Ronnie05's Blog

A re-think on Daily deals business: Unsustainable? Or a tight margin business proposition for the future?

Posted in Collective Buying by Manas Ganguly on September 13, 2011

Even before the daily deals business has really taken off, there are casualties as some of the big names (Facebook Deals) seem to dropping off and some others such as Google Offers seeming to be loosing big money fast. Then there are others such as Yelp who have restructured the deals business and chopped the number of offers it runs.

The latest reports seem to indicate troubled times at Google offers as its revenue per deal fell 37 percent, driven by a 46 percent slump in the number of vouchers sold per deal in the third month of its operation.Total revenue generated by Google Offers dropped 23 percent in August from July despite a 22 percent increase in the number of daily deals run.The average price of Google Offers vouchers increased 18 percent, but it remains “far below” that of Groupon and LivingSocial.That means less incentive for business owners, and despite the lower costs, users still aren’t biting.This despite 9 percent revenue growth in the North American daily deal industry.

In contrast, Groupon gained market share in August. Revenue was $120.7 million in North America, up 13 percent from July.LivingSocial revenue in North America slipped 3 percent to $45.1 million in August, Yipit data show. Groupon’s market share increased to 53 percent in August from 51 percent in July, while LivingSocial’s market share declined to 20 percent from 22 percent. Amazon Local generated more than $1 million in revenue in August, despite being active in only a handful of markets for the full month.

Two observations on the daily deals scene that now unfolds:

1. No matter how large and influential the challenger be (Consider Facebook and Google), it is the first mover that seems to be holding the edge in the daily deals market unless the challenge is very limited and relevant to a niche.
2. There are reasons to believe that at times of economic slowdown and uncertainty, the number of daily deals would actually increase though the ticket sizes may actually come down. Thus a trade-off between deal volumes and deal value.
3. Given that Groupon has deferred its public listing, this has given some reprieve to the bubble scenario which was building fast. It would be interesting to follow Groupon and LivingSocial and see how they walk the tightrope between operational efficiency and wafer thin margins.

What does closure of Facebook Deals imply for the daily deals business?

Posted in Collective Buying by Manas Ganguly on September 1, 2011

A few months back, i had covered the daily deals business to some depth and posted a few blogs around the industry and the trends. Groupon with its multi billion valuation seemed to be hogging the headlines, albeit for wrong reasons. A bubble was suspected.Four months after a euphoric launch, Facebook Deals closes shop. Is it merely operational intricacies of a discount business? Is it?

(Reproduced from a Fortune Blog)

Facebook’s announcement of closing its local deals business merely four months after it started has sent mixed signals for the future of the daily discount business.While deal giant Groupon should naturally be happy that it has one less competitor to fight against (a big one too, with over 750 million users!), the decision also raises questions on whether capital-intensive daily deals are a viable option in the long term.

Facebook Deals was competing with other large companies in the daily deal segment such as Google, Groupon and LivingSocial, along with hundreds of other daily deal clones worldwide.

Facebook’s closure of its local deals business is good news for Groupon, which has seen numerous competitors enter into the local deals sector due to extremely low barriers for entry. With over 750 million users, Facebook has a tremendous network and scale effect which it could take advantage of to bring in more subscribers compared to Groupon’s existing subscriber base of over 115 million.

With its core business centered around bringing people together, Facebook clearly overshadowed Groupon in terms of its social media reach, which could have translated into group buying initiatives. Facebook’s exit is also a loss for smaller deal sites such as ReachLocal and Gilt City, which were promoting their deals through Facebook.

But It Also Reflects the Enormous Challenge of Reaching Profitability

The Facebook Deals closure also indicates how even big tech companies with multiple (stable) sources of income are finding local deals to be exceedingly challenging to execute. Promoting and selling discount deals is a highly capital-intensive business, requiring a strong sales force and high marketing costs to acquire and retain both merchants and subscribers.

Given that Facebook is almost a pure technology background, it seems that Facebook is deciding to commit less to running a business model that heavily depends on employing sales reps and handling complaints. Facebook is notoriously hard to get a hold of on the phone for instance if you want to shut your account.

The decision also raises some serious questions over the long-term profitability of deal providers like Groupon whose financials clearly show a trend of rising expenses. [2] Groupon has spent over $800 million in marketing and administrative expenses in the first half of 2011, which is roughly 55% of its revenues, and the ultimate operating leverage associated with this business model remains unclear

The Economic Slowdown could be a boon for daily deal websites to make money and establish themselves

Posted in Collective Buying, Industry updates by Manas Ganguly on June 29, 2011

Boston Consulting Group recently released a report which says that Consumer Confidence Is Retreating in Many Parts of the Developed World. Nearly 90 Percent of Respondents in developed countries say they plan to maintain or reduce spending—but China and India Are Notable Exceptions. BCG’s 2011 global report on consumer sentiment, Navigating the New Consumer Realities states that the negative emotional responses (which are chiefly due to the economic slowdown) are directly affecting spending behavior.

To quote the report- Consumers are trading down and purchasing more private-label products because they feel it’s important to get a good deal—not necessarily because they can’t afford the price.Trading up has shifted from conspicuous to ‘conscientious’ consumption.

Now then, consumer buying preferences are shifting to bargains and thus, this should be music to the daily deal makers. If consumers start flocking the daily deal websites such as Groupon, Snapdeal, LivingSocial and so on, traffic to these sites is going to multiply. Is that good or is it bad?

On a immediate basis it is better than good, Great in-fact for the daily deal businesses. More traffic, more revenues, more businesses signing in and the general doubt on the nature and sustainability of this business model will be laid to rest. This will be brand antagonistic. However revenues, profits and footfalls aside, the daily deals businesses will need to perfect their back end business models and deals with sellers and businesses. Currently that side of the business is less than great! Inability to put traffic and back-end mechanisms in sync could end up in a lot of consumer and partner dissatisfaction. As is said, “there is no better time to build a quality business than a economic downturn”, the daily deal websites will have to master the art of riding this wave during the downturn.

In the long run, Brands will build back the “trading up” factor and their relevance. However, daily deals and bargains will hold a part of the flea bargain market for categories which are less personal and relevant to consumers.

Daily Deal Businesses: The Promises and the (Operational) Anguish

Posted in Collective Buying by Manas Ganguly on June 22, 2011

Continued from earlier post: Is the GroupOn model sustainable?

The stats are telling: Kunal Bahl and Rohit Bansal, founders of which is barely an year old already have 5 million subscribers as on June 2011. They are targetting Rs100 crore in revenues in 2011 and plan on making Rs300 crore in 2012.Kunal aims at Rs.500 crore by 2014.

Snapdeal, a poster boy for the runaway success of daily-deal websites, gets local merchants to offer “deep discounts” on products and services to the value-conscious Indian consumers. For merchants, this offers an affordable route to promote brand and an easy way to sell the so-called ‘distress-inventory’ — such as empty seats on a last-minute flight.

Snapdeal, a poster boy for the runaway success of daily-deal websites, gets local merchants to offer “deep discounts” on products and services to the value-conscious Indian consumers. For merchants, this offers an affordable route to promote brand and an easy way to sell the so-called ‘distress-inventory’ — such as empty seats on a last-minute flight.While there is little doubt about degree of initial success, questions remain about the long-term sustainability of the underlying business model of websites like Snapdeal, modelled after Groupon, which pioneered the concept in US.

To understand the efficacy of the Daily deals business models, one must study the US markets where Google, GroupOn, Facebook and LivingSocial have been working at businesses and consumers on this model.
Rocky Agarwal, a US based local products specialist recounts the story of Jessie Burke saying that “running a Groupon was the single worst decision I have ever made as a business owner thus far”. Rocky has offered the following reasons to the unsutainability of the Groupon/Daily Deal model:

1.There is very little information on which merchants can make decisions
2.Tracking (of Coupons) and infrastructure is really getting to be a difficult problem
scheduling of deals are based on factors that optimize the deal for Groupon, not the merchant. Thus traffic walkins could be unmanageable at the merchant’s end at a point of time when they leats require it.
3.Daily customers are really deal hunters as against being loyalists. Thus the traffic keeps moving around.
4.Merchants make money when customers buy more and not just limit themselves to deal value. If customers only use deal values, the ability to cross sell to higher footfall traffic dies. This is an opportunity for the merchant to make higher margins on related products. However, daily deal customers seldom move beyond the deal value.
5.Operational glitches like lack of training.
6.All these mount upto customer dissatisfaction which is pernicious to the initial cause of taking the business to a wider cross section of people

Is the Groupon model sustainable? (Part I)

Posted in Collective Buying, Social context, media and advertising by Manas Ganguly on June 17, 2011

Groupon has set the collective buying scene on fire over the last few months. After rebuffing Google’s $6bn buy out bid (read post here), Groupon’s IPO valuation of $25bn ignited speculations of a bubble (given that with revenues of $760 million, the P/E multiple is 33!)

However, the rational of Groupon’s high valuation and the business fundamentals are now being questioned?

An overstretched valuation: the making of a bubble!

To quote Forrester research e-commerce analyst Sucharita Mulpuru: There is no rational math that could possibly get anyone to the valuation Groupon thinks it deserves.This IPO game isn’t about finding value, it’s about finding a greater fool who actually believes the valuation is true. Trust me, you will be the fool.

The argument goes such that the IPO valuation of $25 bln with 2010 revenues of $760million places the stock at a P/E of 33! That is high enough. However, $615 million of the $760 million were the result of acquisitions and expansion into new markets. Excluding that, Groupon generated $96 million in 2010 revenue from truly organic growth. So while the topline says 233% growth, a lot of it is in inorganic form which may not be sustainable unless there are very strong business fundamentals in place to support the high revenue and traffic opportunity. At a self generated $96 million revenue, Groupon’s IPO valuation of $25 bn is a P/E of 260. Even if the exuberance were to be tapered down to $2bn valuation, the P/E multiple would be 26 which by itself is also very high.

Everything that is social or crowd is basking in the glory of the success of Facebook, LinkedIn and a few other social business models. However, a lot of this exuberance is irrational. Everything social is not gold and investors would have to be wary about the ability of many of these companies to be able to stand upto their high valuations. Groupon, is the forbearer of collective buying, a very potent concept.(read more about Collective buying).But irrational exuberance may bust the expectation bubble before it gets anywhere.

Tagged with: ,

Future of Local Commerce: Collective buying (Part II)

Posted in Industry updates by Manas Ganguly on March 20, 2011

This post is a continuation of the part one in the collective buying series and details the competition in the area of collective buying which now has the fancy big boys (Google, Facebook, Yahoo) joining the originals (Groupon, LivingSocial and Foursquare)

Facebook is planning to offer multiple deals every day, focusing particularly on activities that can be shared with friends, such are visiting restaurants and concerts. The strategy builds on the company’s existing Deals program, which is offered as part of Facebook Places. Facebook is testing a new discount service that allows people to buy deals on Facebook and share them with their friends. This then is FB’s most direct assault yet on local deals giant Groupon. FB is in a pilot to test this service in Atlanta, Austin, Dallas, San Diego, and San Francisco.

Google has recently launched a similar check-in deals service for Android smartphone users. Like Facebook, Google’s efforts borrow from the Google Latitude, Google Maps, Google Places and the Check-in app. Google’s move highlights its aggressive measures to target the intersection of local search and e-commerce in the wake of the company’s failure to acquire Groupon for $6 billion.

Yahoo Local on its part has partnered with Groupon, LivingSocial, and more than a dozen other companies to surface deals and coupons from restaurants, spas and local clothing shops. Users are prompted deals basis his profile and relevance of the deal to his online buying behavior. Yahoo and its partners would share revenue generated from any local business deals consummated by consumers through Local Offers.

With check-in deals, Google, Yahoo and Facebook have joined Foursquare in dipping their toes in the deep pool of mobile, local and social search. These efforts take advantage of the intersection of users conducting searches for local businesses from their mobile phones and get deals.

Foursquare is one of the old boys in this list and is looking to steer and stay ahead of the pack by introducing location-centric deals. Foursquare users have previously been able to see nearby offers from local merchants, but they had to hunt for them on a large list. Now the deals will be aggregated by locations which will make them easier to find. To make things better, Foursquare also has added a Analytics spin for its vendors. Foursquare Merchant Platform, now includes a gender breakdown of checkins, a breakdown by time of day and other data that the company hadn’t shared before. As previously, the program is free to vendors.

LivingSocial Instant Deals provide a platform for merchants to create deals and get traffic through their doors when they most need it, such as during slower business hours or when they have an inventory of specific items they’d like to move. While LivingSocial daily deals are live for 24 hours, Instant Deals will only be available for a much shorter time, for example a restaurant can gain some additional traffic by offering a special that’s available only between the lunch and the dinner crowd. The deal can be redeemed at the merchant’s place by showing the phone and the Living Social authorization message. In a report in December, LivingSocial said it brings in about $1 million a day.

Groupon may not have been the pioneer at Collective buying as a business(That crown belongs to LivingSocial).However, Groupon has made the most news bytes and has the best presence in US markets. Groupon registers 178 cities with deal-a-day sites reaching 102 million people in the United States. Groupon Inc. may go public this year and be worth as much as $25 billion in its initial stock offering. In trying to stay ahead of the herd, Groupon is not reported to be looking toward the enterprise space, with at least one coupon for IT services consulting in the mix.As with Foursquare, Groupon is also is pushing the envelope with geolocation technology, using hyper-local targeting to reach customers who might be within a few blocks of a client with coupons for, say, a lunchtime deal.

Social Networking, Mobile computing and Collective buying are natural siblings in the era of convergence and connectedness. The Collective buying space is growing fast and is quickly able to cater to both users giving them discounts and bargains they have been looking for and for local business men as well, who now have the ability to push products which are loosing their marketable prices at discount prices rather than booking losses on the whole stock.

Future of Local Commerce: Collective buying (Part I)

Posted in Industry updates by Manas Ganguly on March 18, 2011

A few months back, Groupon made news because of a Google take over attempt for $6 billion. Groupon has stayed in limelight ever since. However, what has also emerged is the emergence of collective buying as a trend either in its original form or in different guises. This post examines the emergence of collective buying as a trend with lot of future potent.

Collective Buying Power with huge base discounts can only be redeemed if a certain number of people agree to buy the deal together.
U.S. consumer spending on deal-a-day offers could grow from $873 million in 2010 to $3.9 billion in 2015, according to a recent forecast by BIA/Kelsey. That represents a 35.1 percent compound annual growth rate.The market could reach $6.1 billion by 2015 — a 47.4 percent CAGR. The most conservative scenario, BIA/Kelsey estimated, would be a 19.7 percent CAGR, resulting in a $2.1 billion market by 2015

Web-based local deals is a market that startups such as Groupon and LivingSocial have blown right open by cold-calling and visiting local businesses to get them to mark down goods and services for the sake of bumps in volume. Collective buying rides the current wave of social networking to Facebook, Google, Yahoo and others are looking to join the fray. For merchants, it’s a chance to fill empty tables or bring in customers during historically slow times. Local businesses have never really had a simple way to manage their perishable inventory, especially labor and food. Why waste those resources during slow periods when you can bring savings-savvy consumers through the doors with a highly targeted local deal?For users, obviously, it’s a chance to get more deals, with the added convenience of location and the added urgency of an expiration hour, not just date.

The second part of this post will be about the various players who feature in collective buying.

%d bloggers like this: