Group Buy Research

http://www.warwickdailynews.com.au/story/2010/11/29/will-australias-groupon-bubble-burst/

Will the Groupon bubble burst?
Patrick Stafford | 29th November 2010

YOU can call it the great Groupon gold rush.

IN just 12 short months, more than a dozen new group buying sites have been launched in Australia, all modelled on US group buying pioneer Groupon, which has annual revenue of about $US350 million and a valuation approaching $1 billion.

In some cases, even the names sound similar – as well as market leaders like Jump On It, Cudo and Spreets, Australian sites Scoopon and Zoupon are also jostling for a slice of the market.

And while Australia's group buying explosion might have a dotcom bubble feel to it, that hasn't stopped investors including Microsoft, PBL Media, Ten Network, venture capital veteran Roger Allen, US company Living Social and original Facebook investor Klaus Hommels leaping into the sector with at least $15 million in venture capital.

The most successful of the Australian sites claim to be turning more than $2 million in revenue per month, but already the industry's main players are claiming the market is overcrowded and it's only a matter of time before smaller players, which include Ouffer, Zizzle, DealMe and Crowdmass, will begin to fall away.

Groupon president Rob Solomon told SmartCompany the company has noticed the huge number of copycat businesses – and it's a trend that won't last.

"There are a lot of clones in Australia, or Britain, and China. All over the world they are jumping on the market. But there just isn't going to be room for 20 to 30 players, there'll be room for one or two main ones, and then maybe some niche sites."

"You're going to see consolidation over time. It won't happen overnight, but merchants don't want to work with 10 guys, they want to work with a successful business."

Cudo chief executive Billy Tucker says the consolidation will happen sooner than most people think.

"I think we're going to see consolidation over the next three to six months. I've already seen some of these businesses evolve in their models, and they'll do everything they can to try and change their business."

The group-buying model
The Groupon model is simple. Sites partner with small businesses, (ranging from restaurants to retail stores), to offer discounts on a particular product or event.

But these deals only work if a certain amount of people sign up, and that magic number changes every time. If one deal requires 300 buyers, and you have 300 customers when the time ends, then the deal goes ahead. But if you only have 299, then it's a no-go.

It's a strange model, but it works – and spectacularly well when done right. The best of these companies are making tens of millions of dollars a year.

Most of the deals are for local businesses like restaurants, but some are serious revenue-raisers. Groupon's biggest deal so far was with Gap, which earned $US11 million in a day for offering 50% discount deals.

"I don't think we've seen a space that has been copied so quickly, or as shamelessly," Solomon says. "But getting millions of subscribers is the difficult part. Throwing up a site and doing some deals, well, a lot of people can do that."

Australia's growing market
Within six months of Groupon starting up in 2009, Australia's first group buying site began – but exactly which site was the first to market depends on who you talk to.

Gabby Leibovich, who runs daily deals site Catch of the Day, launched Scoopon on April 1. He claims the company hasn't used a single cent on advertising so far, and instead has leveraged Catch of the Day's 500,000 strong mailing list.

"The site was launched in April. We spotted the trend months ago, just as everyone else, but it took us some time to get programming. We were inspired by the success of similar sites in Europe and the US."

But competitor Spreets believes it was the first to launch. Founder Dean McEvoy says the company began in March, but didn't receive its $2 million in funding from investor Klaus Hommels until after April.

"We came into the market competing against them, because while we were the first to launch we didn't really receive our funding until after Scoopon launched. They already had a huge database and we were competing against that."

Some of the larger offerings include Jump On It, backed to the tune of $1.3 million by veteran investor Roger Allen and with $5 million from LivingSocial.com, and the PBL/Microsoft venture Cudo.

Billy Tucker, chief executive of Cudo, says the company is the latest player in the race, having launched in September. But Tucker says he has already managed to gain a significant foothold.

"I'm still not comfortable just yet, but to be honest, Microsoft and PBL are prepared to do what is necessary to grab a share of the market and they know what they need to do."

Tucker refers to official Nielsen data, which shows that for the month of September, Cudo came in second for group buying sites in Australia, with 343,000 unique browsers.

Jump On It was recorded as having 410,000 unique browsers. Spreets maintained third place with 294,000 uniques, (although McEvoy says this figure is actually underrepresented compared to Google results), while the Nielsen data shows Scoopon recorded just 166,000 browsers. However, Scoopon claims this figure is actually over 266,000 for September.

OurDeal came in last, with 64,000 uniques, but chief executive Julian Holman says the company is "tracking well on budget" and experiencing solid growth.

How lucrative is this sector?
If it's hard to pin down the companies on user numbers, it's even harder to get a sense of their revenue.

At the top end, Jump On It has previously claimed to be turning over $2 million a month, which would put them at the top end of the sector. However, Zoupon chief executive Adam Schwab says that figure is "extremely unlikely".

"I don't think that's even close to being correct. At the moment I'd be happy with $7-10 million. To get $24 million you'd need to be doing about $40,000 a day."

Spreets also claims to have made $2 million during September. However, recent research conducted by marketing firm Altima show these sites may not be earning as much as originally thought.

Analysing deals made by Jump On It, Ouffer, Scoopon, Spreets and Schwab's Zoupon between September 1 and October 25, Altima says a total of 183 deals were made, generating 123,736 purchases and a transaction volume of $4.8 million.

Altima said Spreets was the largest player with $1.7 million of the full volume, followed by Scoopon with $1.3 million, while Jump On It came in third with $1.3 million. These three, Altima argues, are clearly the leaders of the market.

McEvoy did say Spreets now has more users on its email list than Scoopon, which Leibovich says has more than 100,000 addresses.

"We've not only got a large database, but we've overtaken them," McEvoy says.

But Leibovich isn't forthcoming with many details. He says the entire Catch of the Day network turned over $60 million during 2009, before Scoopon launched, and the network is set to turn over $100 million this year – but he won't say how much of that is due to selling coupons.

But Jump On It claims to be the biggest of the lot in dollar terms. Chief executive Colin Fabig says the company is on track to reach $50 million in revenue, will expand its employee base to 150 in the next four months and plans to offer multiple deals each day for capital cities.

The company says it has over 700,000 subscribers on its email list, (along with the LivingSocial platform), along with another 100,000 Facebook fans, and will reach more as it expands.

The company just received a $5 million investment from group-buying giant LivingSocial, and will also handle the company's local operations. Together, Fabig says the companies will control the group buying space.

"You'll be able to get deals for your city and then go out and get them locally, that's what the two platforms offer us. A person may get multiple deals from competitors, but we are able to give them multiple deals from the one site."

It's also necessary to point out that these sites don't see all of their revenue. Cuts are split between the company and the businesses putting their deals on the site, and none were willing to disclose just how much money is going to either side.

But even that amount can vary. Schwab says while the industry standard is for merchants to hand over 30% of the revenue to group buying sites, this can change.

"The rates vary, but these deals can run anywhere between 10%-100%."

Points of difference
While none of these companies are exactly forthcoming with just how much money they're making, what is clear is that they are all frantically trying to gain as many members as possible and grow their email lists.

Cudo is using the backing of Microsoft and PBL to spread television ads across a number of different capital cities.

"We're promoting our business typically twice a day, and we think we're able to show our vendors that they are able to get on TV with our offering."

Leibovich says his company hasn't even spent a cent on advertising. Instead, the company believes its doing fine by bringing customers over from Catch of the Day.

"I think the number of categories for deals will grow. Vendors will become familiar with the space, and then the amount of offerings will grow and there will be a lot more variety. That will help the industry as a whole."

Leibovich points to Scoopon, Jump On It and Cudo as the main players. The rest, he says, won't last for long. But McEvoy from Spreets says Cudo will die off due to the sheer amount of money being spent on television ads.

"The largest players in the market are us, Jump On It, Scoopon, and some would say Cudo because they have the backing of Channel Nine and Microsoft. But I think they will die, because they're throwing heaps of advertising behind it but they're not selling as much."

"I think someone will buy them up, or at least they'll be bought for someone else."

But it's hard to compete with the success of the Cudo's advertisements, especially given the company rocketed to second place in terms of traffic in just one month, according to Nielsen. Tucker says as long as the company keeps pumping the ads, they will maintain their position.

"The number of people we put in our email database is secondary, because we think the advertisements are doing their job. Our email base is large and growing quickly, but it's not the main issue for us."

Buying Facebook
One of the more curious methods for getting ahead of the pack is the buying and selling of Facebook groups. Zoupon founder Adam Schwab says this occurs when a business approaches the administrator of a Facebook fan page, and then starts using that page to plug their deals.

"Facebook groups are like any mail list. They're like a database. Jump On It uses them as a great communicator with their customers," he says.

Currently, Jump On It offers coupons through a number of Facebook groups, including the "I Love Melbourne" and "I Love Sydney" groups, which have well over 100,000 members on each. The company isn't shy about branding – the Jump On It name is clearly displayed in the profile picture.

But while Jump On It began late 2009 and the site itself launched in the middle of this year, the "I Love Melbourne" site has posts dating as far back as April 2009. At some point, Jump On It became involved and started offering deals.

Fabig says Jump On It made two of its Facebook pages but obtained control of a Melbourne-based page through a deal with its administrator.

"I Love Melbourne was run by a bloke. The site had started already, and we talked to him. This was at the time we were starting up the other sites as well. We spoke to him and at that time he worked for us for a while, and he was paid."

Fabig also believes his company, the largest in the local group buying market, will stay strong by pushing as many deals as possible through both Jump On It and LivingSocial's Australian platform.

"We think we are way ahead now, and with those two platforms we will maintain that position. The question is, how do we stay ahead? We think that offering multiple deals in your local area will keep us there."

Schwab suggests buying a well-established page can reach well into the thousands of dollars. He says his own company, Zoupon, has done the same thing.

"We just approach them and ask. Of course, it depends on the group and the negotiations between the parties, and you can pay per member, but it differs from project to project."

"So we used one called Secret Melbourne. We just kept it the same, and then we started to add Zoupon deals in there for Melbourne users. We kept the purpose of the group intact, it's a great way to start plugging deals to your members."

The great email chase
These players all say the same thing – group buying is a win for the business, a win for the customers, and a win for the operation selling coupons through the site. But is that always the case?

There are no large companies to be seen, at least so far. The largest company involved in a group-buying deal is arguably Gap, but Solomon says the focus is purely on SMEs.

"Most of the offers we run are for local, smaller businesses. Eight out of every $10 spent in the US is spent in a person's local area. Ecommerce is a gigantic category, but this model focuses on those local businesses."

The group-buying business model depends on small businesses walking away satisfied. If they stop offering deals, then these sites are left with nowhere to go.

Bagel House, a Sydney-based bagel business, says its own deal with Spreets performed particularly well and the company sold 300 vouchers in a single day. "We could classify it as a success," the company said.

Viva Photography, a Melbourne photography studio, also said its Scoopon deal did very well. "A lot of people bought them," the company said. "Our deal went pretty well."

But while there are many customers who might say their deals have given them some much-needed exposure and a shot in the arm, there are also those who would say dealing with coupon sites isn't a financial success.

Miki Kospantinovic, who owns Curves Restaurant in Melbourne, managed to sell over 2,000 coupons. But she admits the deal hasn't given her any sort of financial benefit.

"We did a promotion giving away $85 worth of food and beverages for about $25. So that's over a 75% discount. It's not for the money, you're doing it for exposure," she says. "We've lost a little in the process."

In fact, Cudo has already come up against this issue. The company was forced to recall an offer earlier this month after the merchant, a cupcake store, was unable to satisfy the huge amount of demand.

Julian from OurDeal says this is the problem that many companies will face. They'll end up selling thousands of coupons and actually lose enough money that it could send them out of business.

"What I see happening is that companies may be a little too forward-facing. They may be too much about acquiring members, and turning all the taps on 100%. So you have a restaurant that sells 3,000 vouchers, and then can no longer survive."

Holman says this a problem OurDeal has identified, and it already has a solution – capping deals.

"We've taken an approach to help out our businesses, so we have capped deals. They run at 100 or 150 only, or whatever the number is, so you don't have a merchant that is absolutely slammed by our service. We think it sets us apart and is a good point of difference for our business customers."

Consolidation is coming
There are already problems beginning to appear with so many players. Leibovich says some of his sales team have encountered problems in signing up new business members.

"We started Scoopon with about three or four people walking the streets trying to source deals. And it does become slightly crowded with so many people in the market – you find that anyone you approach has been approach by 10 other people before."

On the other hand, Spreets believe success in this sector is all about the database, rather than signing up as many businesses as possible.

"We already have a large database, and we have overtaken some of our rivals. We're focusing on building the quality of our database, because you want to be sending to good people, not just bargain hunters."

Cudo believes it will be able to maintain its image by keeping the amount of television advertisements high enough to maintain regular interest. On the other hand, OurDeal says the market will change, but not necessarily through natural attrition.

"I believe we're going to see Groupon enter the local market, either through an acquisition or organically, and maybe two major players will be left."

But Fabig says that won't necessarily be the case. "I think they'll have to buy a company. They are too far behind when it comes to user penetration and it's going to be too hard to start from scratch again in a new country."

Robert admits the company is looking at either an expansion or acquisition, but hasn't decided on an entry point just yet.

"We look at markets all over the world and we're evaluating when and where to go in. It's just a matter of time. Now we're evaluating the next 10 or 20 countries to go into."

"But we think the Groupon brand is the meaningful part of the business, and we want to bring that with us whatever we do."

If Groupon comes out here, it may do so through buying Scoopon – the company is currently in a trademark battle and wants Leibovich to hand over the company's URLs. Or it may even consider Jump On it, which has a considerable following through its Facebook pages.

But while Robert says the company is still negotiating how to enter the market, it certainly knows already how to evolve the model. He argues personalisation is key, and if sites don't evolve to make users feel welcome, they'll die off.

"The next component with this is personalisation. We're launching a deal a day, but in Chicago, for example, we might run 10. So you're getting deals based on your region and buying patterns."

"Getting more and more personalised and attracting new customers that way – that's the huge difference between us and the companies popping up everywhere."

Saturday, August 13, 2011