Sunday, May 22, 2011

Customer Loyalty and Groupon: Different Results in Latin America?

Some of you have commented on my lack of recent posts. Yes, it's been busy--one "excuse" is that I'm in school. Below is a paper I wrote for my Topics in International Marketing class, which relates to LatAm marketing and customer loyalty.

One of the fastest-growing online marketing tactics over the last three years is often termed “social couponing” or “group sales” sites. The leader of this trend, not just here in the U.S. but globally, is Groupon.

Like other social couponing sites, Groupon operates by attracting customer subscriptions and site traffic, where consumers have access to deals from local merchants. When a minimum number of consumers subscribes to the offer, the deal becomes active, giving them access to deep discounts on products and services. Groupon takes a 50 percent cut of the advertised price.

Not even three years old and claiming 40 million subscribers, this Chicago-based company declined a $6 billion acquisition offer from Google last December (Quinton, 2011). It has expanded into many markets—Canada, Europe, Australia, Asia and Latin America—by acquiring similar deal providers. Nearly a year ago, the company acquired ClanDescuento, which provided offers in Chile, Peru, Argentina, Colombia and Mexico. Groupon researches the local markets in which it operates to identify successful businesses, after which sales personnel approach those businesses and offer a partnership (neXtupResearch/Global Silicon Valley Partners, 2011). The mom-and-pop businesses thrive across Latin America, and local operations can be key to forging relationships with those businesses (Guimarães & Neves, 2010).

In an August 2010 press release, Groupon President and COO Rob Solomon explained, “We are especially interested in catering to the unique cultures and interests of each market and that’s why they are managed by local teams in different markets.” (WiredLatinos, 2010) Groupon currently operates in several Latin American markets: Mexico, Brazil, Argentina, Chile, Colombia and Peru. Last year several other group sales sites launched in Latin America, including,, and in Mexico, in Panama, Colombia and Argentina, and in Colombia (WiredLatinos, 2010). Sites targeting Latino consumers within the U.S. include Papá and

When the founders of some of the above-named group sales sites operating in Latin America speak about the opportunities they cite that, between Mexico, Argentina, Brazil, Colombia, Chile, Peru, Uruguay, Puerto Rico and the Dominican Republic, there are 166 million online users—an average penetration of 37 percent—and advertisers are not missing out on this market but are instead investing heavily. The figure for general online advertising in 2009 was $880 million (WiredLatinos, 2010). No figures were available to show online couponing growth specifically in Latin America.

There are several significant barriers in Latin American markets, such as online access, credit card use and general economics. Groupon is approaching the credit payment obstacle head-on, by partnering with trusted local business to offer payment alternatives. Executives from Groupon and other sites see online couponing as a new culture their consumers are learning. Internet penetration and ecommerce are still in early growth stage throughout most of Latin America, and the online buying culture we have developed in the U.S. is just emerging there (WiredLatinos, 2010). At OferCity, teams intend to educate small business operators in Mexico that social ecommerce is effective and that it represents an investment and a real opportunity, versus an expense.

Despite the cultural and other barriers present, the appeal of discounts on luxury and other products and services appears to have a universal appeal, as shown by the onslaught of Groupon and similar group sales sites and further illustrated with Groupon’s recent $15 billion valuation (Quinton, 2011). The appeal also exists initially for small business owners, who appreciate the zero upfront investment required for their partnership with Groupon.

The not-so-mentioned phenomenon is the actual experience from the small business perspective. In the U.S., small business owners warn each other about the related threats that can cost them their business. Most significant are the cases of businesses that, through Groupon offers that weren’t smartly capped, have overpromised and underdelivered, or the unfortunate trend of investing in one-time customers who are price-sensitive deal hunters and often prove high maintenance. These circumstances have often resulted in net loss, not profit. There is also the concern of a brand losing perceived quality by undercutting its prices.

Savvy small business owners are indeed wary of these threats, as found in a Rice University study in September 2010. Researchers interviewed 150 merchants who had partners with Groupon on deals. Of those, 32 percent said that the outcome was not profitable (some even suffering losses) and 40 percent said that they would not run another promotion with Groupon (neXtupResearch/Global Silicon Valley Partners, 2011).

I sought to learn whether Latin American consumers would behave differently than subscribers here, or if they would also shop the best deals no matter the advertiser. U.S. Latino consumers are known to index as more brand-loyal than consumers from market at large; therefore the Groupon experience in Argentina and elsewhere in Latin America might have more positive results for both consumer and merchant.

A 2003 Cultural Access Group study showed that the most unacculturated U.S. Latinos—typically those who have been in the country the least amount of time—behave with the greatest brand loyalty. This same group also demonstrated greater brand affinity in product categories that have prestige or high price points, or those they see as more serious or important; think automotive, electronics or OTC medications versus laundry detergent or sour cream (Ashton & Valdovinos, 2005, pp. 21-22). A Global Insight study also found Hispanic consumers to be very loyal buyers. In that study and from 1998 to 2000, Latinos ranked number one in brand loyalty among ethnic and cultural groups. In the automotive category for example, U.S. Latinos proved to be twice as likely to buy the same brand of vehicle for their next purchase as the average consumer, and they displayed the second-highest percentage of dealer loyalty (Cartagena, 2005). From these studies and for the purpose of this research we could surmise that Latin American consumers are a generally brand-loyal group in their homelands.

Though they index higher on brand loyalty than the average consumer, Latinos are also known value shoppers who desire to find quality while remaining a price-conscious consumer group. Both in the U.S. and throughout Latin America, the matriarch is the traditional decision maker for everyday purchases. In an online survey of Spanish-speaking female consumers in the U.S., conducted by Todobebé in April 2010, coupons and other offers from retailers were by far the most important motivators; online advertising and information were also deemed valuable (Tornoe, 2010). However, couponing to U.S. Latinos has not traditionally brought impressive results; marketers maintain that printing coupons in-language isn’t the whole story. Those advertisers many times promote brands/products that are irrelevant, do not offer price reductions that impress Hispanic consumers, require multiple-item purchases for discount or limit to a quick-turn expiration (Grant, 2006). By localizing operations in the markets Groupon serves, it can bypass some of the mistakes made in the U.S. by less-savvy marketers. Results from a study conducted by direct media company ADVO (since acquired by Vallasis) show that 74 percent of Spanish-dominant Hispanics say they use coupons and would use them more frequently if they received more (Lipton, 2007).

Latinos in their homelands, much like those who have recently arrived to the U.S., are relatively new to direct marketing practices and therefore more receptive to all forms of direct marketing, including direct mail and, in the case of online consumers, email marketing. In the ADVO study of U.S. Latinos, 40 percent reported receiving just 10 pieces of direct mail a year, and 39 percent said they want to receive more (Lipton, 2007). It’s not just talk; this group brings higher response rates than the general market, no matter the medium (Cartagena, 2005). This would bring me to conclude that offers such as those of Groupon would be of interest to consumers in Latin America who otherwise enjoy deals though may not be accustomed to receiving coupons.

Unfortunately, my plan to discover the outcome as it relates to customer loyalty was thwarted by a lack of available research and other documentation specific to current consumer behaviors in Latin America. I will instead offer a hypothesis based on the information I have culled from the research I was able to access.

I learned that some would believe that the type of consumer that subscribes to Groupon is simply not a brand shopper. For example, blogger Barry Hurd considers the Groupon business model parallel to that of Walmart—neither acts in favor of the brands they market, but instead they both drive local shoppers to find the best deals. People shop at Walmart not for the brands, but for the value (Hurd, 2011). These are Groupon shoppers. So whether in the U.S. or in Latin America or elsewhere, merchants not competing on an “Everyday Low Price” model need to differentiate themselves otherwise—and command a price that reflects their unique value proposition. If we agree with Hurd’s concept, brands that align themselves with Groupon are eventually going to be seen as the types of brands you would find on Walmart’s shelves. Because of the inherently viral sharing of coupons, Groupon may go further than simply demoting a brand’s uniqueness, even putting that brand out of business. Hurd wrote, “The ratio of consumer savings versus business profit can kill small business.” Simply put, small businesses by their nature aren’t equipped to deal with the scale viral coupons can achieve and the spikes in traffic they bring.

To be clear, this doesn’t signify that consumers won’t keep going after Groupon-type deals worldwide. There will always be bargain shoppers, eager to boast their big savings and indulge in services which they may not otherwise. In Latin America, which is about 18 months behind the U.S. in social couponing, the Groupon customer base will likely experience a slower pattern of adoption based on online usage, economics and other barriers, yet I project the region will see explosive growth similar to what we have witnessed stateside. Why? Consumers see it as a win-win.

However, this research is not focused on the customer perspective but whether that Latin American Groupon customer responds with loyalty. Groupon as it operates today doesn’t encourage the repeat business mom-and-pop shops require for sustainable success. Groupon customers base their decisions of where to shop and what to buy on the offer of the day, but authentic loyalty cannot be bought. That loyalty is earned through memorable customer experiences, at retail and with the product, and high perceived value.

For this topic to be aptly studied, primary research needs to be conducted and made accessible. For the purpose of this paper, I would like to advance my hypothesis that shoppers in Latin America, as here in the U.S., can be divided into two classes—the brand-loyal and the deal-hunter. Consumers who are brand-loyal and contribute to that sustainability small business requires are not likely to convert into Groupon customers, nor are deal-hunters likely to settle on a brand at full price while alternatives exist.


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