I thought I was the only person getting weary of a deluge of daily-deal pitches, each offering an improbable discount on a future purchase from a local merchant if I'd pay in advance. But after reading the lengthy filing Groupon posted on Wednesday, it seems I have company.
Until recently, Groupon and this whole category of e-commerce have looked unstoppable. The Chicago firm, the biggest in this market with 83 million subscribers tuned into its deals, had declined a reported $6 billion purchase offer from Google before readying its initial public offering.
It's also inspired numerous competitors: Washington-based LivingSocial (which essentially gave money away in January by selling $20 Amazon gift cards for $10); daily-deals options from Facebook and Google; lookalike ventures from newspapers such as Gannett's DealChicken and the Washington Post's Capitol Deal; and smaller startups like ScoutMob and GiltCity (each of which recently arrived in the District). The entire deals phenomenon has been heralded as a sort of retail revolution.
What could go wrong with the chance to buy things at half off or more? Plenty.
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For the shopper, these e-mails often turn out to be poorly targeted. They offer things I will probably never buy without providing a "not interested" link that might help fine-tune the selection. And if you're serious about finding the best deals, you can't use just one site. The overloaded Gmail account seen above understates how many deals one could sign up for; the coupo.st deal aggregator listed 25 new local offers for Washington-area residents Friday morning.
For the merchant, things can get much worse. While it's possible to fine-tune a Groupon or other offer so that it only draws customers at a slow time and preserves a possibility for profit, many local businesses wind up losing money and alienating people.
This issue gets brushed aside in daily-deal ads. First, most local shops have little income to spare--restaurant profit margins average from 2 to 6 percent. (Somehow, companies with outsize margins like Apple or Comcast don't offer these bargains.) Second, they don't just cut prices by half but also pay a deals site for the privilege of getting an advance on a future sale. Groupon, for example, usually keeps 50 percent of each voucher sold.
And it now seems that daily deals may not work for deals sites themselves. The revised S-1 form Groupon filed Wednesday with the Securities and Exchange Commission notes disturbing trends. Not only did the company lose $205.4 million in the first half of this year, after spending $345.1 million to acquire new subscribers over those six months it's making less money off them (falling from an average of $27 to $18, with worse declines in its oldest markets) and seeing fewer merchants sign up.
Competition may be one reason. LivingSocial, for example, takes about 40 percent of each voucher, while ScoutMob charges local shops a flat fee of $2 to $4 for each deal it moves.
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The deal fatigue I've experienced could be another. I'd rather see fewer, more relevant offers--the smartest thing Groupon has done lately is have Foursquare list "Groupon Now" discounts from nearby shops in that service's location-aware phone apps.
But to me, the bigger picture is that this market is returning to Earth. Daily-deal promotions can be a terrific form of advertising, but they don't repeal basic economics. Deal sites will have to find a path to profitability without throwing money at customers or asking merchants to throw it at them. Buyers, in turn, will have to accept smaller discounts. After that, all three parties may come out ahead--leaving one clear loser, the print-coupon business.
Tags: Online Community and Social Networking, WiFi and Mobile
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