It's Adapt-or-Die Time for Daily Deals Firms

The squeeze is on

Photo: Ben Shaul

In 2009, daily deals firms sprouted up on the digital landscape like eager-to-bloom crocus flowers often seen at this time of year. But more recently a late winter freeze has buzz sawed through one flowery bulb after another, as hundreds of daily deals upstarts have fallen by the wayside because they couldn’t develop in the harshly competitive climate.

Could a big one—LivingSocial—actually be the next to wither away? Sources familiar with the company say they wouldn’t be surprised if the industry’s No. 2 player, trailing only Groupon, was sold to a larger company or liquidated piece by piece by spring 2014. They say LivingSocial has lacked the speed to adjust to a space that’s increasingly becoming more complex.

Even worse for this nascent field, the marketplace has gotten a lot more crowded. Dozens of outfits from Yelp to marketing giants such as American Express and Bank of America—to even companies that enable retailers to set up their own offers—now provide innovative ways to link customers with local merchants.

Forrester Research analyst Sucharita Mulpuru-Kodali says neither LivingSocial nor Groupon are too big to fail—even if the latter still has cash reserves in the billions from its 2011 initial public offering. “The daily deals space is saturated,” she says, “and it never provided tremendous value to merchants. And that was the fundamental flaw in the business model. They’ve survived over the last few years even when these truths were obvious because they’ve reduced the margins they ask of merchants, they extend the length of offers and they make more offers available at any time.”

Groupon, in recent months, has been giving a bigger slice of voucher sales to deals-weary local businesses—a gesture meant to inspire loyalty to its platform. The lower merchant commissions were largely to blame for Groupon’s poor 2012 results and resulted in the ouster of company founder Andrew Mason as CEO (whose memorable farewell memo to staffers is now the stuff of legend). The Chicago-based daily deals firm declined all interview requests for this story.

Indeed, daily deals have been on a cold streak. LivingSocial dismissed 400 employees last November after suffering a net loss of $560 million during Q3 2012. In its Q3 ’12 earnings, Amazon blamed its first net loss in four years on its $169 million write-down for its two-year-old stake in LivingSocial. More recently, LivingSocial endured scrutiny about whether its cash infusion of $110 million was emergency funding or simply another money round for the four-year-old operation.

“You have to ignore the naysayers and focus on the people who matter—our millions of satisfied customers and merchants,” contends LivingSocial rep Andrew Weinstein, responding to the numerous issues his firm is allegedly facing. “After our most recent funding round, we have a significant financial reserve to take advantage of any opportunities, and we are executing against our plans for growth and profitability in 2013.”

Weinstein and his team argue that 80 percent of merchants do repeat LivingSocial deals when contacted by a sales rep—though its self-reporting flies in the face of third-party data available (more on that later). The team is also optimistic about the growth of its newer products, chiefly the Escapes and Fun & Events offers that are designed to build out audiences beyond seekers of discount massages and half-price leg waxes.

“It’s about experiences—not just about the discount,” says Mitch Spolan, svp of national sales for LivingSocial. “You want to climb Kilimanjaro, well, we have an ‘Escape’ for that.”

For Unaiz Kabani, director of product development for Yipit, a deals aggregator that also shares data from the activity it sees, maintaining growth will be the challenge. Kabani points out that the number of merchant deals continues to climb but not at the rates to which Groupon and LivingSocial have grown accustomed. “That’s somewhat to be expected,” he says. “This space has matured really quickly.”

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