Daily Deals: The Latest US Internet Boom to Bust?

WASHINGTON, December 4 (By Sasha Horne for RIA Novosti) – Massages for half price. Cooking classes with top chefs. Deals to test drive sports cars on superfast racetracks, or spend the day with the Dallas Cowboys cheerleaders, including locker room access. They’re all part of daily-deal mania in America. But those deals have seen better days.

In 2009 daily-deal mania swept across the US, as price-obsessed Americans were introduced to an innovative, social media driven concept of saving money on common and not so common services with the advent of flash sale websites.

“There was such a craze about these daily deals, and everyone was excited,” said David Reibstein, marketing professor at The University of Pennsylvania.

The concept was simple, find deals around town that offer deep discounts on dinner, yoga, or other products. In return business owners received exposure and an increase in customers.

During that period, industry leaders Groupon and its chief competitor LivingSocial were called game changing. Consumers couldn’t say no, thousands of people found jobs at the companies, and hundreds of other websites launched as budding entrepreneurs sought to emulate their success.

“Definitely a big part of Groupon is taking some of those nicer things that are hard to afford these days and bringing them back within reach,” said Groupon founder Andrew Mason in a 2009 interview with Time magazine.

Now, three years later, that once booming industry is near shambles. Last week, LivingSocial laid off 400 employees, 10 percent of its entire staff.

That came several months after Amazon, the online shopping giant, reported a worse-than-expected loss due in part to its investment in LivingSocial. According to reports, Amazon lost $169 million on its $175 million buy-in.

Groupon, the company that once turned down a $6 billion buyout offer from Google, is taking a beating as well. In early November, its stock plummeted 30 percent, and last week, as the company’s board of directors met to discuss the fate of its CEO, shares of Groupon, which debuted on Wall Street at $20 earlier this year dropped to $4.36.

Over the past three years, analysts say online deals have gone from a hot commodity to an easy to copy but difficult to sustain business model.

Some analysts, like Reibstein, balked at the business from its inception.

“I was highly critical from the beginning, and everyone thought I was nuts,” Reibstein said in a telephone interview with RIA Novosti.

In May 2011, when asked about the sustainability of the daily deal model, Reibstein predicted merchants would stop using the flash sale services when they began to realize that the coupon deals were duds.

“Merchants saw it as a daily deal that would attract new customers,” Reibstein said.

But because daily deal companies take a cut of whatever business the special offer drums up, Reibstein says small business owners often walked away with little or no profit.

“Some companies even take a loss, thinking they’ll make it up because of all the new customers who would come back again and again, but that’s just not the case,” said Reibstein.

In fact, a recent survey found only 3 percent of retailers reported repeat customers from daily deals promotions.

“The customers that use the deals are not high value customers,” said Ken Russell, an analyst who works in business development for tech startups.

“Instead businesses get customers who chase deal to deal and have little interest in coming back to pay full price,” he said.

The survey also found 82 percent of small business owners polled said they will not run a daily deal this year, even though they have in the past.

Russell also said consumers are beginning to shy away from daily deals as well.

“There are only so many deals out there, and Groupon, LivingSocial, and others are all going after the same market,” said Russell. “The market just can’t handle hundreds of competitors so you’ll begin to see either consolidation or companies folding,” he said.

Russell likened the plight of the daily deal industry today, to the tech bubble that later burst in the 1990s, and there is at least some available data that indicates this could be the case.

Using data gathered by daily deal aggregator Yipit, the Wall Street Journal reported that 170 of 530 national daily deal websites disappeared in 2011.


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