Daily deals 2: The seeds of destruction?
Jinfo Blog

By Tim Buckley Owen

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At the moment the daily deals bandwagon seems unstoppable. But there are warnings nevertheless that all may not quite be as well as at first appears.

As surveys from one daily deal provider, PriceGrabber, indicate, almost two thirds of online shoppers believe that the market is becoming overcrowded, with too many sites. And, crucially, the sites don’t seem to be doing much to generate new sales opportunities.

Almost 80% of the PriceGrabber respondents bought local deals to save money, while fewer than 20% used them to try out products that were normally outside their price range. It’s one of a growing list of challenges facing this industry, alongside an apparently overpriced model for local suppliers, disappointing levels of repeat business and a whole host of legal issues.

First, a paper from Harvard Business School assistant professor Ben Edelman points out that (under United States law, presumably) voucher discount schemes tend to operate in the highly regulated space of food and alcohol and therefore face numerous consumer protection restrictions. These may complicate certain marketing practices and disallow others altogether – yet one large Groupon shareholder says that the company “can’t worry about the noise the legal system creates”.

Next, research from Rice University in Texas indicates that daily deal providers will find it progressively more difficult to find new suppliers because not enough of them are coming back again to make the deals business viable in the long run. It’s not surprising; although almost 80% of deal users were new customers, many fewer ever returned to purchase at full price, and only just over half of participating businesses were making money on their promotions.

Finally, the coup de grace comes in a recent TechCrunch article, where local entrepreneur Rocky Agrawal agrees that the daily deal model only works if more and more new suppliers participate, while repeat business for those suppliers as a result of a campaign is bad news for the deal company. For a small business, a deal campaign equates to an incredibly expensive loan, he adds, and, he mischievously suggests, the only good time to use it is if you’re about to go bankrupt.

Why does all this matter? Because the biggest daily deal maker, Groupon, is poised to go public, having filed its registration statement with the Securities & Exchange Commission.  CNBC duly reports that it enjoyed almost 1,500% revenue growth in the first quarter – but also quotes Joshua Brown, author of the Reformed Broker blog, as saying that Groupon has “an indefensible business model”.

So if you happen to be asked to research the investment potential of the daily deals business, don’t be browbeaten. A little bit of (perhaps initially unpopular) caution might be a good idea.

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