Too Big to Succeed: Why the Daily Deals Space is Collapsing Beneath its Own Weight

Posted by Knowlton Thomas

On August 12th, 2010, reputable money magazine Forbes dubbed Groupon "the fastest growing company ever." At that point, the concept of "group buying" was well and old, but not on the Internet: Groupon was the first one to rework the idea as a Web 2.0 product.

Forbes had to explain the notion in detail, for to many readers, it was a peculiar thought—you only have a matter of hours before an offer expires and cannot be bought; deals only activate after a certain number of buyers commit; and yes, you can get up to 90% off products and services and experiences, no strings attached.

Even then, it was acknowleged that merchants running Groupons would do well to break even and that some should count on a loss. Like real estate's immortalized mantra "location, location, location," so too did Groupon and its supports chant a magic word: "exposure." New customers will come, the promise went, and then they will come again to pay full price. Of course, as "real" a business as it was, this had not yet been proven. But no one questioned Groupon… least of all its future competitors.

In April 2010, Groupon raised $135 million, mostly from Moscow investment fund Digital Sky Technologies, which had money in other hypergrowth startups Facebook and Zynga. This placed the company at a valuation of $1.35 billion. At the end of last year, just a few months after the valuation, Google offered to buy Groupon for $6 billion. The startup rejected the offer to the surprise of many. Then two key things happened: Google announced its own Groupon, called Google Offers, and Groupon positioned itself for a future IPO valuing itself at up to $25 billion. And then two more key things happened: Google Offers went absolutely nowhere, and Groupon delayed its IPO indefinitely. The question is, why?

I first saw Groupon CEO Andrew Mason in person when he spoke at the Grow 2010 Conference in Vancouver last summer. A little like Facebook founder Mark Zuckerberg in the sense that he didn't sport the look and feel of a billion-dollar CEO, Andrew's laidback persona reinforced the Forbes' description of Groupon as boasting "huge sales [and] easy profits." This guy was living the dream. Just 7 months into his venture, Groupon was profitable. His first-mover advantage was colossal—the rear-view mirror was clear of competitors at the time. But this is the tech space, and here nothing stays the same for long.

What didn't last for Groupon was profitability. And it's not for lack of sales: 2010 saw its revenue grow 23X over the year prior, and this year's first quarter saw Groupon rake in nearly $650 million, putting it on pace for well over $2 billion annually. Recently breaking the 100 million user milestone, this daily deals startup-gone-giant looks unstoppable from the outside. Behind the curtains lie a different story.

Groupon has incurred hundreds of millions of dollars in losses over the past couple of years and into 2011, and foresees rising operating costs for quite some time still. It hadn't profited since it was a fledgling; scability was absent. The company's aggressive approach to acquiring new subscribers has kept its marketshare dominant but its balance sheet riddled with weeping sores. If the first and best daily deals firm can't profit, who can? Its competitors? 

Hardly. Since Groupon was founded, literally hundreds of companies have carbon copied the startup's business model. After there were hundreds of daily deals startups, dozens of aggregators starting popping up. Groupon was the fastest growing company ever, and perhaps group buying has been the fastest growing space ever as a result. But like plunging a sponge into water, the crowded market was instantly oversaturated. And now it's feeling the squeeze.

Credit: BargainMoose

You know there are problems when, among 600-plus companies, two hold 75% of the market. Groupon claims at least half while LivingSocial owns roughy a quarter (North America). It's a throwback to the Wild, Wild West—this market ain't big enough for the 600 of us. And those who don't fit die. Dropping like flies, 38 daily deal sites throughout North America shuttered their doors in July, according to Yipit. Read that again: 38 businesses shut down in a single month. That's more than one company per day calling it quits. And of those who aren't going bankrupt? Fleeing from the stormclouds rolling in, Facebook cancelled its own Deals arm after just four months, and Yelp recently slashed its Deals staff by half. There are only so many businesses out there, and only so many willing to gamble on running these vouchers. With no one differentiating, it's a blurred mass of carbon copies—a recipe for disaster.

Andrew Mason said in an internal memo that "our business is a lot harder to build than people realize," which could not be more true. Groupon itself is learning this the hard way.

Credit: Yipit

With competition retreating back into the shadows, does this leave Groupon to retain dominance? In a sense, perhaps, but the lustre of the company has dulled: the fastest growing company ever recently saw a 4% dip in revenue (as did LivingSocial). Competitors dead or dying… leaders faltering… where is the bright side?

Nowhere. Consumers are fatigued. They now hate getting a dozen emails every morning offering 10 differeny Yoga classes at 50% off—over half of Americans have stated they're overwhelmed by the quantity of deals available. And unlike the co-existence of Twitter, Facebook, and LinkedIn, for example, the group buying companies are all mirrors of each other—offering the same deals for the same prices in the same areas, day in and day out. Consumers are letting $600 million worth of vouchers, or one in five purchases, go to waste. These consumers aren't apt to buy more, darkening future prospects.

And that's not all. Running Groupons is all about exposure right? Turns out, it's the wrong kind of exposure: merchants who run Groupons suffer hits to their reputation. And this was the only benefit for businesses—they certainly don't do it for profit. Adding consumer fatigue and merchant wariness, you come up with zero. And these are the two most fundamental components of group buying business sustainability.

Facebook has a base of over 750 million users and couldn't make daily deals work. Yelp is highly experienced with local commerce and couldn't make daily deals work. Google is a financial powerhouse filled with creative minds and couldn't make daily deals work. Hundreds of startups, since vanished, have failed to make daily deals work. Groupon has created the illusion that daily deals work, but sustainability couldn't be demonstrated during the peak of group buying—with the space losing steam, can a "real" business truly function for the long-term? 

Daily deals got too big, too fast, without innovating beyond the original idea, without expanding on the original concept, without proving financial and even legal viability. The space can't keep growing like this, and it's not a feasible place for any new company to tackle right now. The saving grace? Value is still a vital element of modern society and the soul of group buying will no doubt remain in tact. But this era of daily deals needs to fail in the short term to succeed in the long term. It's cumbersome, confusing, and crappy—but it can be reborn, wisened by its mistakes, and done right. 

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Knowlton Thomas

Knowlton Thomas

Knowlton is the managing editor of Techvibes. Based in Vancouver, Knowlton has been published in national publications and has also appeared on television and radio. Previously he was an editor for New Westminster weekly The Other Press and served on its board of directors. When not working, Knowlton enjoys playing tennis, hiking, and exploring weird side streets. more



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