SLATE

The Washington Post Sunday - - BUSINESS - BY AN­NIE LOWREY Lowrey re­ports on eco­nom­ics and busi­ness for Slate.

Is this the start of a group-deal boom or a group-deal bub­ble? Do you find it hard to keep up with the group coupon of­fers pil­ing up each day in your e-mail? This could be just the be­gin­ning, An­nie Low­ery ex­plains.

In the past few years, more than 50 mil­lion Amer­i­cans have signed up for a “daily deal” or “group coupon” site. It works like this: You give the on­line com­pany your Zip code. Once a day, it sends you an e-mail with a deal from a lo­cal busi­ness, whether a sa­lon or a sushi joint. The dis­count is usu­ally steep — gen­er­ally, 50 to 90 per­cent — and the of­fer gen­er­ally ex­pires af­ter a day or two. If you de­cide you want that $100 mas­sage for $50, you pay up, then print your coupon.

The two dom­i­nant play­ers in the field are Liv­ingSo­cial and Groupon — and both are highly suc­cess­ful. Washington-based Liv­ingSo­cial has more than 16 mil­lion mem­bers, and Chicagob­ased Groupon more than 44 mil­lion. Plus, both pri­vate com­pa­nies have se­ri­ous fi­nan­cial back­ing: Liv­ingSo­cial has raised $175 mil­lion from Ama­zon, and Groupon turned down a $6 bil­lion buy­out of­fer from Google, in­stead rais­ing nearly $1 bil­lion from in­vestors. The com­pa­nies’’ suc­cess has in­evitably kicked up copy­cats: Groupon’s chief ex­ec­u­tive re­cently es­ti­mated that 500 im­i­ta­tors have popped up since the site got big. That raises a ques­tion: Is this the start of a group-deal boom or a group-deal bub­ble? Or is it some­thing else en­tirely?

To un­der­stand the phe­nom­e­non, let’s sur­vey the com­pet­i­tive land­scape. Liv­ingSo­cial and Groupon have at least a dozen di­rect com­peti­tors — big sites that serve a num­ber of neigh­bor­hoods or cities, all look­ing to get a piece of the $133 bil­lion that lo­cal busi­nesses spend each year on ad­ver­tis­ing. There is BuyWithMe, which serves 26 mar­kets with coupons of­fer­ing dis­counts of 50 to 90 per­cent. It is backed by ven­ture-cap­i­tal heav­ies Bain Cap­i­tal Ven­tures and Ma­trix Part­ners. Other big play­ers in the group-coupon field in­clude Town Hog (44 U.S. mar­kets, backed by hedge fund D.E. Shaw, among oth­ers), Ever save, KGB Deals and Mama­pe­dia’s Sweet Deals. (Liv­ingSo­cial’s chief ex­ec­u­tive is Tim O’Shaugh­nessy, who is The Washington Post Co. chair­man Don­ald Gra­ham’s son-in­law.)

But the run­ners-up to Liv­ingSo­cial and Groupon are dis­tant run­ners-up. Ac­cord­ing to De­cem­ber site-visit data com­piled by Ex­pe­rian Hit­wise, a re­search and anal­y­sis firm, the two biggest sites ac­count for 92 per­cent of the Web traf­fic in the “group buy­ing” sec­tor. The third-best-traf­ficked site, Mama­pe­dia’s Sweet Deals, clocks in at just 1.4 per­cent.

Be­yond the na­tional group­coupon sites, there are hun­dreds of oth­ers based in and aimed at loc al mar­kets: New York City’s Scoop St., Vir­ginia’s Scoop Coups, Ge­or­gia’s Savvy Like Me, the South’s Get Grouby, Washington’s Deals for Deeds, Seat­tle’s Wrazz, and Phoenix’s Snag And Save. Given that the sites make money by get­ting more cus­tomers to buy more coupons, most are plan­ning re­gional or even na­tional ex­pan­sions. And the group-coupon boom ex­tends fur­ther still, with pig­gy­back­ing busi­nesses show­ing up in the last year or so as well. In fact, there are sites to ag­gre­gate the daily deals: YipIt, 8 Coupons, and Deal Radar, for in­stance. And then there are sites — Adil­ity, Wantsa and Pon­kle — to help busi­nesses set up their own group coupons.

So what dif­fer­en­ti­ates all the group-coupon com­peti­tors — the Liv­ingSo­cial from the Wrazz? To be hon­est, not much. The Groupon copy­cats copy closely. Some sites, such as Deals for Deeds, give a por­tion of sales to char­ity. Some fo­cus on cer­tain types of cus­tomers or prod­ucts — deals for par­ents of young kids or for restau­rants and bars. But all fol­low the same busi­ness model: Lo­cal busi­ness of­fers se­ri­ous dis­counts to lo­cal res­i­dents; group coupon site takes a cut. Strangely, they even all look the same, some­times down to the page de­sign and font.

Taken to­gether, such sites have seen tremen­dous growth in the past year, de­spite re­ces­sion-driven mis­ery in con­sumer spend­ing and the slug­gish­ness of the ad­ver­tis­ing mar­ket. Ex­pe­rian Hit­wise es­ti­mates that traf­fic to group coupon sites grew 610 per­cent from Au­gust 2009 to Au­gust 2010. Sales met­rics are a bit harder to come by, as the com­pa­nies are pri­vate. But es­ti­mates put Groupon’s 2010 rev­enues at $500 mil­lion and Liv­ingSo­cial’s rev­enues at $200 mil­lion or so (though both of those num­bers should be taken with a heap­ing pinch of salt). Add in the smaller com­peti­tors, and the sec­tor’s rev­enues are more than $750 mil­lion. That num­ber is ex­pected to top $1 bil­lion in 2011.

Group coupons are noth­ing but a souped-up it­er­a­tion of an old phe­nom­e­non: Coupons date to the 19th cen­tury, if not ear­lier. That raises the ques­tion of what comes next. Will Groupon and Liv­ingSo­cial prove to be cat­e­gory killers, squash­ing those 500 lit­tle com­peti­tors with their wit­tily writ­ten ad copy and awe­some deals? Will dozens of new com­peti­tors pro­lif­er­ate? Will fierce com­pe­ti­tion among Groupon, Liv­ingSo­cial and their ri­vals thin mar­gins for all the group coupon sites, forc­ing some out of busi­ness? Will a new form of lo­cal or so­cial ad­ver­tis­ing, per­haps one backed by Google or Face­book, come in and blow all of them out of the wa­ter?

We don’t know. But an­a­lysts pre­dict mas­sive growth in deal­based, lo­ca­tion-based and so­cialnet­work-based ads — and through mul­ti­ple chan­nels. So maybe it’s bet­ter to think of group coupons not as a prod­uct dis­trib­uted by a few com­pa­nies, but as a method of ad­ver­tis­ing.

Take “flash sale” sites, which are cousins to the daily deal site. These busi­nesses send mem­bers an e-mail based not on lo­ca­tion, but on what cus­tomers want to buy. Many fo­cus on high-end con­sumer goods and of­fer busi­nesses ac­cess to a co­terie of fashion-ob­sessed, wealthy clients: They of­fer a sin­gle item as a loss leader to draw in those cus­tomers. The wildly pop­u­lar Gilt Groupe — founded in 2007, it feels like an em­i­nence grise in In­ter­net years — sends out of­fers for steeply dis­counted de­signer shoes, bags and clothes. The Aisle of­fers brides-to-be big dis­counts on bou­tique wed­ding dresses. For par­ents, there is Zulily; for home goods, One King Lane; for trav­el­ers, Jet­set­ter. Many more star­tups are in the works.

Ad­ver­tis­ing an­a­lysts also ex­pect the daily deal/group buy­ing/ so­cial dis­count sites to be­come a lot more so­phis­ti­cated. For one, that means that some will start ask­ing for more than your Zip code. (The more an ad­ver­tis­ing com­pany knows about you, of course, the more valu­able you are to it and to ad­ver­tis­ers.) Some cu­rated sites might request your pro­fes­sion, salary, hob­bies — even your fa­vorite restau­rants or brands, or your ex­act block — to bet­ter tai­lor deals to you.

Fi­nally, ex­pect more big busi­nesses to get in the game — with chain stores and so­cial-net­work­ing sites start­ing to send out deeply dis­counted, tai­lored and lo­ca­tion-based of­fers. In Novem­ber, for in­stance, Face­book an­nounced a new func­tion in­spired by the suc­cess of Groupon: “Deals.” Users can check in at malls and cof­fee bars, and busi­nesses near them can of­fer them dis­counts.

So it turns out that what makes Groupon and Liv­ingSo­cial so suc­cess­ful may also be their down­fall: They did not just stum­ble on a great idea. They stum­bled on a valu­able, scal­able, trans­portable idea, one that just might be­come a new ad­ver­tis­ing sta­ple. For­get the com­mon copy­cats. Ex­pect a daily-deal in­va­sion.

AN­DREW HARRER/BLOOMBERG NEWS

Tim O'Shaugh­nessy, CEO of Liv­ingSo­cial, poses at the com­pany's head­quar­ters in­Wash­ing­ton. Es­ti­mates put its rev­enue at $200 mil­lion.

TIM BOYLE/BLOOMBERG NEWS

A Groupon Inc. team mem­ber works at the com­pany's head­quar­ters in Chicago. An­a­lysts pre­dict mas­sive growth in deal-based, lo­ca­tion-based and so­cial-net­work-based ads— and through mul­ti­ple chan­nels.

NOAH BERGER/BLOOMBERG NEWS

An­drewMa­son, CEO and founder of daily deal site Groupon, re­jected a $6 bil­lion buy­out of­fer from Google.

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