The trials and travails of Groupon (NYSE:GRPN) have been well chronicled. What many analysts have yet to discuss is how GRPN has helped generate a wave of mal-investment in the online space – the effects of which are only now beginning to be flushed out of the system.
When Google attempted to buy Groupon for anywhere from $2 billion to $6 billion it set off a wave of interest and speculation in the online space that has contaminated the system. Groupon came from nowhere to be featured on Forbes as the fastest company to reach $1 billion in annual sales. It was another example of the internet making the dreams come true. In the case of Groupon a failed blog took a niche product launched by its users and built it into a multi-billion dollar empire.
Immediately there was a rush to invest in this new and “exciting” space. The beauty of the Daily Deal space was there minimal barriers to entry, no inventory costs and the sky seemed to be the limit in terms of revenue.
Following the PR orgy competitors poured into the space led by LivingSocial, Buy With Me, Google Offers and AmazonLocal just to name a few. Soon other angles of the same idea began to be built out. Traditional media companies entered the fray with a half-price deal that offered advertising in lieu of revenue share. Other companies offered the ability to have some of the revenue donated to charity. In this brave new world of Daily Deals the only barriers were getting local merchants to give away their merchandise at a 70%-75% discount and there was money to be made by everyone (save the merchants).
The bubble burst when Groupon filed their S1 and, to many analysts shock, they weren’t profitable, in fact, they were losing close to $500,000,0000’s annually (depending on how you read their bizarre accounting). Groupon’s filings (and subsequent flounderings) showed that the cost of sale in the space actually could be greater than revenue leading to a daily deal being a LOSS LEADER and not an income generator. It was as if we learned suddenly that the emperor had no cloths, and if the emperor was naked what did that mean for the court jesters, also known as their competitors? Investors began backing off, consolidation of the space began, and thunder clouds hailing a second dot-com crash were seen on the horizon. The market began to sour on daily deal pure plays as investment dried up.
While the effects of the above have been relatively obvious, there is a whole other segment of the daily deal industry that I characterize as the secondary players. Many of these companies did not initially focus on the Daily Deal product, but instead decided to attempt to grow massive user-bases with the idea that once the eyeballs were captured the organization could simply slap a high margin daily deal on the product and rapidly monetize.
Even as the luster has worn off the Daily Deal space many of these companies march on, attempting to come up with new monetization schemes, pretending that a Daily Deal was just one part of their strategy. Let’s take a look at some of these secondary casualties below.
Foursquare: A smartphone App which allows you to broadcast to the world your location for the narcissists among us. Foursquare has numerous problems, from hitting critical mass at a relatively low number of users, to the privacy concerns of girls who don’t want to be stalked by creepy porn addicts. Foursquare’s monetization scheme was built on a flash-deal style product where simply checking in to a partner gets you a discount on your food, drink or waxing. Unfortunately it doesn’t seem that a majority of Americans want to tell billions of web users their location. Given the lack of user scale it becomes difficult to convince restaurant owners to give a discount to the 1% of their clientele who choose to check-in.
Patch: If daily deals were wildly profitable Patch might be the hottest web property in the local space. The thought process in the buildout was simple. Get people coming back every day for news and while they are with you sell them a deal. Unfortunately, the net result was building out a platform at 4x (+) the normal cost structure of a normal deal platform. To make matters worse people who consume news don’t seem to engage in deals. (See Deal Chicken). Less than 12 months out of the gate Patch Deals seem to have vanished Aol will seek another way to monetize this hefty investment.
Yelp: I love Yelp as a consumer. Nothing like peer reviews to tell me which dive bar to try and which 5 star to avoid. However, Yelp combines the problems of the two companies above. Nobody wants to be creeped via check-in and when I’m searching for a review I tend to ignore a deal. When deals don’t sell and the cost of sale becomes even MORE prohibitive. So how do you monetize this thing? (Oh and as a consumer I may love Yelp but my local baker, Serge, hates it after his dreaded competitor left a 1 star review and mentioned a mice problem that (hopefully) doesn’t exist.) Yelp can build out a sales force and sell a suite of services, ala Yodle & ReachLocal, but then why do they need the directory? Not to mention poor Serge who will never give them a dime of his business.
Dishonorable Mention: Gannett’s Deal Chicken: One thing that is common on this blog is our distain for a majority of traditional media’s attempts to get with the dotcom world. A majority of tech and dotcom companies have followed Google in treating employees with respect and dignity, again an approach ignored by their soon to be extinct peers. Poor employee benefits = Poor Talent = Deal Chicken. That’s right Gannett Newspaper marched into the deal space with their group buy product known as “Deal Chicken.”
The fact that Gannet called it’s daily deal product “deal chicken” is worth a chuckle (Once 10 are sold a deal is “hatched”). A cursory look at the amount of deals being sold turns the chuckle into a full belly laugh. Similar to Aol’s Patch the deal sites have no engagement, no deals sold and a rather frightening layout . (“Tell your Peeps on Facebook”…REALLY?) The sad fact is that Gannett actually invested money to the tune of over $1,000,000 into the design and functionality of this product, again not innovating, but trying to catch-up with the daily deals craze. At least Groupon sells a ton of deals (although they still lose money). Gannett manages to lose even more money by not selling their pathetic deals. The joke is on Gannett with deal chicken as the life has literally been choked out of this product. It may still look alive, but the truth is it just continues to hop around long after the death sentence has been executed.
Lesson to be learned. Fools rush in. We all thought Groupon was wildly profitable, but at second blush, the daily deals market is much more complicated, and much less lucrative, than we ever imagined. Organizations and investors would be wise to consider entirely new opportunities to make money before deciding to chase after an unproven model, with minimum data points. Copying a loser is a surefire recipe for failure.