Group buying loses its mojo

The group buying space has seen massive consolidation, with local businesses in the sector shrinking from around 40 sites to a handful within the space of just a year. When the concept launched, it was touted as the next big thing, but – now that the hype has settled – is settling into its role as a part of the broader e-commerce space, instead of revolutionising the landscape.

Groupon, at one stage the fastest ever growing technology company created, was launched at the end of 2008, and, by 2010, had entered more than 100 new markets. The company entered SA early in 2011, on the back of its buyout of Twangoo.

Locally, group buying first appeared in earnest at the beginning of 2010, with the establishment of WiCount. WiCount was followed by Twangoo, and several other entities, such as Kulula’s Daddy’s Deals and Avusa’s Zappon. While Daddy’s Deals is still around, Zappon and several other players that intended to capitalise on the hype have closed, and group buying is no longer the buzz it once was.

TAKING STRAIN

At the end of February, shares in Groupon – listed on the Nasdaq – lost a quarter of their current value on the back of its results, Reuters reported. While the stock has recovered somewhat, it is now worth a little more than a quarter of what it was when it listed in November 2011 – at the time the largest ever technology listing since Google.

Former Groupon CEO, Andrew Mason

The group buying pioneer’s results revealed that it sacrificed revenue and profits to attract and keep merchants, the wire service reported. Therein lies the rub with group buying; customers become attracted to the discounts, and not the supplier, who offers the discount in a bid to grow its customer base.

For the full year, Groupon reported gross billings up 35%, to $5.38 billion, while revenue grew 45%, to $2.33 billion. It made a full-year operating profit, compared with a loss in 2011 and narrowed its bottom line loss, but saw operating cash flow decline.

However, its bottom-line loss in the fourth quarter was bigger year-on-year and caught the market by surprise. It made a loss, despite a gain in billings, revenue and operating profit.

“Record billings growth this quarter is a clear signal that customers love Groupon,” said then-CEO Andrew Mason, just before he was abruptly ousted. “We will continue to invest in growth through 2013 as we see new opportunities to give our customers what they want.”

CFO Jason Child told Reuters that Groupon began sharing more money from its deals with merchants early in the fourth quarter, to persuade new businesses to come on board with an initial offer, and also to extend existing relationship with others. This was done selectively in the US and in Europe, he added.

Historically, Groupon has kept about 40% of the money generated by daily deals. That declined to about 35% in the fourth quarter, notes the wire service. Groupon then “fine-tuned” take rates later in the quarter and Child said the company expects profitability to improve as a result.

“We are focused on driving growth,” he said in an interview. “We will make the investments we feel we need to optimise for growth and merchant profitability.”

NOTHING SPECIAL

Vestact analyst Sasha Naryshkine says Groupon suffered from the fact that there is too much competition, as it is very easy to replicate the group buying model. “There’s nothing special about it.”

Daniel Guasco, Groupon

Group buying is essentially just a discount provider and, while Groupon had a great idea and saw quick growth, it was not long before everyone jumped on the bandwagon and started replicating the concept, says Naryshkine.

Groupon was the largest listing at its time since Google and was priced at $20 a share, but has lost more than three-quarters of its value since going public, notes Naryshkine. Some shareholders were criticised for exiting at the initial public offering, but anything could have happened with the business, he adds. Groupon’s shares crashed after its latest results, but since trended back up a bit, says Naryshkine. “It’s all been one-way traffic.”

While there may be a huge available market to target, the question is how will Groupon be able to monetise it properly. The concept is synonymous with an online couponing business, which retailers could do themselves.

TIME TO GO

The day after its results were published, Mason issued a frank letter to staff: “After four-and-a-half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my  family. Just kidding – I was fired today.”

The co-founder and now former CEO of the group buying site added that if anyone was wondering why he had been fired, they “haven’t been paying attention”.

In the letter Mason wrote: “From controversial metrics in our S1 to our material weakness, to two quarters of missing our own expectations and a stock price that’s hovering around one-quarter of our listing price, the events of the last year-and-a-half speak for themselves. As CEO, I am accountable.”

Mason said to Groupon employees: “You are doing amazing things at Groupon, and you deserve the outside world to give you a second chance. I’m getting in the way of that. A fresh CEO earns you that chance. The board is aligned behind the strategy we’ve shared over the last few months, and I’ve never seen you working together more effectively as a global company – it’s time to give Groupon a relief valve from the public noise.”

The public announcement from the group thanked Mason for his “leadership” and “creativity” and announced that chairman Eric Lefkofsky and vice-chairman Ted Leonsis would takeover the helm while the search is one for a new CEO.

Leonsis said Groupon will continue to invest in growth. “We are confident that with our deep management team and market-leading position, the company is well positioned for the future.”

According to Lefkofsky and Leonsis, they are aware that Groupon’s “operational and financial performance has eroded the confidence of many of our supporters, both inside and outside of the company. Now our task at hand is to win back their support.”

STILL CONFIDENT

Locally, Groupon SA joint CEO Wayne Gosling still believes that the concept of group buying is the next big thing in e-commerce. Gosling says social networking and group power is continuing in significance and impact.

“The technology that is exploding into the space right now is phenomenal. For our partners here in South Africa to finally have access to the full reporting capabilities of our merchant centre is amazing. It is something that our merchants are getting really enthusiastic about.”

Gosling adds that there are heat maps and “amazing” analysis tools for the promotions merchants run. “There probably isn’t such insight on any other advertising platform. On the consumer front, our next big thing is making e-commerce hyperlocal. Groupon Now enables subscribers to see what deals are happening live in specific areas, at a particular time.”

However, Gosling concedes that its processes have not always kept pace with its rapid growth. “In December, we had a problem with delivery, when one of the courier firms we were relying on went bankrupt.”

This, says Gosling, “is one of the realities of business in the current economic climate”. Groupon has been improving its quality assurance process so that it can minimise its exposure to bad deals and poor delivery.

“Based on the numbers of calls coming through and increased number of deals, we’re getting there with sorting out those issues from the tail-end of last year. So, through working with premium partners and having better global processes, we’re confident in what developments are being made.”

It has not always been plain sailing for the local group, which saw a surge in its business very quickly. In the middle of last year, joint CEO Daniel Guasco admitted that, despite Groupon’s strict quality assurance process, some vendors fail to come to the party.

For example, vendors may assure the products are in the country, when they are actually caught up in customs. Groupon has learnt from this and is implementing a stricter quality control process, he said.

A quick look at consumer complaint site HelloPeter.com shows that customers are not happy with what they are receiving. There are several complaints about a lack of service, no delivery, and difficulty in getting refunds.

Gosling says the company has learnt lessons, chief among these being to start with the customer and work back. “This is the foundation of Groupon, local commerce starts with the customer. If we’re to be the engine for that opportunity we need to determine the things customers want, and deliver them in the ways they want them.”

BUYING INTO THE CONCEPT

Arthur Goldstuck, MD of World Wide Worx, points out that the concept of group buying was always fraught with challenges and many were sceptical on many levels, especially of the business model.

The fundamental driver for retailers to take part is to garner new audiences, which they do through offering a massive discount, says Goldstuck. He says the discount is an incentive for the consumer, which provides a very good chance of attracting a new audience.

However, the dilemma is that consumers become loyal to the discount, and not to the supplier, so they go back to the group buying site to gain another saving and do not become repeat business for the retailer, says Goldstuck. He says that the offering needs to be compelling and differentiated.

Undifferentiated offerings are a recipe for failure, says Goldstuck. He says that group buying sites have to keep getting new customers on board, and adding new offerings, and face the risk of either running out of retailers or discounts.

Differentiated deals, however, are the best case scenario and result in customers spreading the word, says Goldstuck.

In South Africa, group buying has been an incentive to encourage those who are leaning towards shopping online into actually doing so, says Goldstuck. Group buying and Groupon have been the single largest conversion proposition, he adds.

Last year, four million people had the “propensity” to transact online, and half of these shifted from being willing to buy online, but not yet active, towards engaging in e-commerce, says Goldstuck. However, Goldstuck points out that once people pass the initial online buying stage, they start shopping around. At the end of this year, there will be 4.6 million people with a propensity to shop online, he adds.

The challenge remains to convince service providers that group buying is a compelling proposition, says Goldstuck. He says the danger is customers are looking for a killer deal, rather than a differentiated service.

RISE AND FALL

Everyone saw how easy it is to cut and paste the business model and did so, but made two mistakes in not realising that they have to sell to retailers and then sell to the public while also offering a sense of value, and trust, says Goldstuck.

Instead, they assumed that, because they have an audience for content, they can simply monetise it, but group buying is not a model that works like that, says Goldstuck. Globally and in South Africa, there has been massive consolidation, says Goldstuck. Around a year ago, there were 40 group buying sites, and most have since vanished, he says.

There are still a few sites around, but these are hard to find, says Goldstuck. The current main ones are Groupon and Wicount, he adds.

Group buying did happen in a big way for a while, then the wave almost crashed as the industry matured, says Goldstuck. He says the initial hype reaction was overblown and it is now fitting into its natural place in the e-commerce landscape.

In the middle of last year, 247deals.co.za, formerly 247deals.co, shut down operations after launching around 18 months previously. The daily deals site was accused of terminating operations and failing to honour its debts to customers, vendors and staff.

Jerry Biti, CEO of Australian digital solutions company Gambit Global Systems, who also headed the site said the now defunct site was temporarily put on hold after a group of “fraudsters” targeted it.

The disappearance of the site followed several others that had failed, including Dealify, which closed shop after about seven months of operation. This was preceded by the closure of Zappon, which lasted roughly nine months, and Dealio, which treaded water for about 10 months.

MIH, media giant Naspers’ investment arm, set up Dealify. However, less than a year down the line, it closed down. At the time, MIH Internet Africa (MIHIA) CEO of e-commerce platforms SA Stephen Newton said the collapse was due to unsatisfactory profit margins.

Zappon shut its doors, because it did not perform fi nancially, in a way that justifi ed its continued existence. When it shut down, Avusa Digital MD Elan Lohmann said there were a number of contributing factors to the early breakdown of what initially seemed to be a feasible money-spinning investment and the current group buying business model was flawed.

Lohmann said customer acquisition is expensive and there is no loyalty factor there. “People go where the best deal is.”

He said, at the time, that the venture had proven less than fruitful, and expressed doubt as to the viability of the group buying business model.

However, a recent entrant, which launched last February, Flook.co.za, has remained up and running. Originated by media executives Craig Ross, Nic Wides, Larry Katz and Russel Stromin, Flook was SA’s first group-buying e-business that focuses exclusively on sports deals.

Gosling says Groupon SA has been running for two years and “already we’ve seen several competitors come and go”.

“All models need to evolve to survive and thrive and that is something we do particularly well here in South Africa. Already, we’ve seen the group buying trend shift from just local deals to include goods as well as travel.

“Mobile is still the major space we are developing, especially with the increased use of smart phones and technology internationally, but also here locally. One of the most exciting consumer technologies on the horizon for us in South Africa shortly is the daily deal personalisation technology: SmartDeals, which is currently live in the UK. We are hoping to go live with it later this year which will be great for the South African consumer,” adds Gosling.

Groupon’s “long-term strategy is to become the local platform for e-commerce. All of these factors make the year ahead a very exciting one,” says Gosling.

However, Goldstuck says group buying does have a place in the e-commerce sector, but not as a dominant player.