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Group buying may not be dying, but it’s certainly sick.
In the two-and-a-half years since the industry hit Aussie shores, there’s been a dramatic swing in its success. A year ago, there were 100 players, including major names like Scoopon, Groupon, Spreets, Cudo and LivingSocial. Today there are about 40.
Fewer than 10 control the majority of the $500 million market. Revenue growth declined most of this year and has been flat in the last quarter. Smaller companies have fallen away, either through low sales or, in the case of disappearing company SoSharp, financial turmoil.
The pain isn’t limited to smaller players. Earlier this year, Yahoo! said it would stop handing over performance payments to its subsidiary Spreets, and Cudo chief executive Billy Tucker recently said he left the industry at a “good time”.
Insiders question the industry’s profitability and revenue forecasts. “What’s happening with some of these businesses and their spending is just not sustainable,” says Billy Tucker. “Something has to change.”
Industry consolidation has continued due to fatigued merchants, consumers and overly ambitious marketing budgets. Many companies are not profitable. There’s also in-fighting – international companies accuse media-owned businesses of going down the tubes, and vice versa.
But still, analysts believe existing players are in a good position.
“I think there’s an opportunity for improvement here,” Telsyte senior research manager Sam Yip says.
“And there are plenty of opportunities for the existing businesses.”
The international downfall
Groupon has lost 80% of its value since its initial public offering last year. Accounting problems aside, things are also pretty bad in Europe, where sales are slow.
But the Australian fallout is not the result of an international trend – this is a domestic problem. And not all of what’s about to be described can be attributed to any sort of executive failure. These are industry trends affecting some of the biggest companies in the country.
Consider the following:
> Last year, there were 100 group-buying companies. Now there are less than 40.
> The industry is worth $500 million and continues to grow but most of those 100 group-buying companies were producing no substantial revenue.
> Yahoo said earlier this year it would stop giving performance payments to Spreets. A source told The Australian Financial Review the “gloss has worn off the space”. Industry sources have told Private Media that Spreets is in trouble.
> In June, it emerged Spreets founders Dean McEvoy and Justus Hammer had moved on to other ventures. Yahoo! said the move was “part of a planned management transition”.
> Cudo chief executive Billy Tucker left the company to pursue his own ventures and told the Financial Review he left at a good time – and the industry faced plenty of problems.
> DealsDirect shut down its daily bargains site, DealMe.
> The Fair Trading Commission said in December last year it had received a large number of complaints about deals bought through group buying websites.
> Smaller sites, such as RedLipDeals, began to lament that the industry was no longer sustainable.
Now, industry insiders say the major companies are struggling. While Scoopon is said to be profitable, the media-owned group buying sites are reportedly performing poorly.
Cudo, owned by Ninemsn, Spreets, owned by Yahoo!7 and OurDeal, owned by Ten, are “not doing well at all”, according to industry sources. However, Cudo chief Mike Sneesby tells SmartCompany the company recently had its best month ever due to a deal for SeaWorld – although admits the industry is changing quickly.
“If you look at today’s market, I’d say there’s room for three or four players. We’ve heard more businesses have been pouring money into themselves to keep it running.”
“From my perspective, it can only go on for a certain amount of time.”
LivingSocial chief Adam Rigby says these media companies are the ones shackled by the whims of their parents, saying they’re “sucked up in corporate infrastructure”.
Mid-tier sites have also been snapped up. Deals.com.au bought Ouffer earlier this year – and Catch of the Day has bought another deals site of its own. Before Groupon was able to use the local name, it also bought a couple of local, smaller sites.
According to a recent report in The Australian Financial Review, Groupon and Scoopon hold about 50% of the market, while LivingSocial controls about 14%. The rest of the market is shared between the other major and minor sites.
So what’s happened?
The industry’s problems differ depending on who you speak to.
For Billy Tucker, indiscriminate marketing has been a big problem. Specifically, he means the international duo: Groupon and LivingSocial.
“The sites are just pleasing everyone and it was never meant to be a marketplace, as it is now,” he says.
He’s referring to businesses now offering more than one daily deal. Instead, they offer dozens, putting pressure on businesses to come up with more money and staff to manage merchant relations.
“The merchant used to get promotion out of this, but the information coming at the buyer is a lot to take in.”
Sam Yip agrees, although says the industry’s problems are broader. “There were low quality merchants that didn’t understand how to utilise the group buying model, and consumers who didn’t know what to expect from these new sites.”
One critical factor, Yip argues, is that sites started offering deals that lasted more than 24 hours, which cheapened the value of the deals on offer. The more you do that, he says, the more these sites become like department stores – the very type of retail offer they had tried to avoid.
“The whole 48-hour deal thing is a critical factor. Once you start holding deals over two days, then you lose the ability to come up with new deals every day that seem fresh.”
“A large portion of the control needed is found in innovation. These companies have the tools to innovate.”
Deals.com.au head Adam Schwab is more direct in his criticism. The sheer amount of emails bombarding consumers is an annoyance, he says. In a quest to make group buying more customisable and focused, users are hit with emails two or three times a day.
“A lot of my friends are happy to receive emails multiple times a day, but you lose a lot of people in the process of doing that and it becomes frustrating for them,” says Schwab.
The massive amounts of marketing spent by both Groupon and LivingSocial, subsidised by American parent companies, have allowed them to control large slabs of the market – although Groupon still far outstrips LivingSocial in market share.
Mike Sneesby says it’s only a matter of time before that marketing spend comes back to bite the more troubled companies – which will feed into more consolidation.
“Now, I don’t know the bottom lines of every company, but I’d say there’s room for only three or four players in the main space. Anecdotally I’ve heard more businesses have been pouring money to keep their operations going.”
“From my perspective, that can only go on for a certain amount of time.”
He also argues that the local companies are at an advantage, in that “we aren’t tied to international parents”.
Schwab agrees that a local foothold can bring benefits. “I’m not privy to the financials for either one of those companies, but I’m guessing they’re losing quite a bit of money being attached to their parent companies.”
Groupon Australia chief executive Andrew Mason says the company’s strategy is to differentiate itself by focusing on tech upgrades like customisation tools.
“For Groupon Australia to maintain and grow its position as market leader, we need to stay ahead of the pack and continue to push industry boundaries.”
Adam Rigby, on the other hand, feels the combination of a media and group buying division just doesn’t make sense.
“All internationally-based organisations have overheads and complexities, but I think they’re far less distracting than the problem of having a whole different corporate agenda,” he says, referring to media entities.
“So you may have an international structure in one business, but there’s misaligned strategy in the other. The signatures are very different.”
Yahoo!, Nine and Ten all bought group buying companies in 2010-11. In its defence, Cudo chief executive Mike Sneesby says the business is developing long-term potential by partnering with brands like Getaway to validate its travel deals.
But Rigby says the two entities just don’t gel.
Rigby wouldn’t disclose revenue figures for LivingSocial, or market share, but did suggest that Telsyte’s estimate of 14% is inaccurate. As for the industry’s future, he says it’s not disappearing. But there are too many players to sustain.
“From the outside, I think the appearance is that change is much bigger than it actually is. The press got excited about group buying, and then there was this talk about how it was amazing but wouldn’t last long. Then you have complexities like the Groupon share price.”
“The idea that the industry is going to disappear is absurd.”
Billy Tucker says refunds can be a problem for cashflow-strained businesses like group buying sites.
“It’s not uncommon to see 5% of gross revenue paid out through returns. If you’re taking 50% net margin and you see 5% gross revenue paid out through refunds, that’s kind of sustainable.”
“But if you’re only taking 20-25% as a margin, suddenly it’s not. That’s a huge amount of refunds.”
Scoopon uses the entry of American companies to the market as framework for its own branding story: the “little Aussie battler” going up against the big guys. But, the truth is, Scoopon is the second biggest group buying company in Australia. And general manager Jared Baker says that’s because of a focus on sustainability, not just revenue or profit in isolation.
“It’s not about profitability, although we are massively profitable. Profit is just the outcome you get of doing your business well.”
“If you’re only focused on revenue, you’re not incentivised to have a healthy bottom line. You’re making different decisions for your customers than you would in the long term.”
Plenty of customers have expressed problems with local group buying sites. Regulators have received more and more complaints over the past two years.
But perhaps the biggest shift has been in the deals themselves. Originally littered with discounts on beauty treatments and restaurants, companies are now offering more product-related deals.
But the companies say this is a downside. Sam Yip says product deals can hurt the bottom line.
“These businesses cannot have a healthy bottom line if you’re just throwing money at things like product deals and repeat deals. It stops getting a good result for the merchant,” he says.
Merchants take big hits on margins for product-based deals. Service deals, on the other hand, can generate money.
A bigger problem still is when products end up being dodgy. The SoSharp scandal earlier this year saw the company incur a six-figure refund bill after its KitchenAid deal went bust – the mixers were faulty.
“Customers can smell a rat,” Billy Tucker says. “I look at half a dozen products and can see which ones are just not good.”
Merchandise kings Catch of the Day have recognised that travel-based deals are the key to success, rather than product-based offers. It’s even secured a travel agency licence to offer more of these deals.
“There’s less hesitation now to spend a lot of money on these deals,” says Baker. “We’re seeing higher average spends, and that’s to do with customer confidence in these types of deals.”
“The reason we got a travel licence is so that people have that confidence. They know that if we were to go bust, which would never happen, they’re defended by Australian law. It gives security about these $3,000 to $4,000 deals.”
The group buying game is one of scale. Businesses that have already spent enough money to control double-digit market share are likely to stay there – but only if they can hold customer loyalty.
Billy Tucker notes Scoopon is likeliest to succeed in the long term, noting its connection to the Catch group. Outside investors help too.
Adam Schwab says it’s media-owned companies, Cudo, Spreets and OurDeal, that will struggle. With limited market share, they will need to work harder to gain more loyalty.
“In the next 12 months, we’re going to see less and less of the traditional awareness marketing and, instead, [more] building loyalty.”
Scoopon’s Jared Baker says much the same, arguing customer care is vital in a limited growth market.
“In the last year, we’ve invested much more in customer care than in marketing.”
Group buying isn’t going away. It’s worth $500 million and continues to grow. But as Billy Tucker points out, we’re only now seeing the consequences of its dramatic, early success.
“These websites need to slow down the amount of information, reduce the number of deals, and then focus on the no-brainer deals that everyone is going to like. That was the original intention.”
“There’s a market here. There’s $100 million in profit for the winners, but it has to evolve.”
This article was first published on LeadingCompany's sister site, SmartCompany.