Daily deal services like Groupon, LivingSocial and Google Offers took off because they seemed to offer something for everyone: small businesses got a novel way to bring new customers in the door, shoppers got a discount and the deal providers got a large cut of every sale. But signs of deal fatigue are everywhere, raising questions about whether Groupon and its competitors can continue their hyper-growth. In the last six months of 2011, 798 daily deal sites shut down, according to Daily Deal Media, which researches the industry, says the NY Times.
Some excerpts from the story:
When Groupon reported its second-quarter results this week, it said that active customers — defined as people who purchased a Groupon deal in the last year — grew just 3%, a significant slowdown from previous quarter-to-quarter customer growth rates. While traffic to Groupon was higher at the beginning of 2012 than last year, it was down almost 10% in May and June from the same months in 2011, according to comScore.
Shares of Groupon have fallen 82% since it went public in November, and the company is now worth just $3 billion, half of what Google offered to buy it for in 2010.
Gilt City, a daily deal service owned by Gilt Groupe, laid off employees and closed offices in six cities earlier this year. Google Offers, whose membership has plateaued in some cities, has had to team with 35 other deal providers to supplement its own selection and help other companies reach customers. Facebook and Yelp were quick to jump on the fad, but backed off last year. Groupon is searching for alternative ways to make money, like buying movie tickets, watches and other goods and selling them to shoppers.
“Many of the other competitors have retreated or scaled down ambitions,” said Jordan Rohan, an analyst with Stifel Nicolaus. “There are no real barriers to entry, but there are fairly significant barriers to success.”
One of those barriers is keeping merchants happy. Though small businesses were excited at first about a new way to attract customers in a post-Yellow Pages world, many soon soured on the daily deals. Customers who bought deals overwhelmed the businesses, spent the bare minimum and never returned.
The scene on a three-block stretch of Mississippi Avenue in Portland, OR, is a snapshot of what is happening nationally, as merchants grow increasingly wary of daily deal services even as more daily deal salespeople try to court them.
Muddy’s Coffeehouse, which serves coffee and granola in a purple-trimmed Victorian home, offered $24 of food and coffee for $12. It paid Groupon half of that. Muddy’s succeeded in drawing crowds — but ended up losing money.
“I pretty much had to take a loan out to cover the loss, or we would have probably had to close,” the owner, Dyer Price, told The NY Times. “They don’t warn you that you’re going to get hit really hard and that you have to be prepared. We will never, ever do it again.”
A few doors down, Mississippi Studios & Bar Bar, a former Baptist church that became a live music club and burger and cocktail restaurant, offered a Groupon deal but said it slowed down the bartender, who had to complete paperwork for each coupon, and brought in customers who did not return.
“It was a huge boondoggle for us, and we were counting down the days until it was over,” said Kevin Cradock, co-owner of Mississippi Studios. He said he had a better solution for local advertising. “We still do the old-school thing,” he said. “We print these posters and hire kids on bikes to put the posters up.”
He also tried Google Offers, whose deal was easier to process because Google sent an Android phone to scan coupons, but it did not attract repeat customers, either.
The story was the same elsewhere. Kevin Stecko, founder of 80sTees.com, offered a Groupon deal for $20 off a $40 order, of which $10 would go to Groupon. Initially, the results looked good: 971 coupons were sold, and almost all of the customers were new.
But Stecko said he lost $2.96 per order on average, and only nine of the customers who used the Groupon deal had bought something else from the site since then. (He made some money, though, he said, because 14% of people who bought coupons did not redeem them.)
“It devalues your product,” said Rafi Mohammed, a pricing consultant. “You get people who come in who are very price-sensitive, who aren’t going to come back and pay full price.”
RBR-TVBR observation: AE’s should print this out and take it with them to sales calls. For all of the lost dollars GroupOn and similar sites have taken out of local merchants’ pockets, radio and television AEs can help them get it back—the traditional way. Nothing matches finding out what a client’s needs are and fulfilling them. When a real campaign gets real customers coming though the door in droves, merchants can much more depend on them coming back. GroupOn customers are fair-weather deal scavengers, businesses are starting to find that out. And for the stations that aligned themselves with daily deals companies, this might be a good time to put some distance between!