Group buying: merchants strike back

When Billy Tucker started group buying site Cudo in September 2010, group buying was in its infancy. The first two websites had opened in February 2010 – it’s still a matter for urban legend as to whom between Spreets and Ouffer actually ran the first deal – and revenue for this new e-commerce channel soared. “Consumers were introduced to group buying post-GFC and were incredibly excited about the idea of accessing great ideas at a discount,” he says.

However, the growth phase is definitely over. Revenue peaked in the third quarter of 2011, reaching sales of $158.5 million and has been falling since, data from research firm Telsyte shows. “We’ve just come out of two years of massive, unprecedented growth,” Telsyte senior research manager Sam Yip says.

Tucker left Cudo in December 2011 to launch his own start-up 57 Signals and has a damning assessment of the sector. He refers to researcher Gartner’s technology hype curve when he says group buying is wallowing in the “trough of disillusionment” – a drastic fall in enthusiasm for a new product that follows a period of rampant growth.

“Group buying was a victim of its own success and hype,” Tucker says. “The hype for competition in such a small market like Australia led to an overpopulation of group buying websites, all offering an undifferentiated service.”

Not everyone is so bearish. Others in the industry think the websites, which offer daily discounted deals for products and services to massive databases, are just becoming more sensible in preparation for a new stage “driven by innovation”, Groupon Australia and New Zealand chief executive Tobias Teuber says.

What they can agree on is that after a whirlwind first two years in existence, the group buying sector that exists today won’t be the same in 12 or even six months’ time.

The changes may play out in favour of the small and medium-sized businesses that supply products or services. Stories abound of businesses that have been burned by the process but now the tables could turn.

Group buying websites are fighting to get the same deals, which swings the power balance back to the merchants.

In a contracting market, the websites instead need to be differentiated and to do this, they need the merchants on side.

In the first two years, the websites proved to be incredibly effective at attracting large numbers of new customers for businesses offering deals. The downside was a few horror stories where merchants “did go out of business because of running group buying deals because they weren’t prepared for the sheer number of consumers that would come through their doors,” Yip says.

He reckons that planning and structuring deals to benefit merchants was not on the minds of the early group buying sales forces.

The focus was on quantity, not quality.

Yip points to online marketing activity towards the end of 2011 to emphasise this point. The websites were spending up big, bidding for combinations of keywords on Google AdWords. “You could have typed in [to Google] anything you wanted … like ‘car, sky, nose’ and you’d actually get a group buying site ad,” he says. “It was almost like a frenzy. It shows that they were trying to grow their databases at whatever cost.”

That expenditure was “not sustainable” and has since fallen off, Yip says.

“Everyone has become just a wee bit more rational,” Tucker says in his Scottish brogue. “As a result it’s driven down the amount of revenue . . . and growth has stalled.”

He isn’t completely glum on the sector, however. “I still have the utmost faith that the market will exist in the future. It will recover to become a billion dollar market because I think it genuinely adds value to the merchant and consumer.”

But the pressure is on. In their heyday, group buying websites raised large amounts of capital from eager investors who want a return – such as James Packer taking an $80 million stake in Scoopon parent Catch Of The Day and News Ltd buying 50 per cent of OurDeal for $28 million – Tucker says. “A lot of these businesses have got too much to lose. They’re not going to pack up and go home.”

Customers and merchants can benefit from this motivation. Savvy merchants have an opportunity to “call the shots”, Tucker says.

“They could auction their unsold inventory to the best group buying site that can offer a great service, a great brand, an aspirational customer base, is willing to offer a low margin and [be flexible] on things like payment terms.”

The websites’ sales forces are also willing and able to work harder and smarter in structuring deals for their merchants.

This could include sitting down with a restaurateur, for example, and discussing average takings and margins per diner and structuring deals in a way that deliver similar yields, Spreets founder, who has since left the business, Dean McEvoy says. “I think the biggest goal of any business owner is to turn the people that come and experience your business into advocates of it,” he says. “The way we helped to structure deals was to fundamentally find out where [merchants] needed help and set [deals] up in way that [customers] come and have a good time and tell their friends about it.”

Growth will come from helping merchants “manage the loyalty side of their business, run more efficiently and improve yield optimisation,” LivingSocial Australia and New Zealand executive general manager Adam Rigby says.

“A local business often doesn’t think of their business in terms of yield and inventory management. By helping those businesses raise their standards and giving them tools and education we can make a meaningful impact.”

Tucker agrees in principle but says that for the sector to grow sustainably, this initial legwork with merchants needs to lead to repeat business for the websites.

“The way you scale is that 70 per cent of the deals you run are with merchants you’ve run with before,” he says. “That’s a key measure of success.”

To complete the group buying tango, customers need some loving as well. Yip says the effectiveness of deals is “eroding” – that is, customers are buying fewer vouchers than they might have for a similar deal 12 months ago.

Passive unsubscription – where users are still signed up to the database – is rife. Yip estimates that the top websites have about 1 million subscribers but users often delete their emails before reading them. That’s because, reckons McEvoy, customers are becoming more picky. The challenge is to stay relevant and while one way this can be achieved is by better targeting of users, none of the big players have seriously gone down this path.

LivingSocial claims it is the only outfit to offer “hyperlocal” deals, for example deals available in Sydney’s Northern Beaches, rather than just the city itself. However, this relies on self-selection by the customer while Yip and Tucker are adamant the intelligence exists to select for them.

“What’s inexcusable about that is the technology exists and customers will love you for it,” Tucker says. “We know enough about the customers to do a better job.”

“Group buying sites need to start segmenting their customer databases, offering deals [that are] appropriate to demographic and appropriate to [users’] buying patterns, which [websites] do have the data on,” Yip says.

What he is referring to is targeting users based on factors such as location, age, gender and what they’ve bought in the past. So if a 29-year-old woman has bought only vouchers for yoga classes and surfing lessons, maybe the group buying site should hold off on the cupcake vouchers when emailing her.

But it’s a “fine line”, Rigby says.

“We don’t want to lose the spontaneous experience,” he suggests. “Just because you’ve only bought restaurant or pilates [deals], it doesn’t mean you don’t want to see an exclusive ticket offer for a play in your area. If you become to prescriptive about what offers you’re sending, you’re fundamentally undermining the key proposition . . . which is the surprise and delight of a new offer that they may not have considered.”

Deals.com.au will continue to allow users to “tick a box” to choose what category of deals they want to receive, its chief executive Adam Schwab says but Yip believes this attitude will change when the “spray and prey” approach to sending deals erodes further.

Scoopon is “75 per cent down the track” of sending more targeted emails, the chief executive of the parent group Catch of the Day, Paul Reining, says.

Groupon is testing its “smart deals” platform in the US and European markets and is “optimising the algorithms that support personalisation”, Teuber says. “It will be rolled out through the world very soon.” No surprises then that Teuber reckons the algorithm based targeting is more effective than allowing users to select more relevant deals.

Yip also expects high levels of smartphone use to play a part in providing more relevant deals. “Location-based deals and services will spur on a new period of growth,” he says, painting a picture: “As you walk around the city you will get notified of deals that are close by to you.”

This is not technology for technology’s sake. Group buying still has the potential to be a sophisticated and cost-effective marketing channel for small and medium businesses. But for the sector to claw back its reputation and return to sustainable growth it needs merchants onside. Part of this relies on better targeted deals so customers don’t turn away.

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