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

The squeeze is on

Whether or not Groupon and LivingSocial are suffering due to a lack of enthusiasm at the small-business level paints only a part of the picture (even though it remains a key question). The companies still need to satisfy investors by maintaining growth rates by expanding services. For LivingSocial’s Escapes and Fun & Events, Groupon has similar efforts but seems particularly focused on its Amazon-like Groupon Goods initiative.

“Daily deals are not blossoming,” says Mark Fratrik, vp and chief economist for BIA/Kelsey. “And now, Groupon and LivingSocial and other players are branching into e-commerce areas.”

BIA/Kelsey has in the past estimated that the digital deals space will grow to $5.5 billion by 2016. But due to Groupon and LivingSocial’s recent troubles, the Chantilly, Va.-based researcher plans to scale back expectations for the niche when it comes out with new numbers this summer, Fratrik says. “Their offers sometimes go to the spam folders—and not a lot of people check their spam folders for daily deals,” he adds. “I think these companies have seen that and evolved. Whether they have evolved quickly enough, I don’t know.”

LivingSocial and Groupon have evolved enough to generate a few positive case studies. For example, e-commerce company Quidsi, an Amazon property, has used both players to acquire thousands of new customers and build email lists for and For small offline companies, the platforms tend to perform better for events (think minor league baseball games and walking tours of haunted neighborhoods) and travel marketers than they do for restaurants.

One Wall Street analyst even foresees a bright future for Groupon. Arvind Bhatia, an analyst for Sterne Agee covering Groupon, is bullish on the company on the strength of its global footprint, mobile advances (Groupon says more than 30 percent of its business is conducted via smartphones) and huge lead over LivingSocial.

“The international business is starting to see a lot of uptick,” Bhatia says. “While LivingSocial seems to be having a hard time, we are characterizing Groupon as a turnaround story. The caveat of the turnaround story is they always take longer, and there are always bumps along the road.”

It’s those bumps in the road that led deals entities like Facebook Deals, BuyWithMe and Scoop St.—using Groupon and LivingSocial’s sales team-driven model—into a ditch. (Since shuttering Deals, Facebook has released a self-service Offers platform to take its place.) “There are so many firms going out to small businesses,” Fratrik says, “and saying, ‘I am going to help you create more sales.’”

Michelle Mannix, co-owner of Ted & Honey, a Brooklyn restaurant, knows the scenario all too well. She’s tested deals with LivingSocial, Groupon, Google Offers, AmazonLocal, Scoutmob and Bloomspot to attract business for her dinner service. Though the sales calls from those firms keep coming, Mannix says she’s probably done with them. The deals “are not very good financially after you get your cut,” she says. “Our margins are low as it is.”

And such a been-there-done-that merchant sentiment toward daily deals is partly why LivingSocial and Groupon are motivated to create offers in new areas. A recent study by Manta found that out of 1,080 small businesses surveyed, 18 percent planned to run a daily deals in 2013. Just 3 percent in the study says such campaigns produced repeat patrons.

In addition to pleasing investors and adjusting to merchant burnout, LivingSocial and Groupon have plenty of other reasons to evolve. AmEx, Bank of America, Facebook, Apple, Yelp, Foursquare and LevelUp are innovating and attacking their business like hungry piranha. Sure, Groupon, with its 150 million subscribers, and LivingSocial, with 72 million, lead those competitors in a gigantic fashion when it comes to email and mobile marketing.

But what if the way consumers think of special offers is transformed in the age of the digital wallet? Those piranha may soon become great white sharks. “It’s a broader ecosystem with different types of competition than it used to be,” Fratrik from BIA/Kelsey says. “That’s a challenge to Groupon and LivingSocial.”

Of all the intriguing iterations in the space during the last year, Bank of America’s BankAmeriDeals is worth a closer look because it turned a ho-hum consumer activity into a monetization piece. Through technology by Cardlytics, BofA’s system pitches deals from local and national brands to account holders when they review their personal finances online. BofA customers can opt in to get offers in their purchase itemizations as they review their online account statements.

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