo, CEO of Lashou.com - are not sure how feasible such measures would be.

So much information is released online every day that it's hard for administrators to check whether it is true, Lin said. "I think self-discipline is a better way to regulate the industry since most of the large group-buying websites with strong financial support have hardly any financial conflict.

"We attach great importance to credibility and set out strict requirements in selecting cooperating traders. We even provide a refund service to consumers without adequate proof to minimize complaints."

Feng said, "I do not agree about raising the industry threshold, for it may hinder the enthusiasm of young people's enterprising spirit. After one year's development, it is the right time for the industry to be shuffled based on the laws of economics. Eventually, only a few websites with high credibility, the best service and strong financial support will survive."

One affects all

"I've had enough of big promises and little action by some group-buying websites," said Fang Detao, who ordered a coupon for dinner through a group-buying operation. "The portions of meat, fish and vegetables were all at least half of their usual quantity. The meal was not worth the money I paid, and it embarrassed me in front of my friends."

"Many consumers take group-buying websites as a whole body," Wu said, "so once they have been cheated or have had an unhappy experience, they will lose trust in all the group-buying websites." It is necessary, he said, to call for serious punishment of illegal acts.

"The essence of group-buying is to satisfy the marketing demands of local sellers and to provide goods and services with superior quality and attractive prices," Wu said. "I suggest that consumers choose big group-buying websites with high credibility and a sound refund system." Those attributes provide better recourse to consumers when conflicts develop, he said.

Looking ahead

"I have great confidence in China's group-buying industry," Ftuan.com's Lin said. "People's reliance on group-buying will become a must-do in their daily lives."

Survival in the rapidly expanding model relies on raising the quality of service, he said. "Meanwhile, don't always pattern yourself on others, but make something your own. We have a special staff to investigate the market so we can develop new service methods."

Lashou.com's Wu also is optimistic about the future of the group-buying industry. "We have 4,500 members on our work team, and our service has already extended to 150 first- and second-tier cities. We plan to continue our expansion and to hit 500 cities by the end of this year."

Manzuo.com's Feng said, "The war of low prices will finally corner all the players, so differentiated marketing is needed. So far, among all the group-buying items, food and beverages still account for a high proportion. But in the long run, Manzuo.com will introduce more items in the realm of culture, literature and art, like concert, opera and drama."