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Posted at 06:00 AM ET, 08/05/2011

Let’s make a deal for an economic recovery

VIEW THE GALLERY | An employee works at the Groupon offices in Chicago, Ill. See more photos of some of the most innovative companies.

Daily deal sites like Groupon, which first burst onto the scene a little over two years ago, have now become one of the most popular website concepts around. "Groupon Clones" have multiplied like sun umbrellas at the beach, while big-time Internet competitors like Facebook, Amazon and Google have all sought entry into what appears to be a lucrative, if increasingly crowded, market niche. Google, after getting its $6 billion offer for Groupon rebuffed late last year, launched Google Offers in June — and recently beefed up that offering with its acquisition of The Dealmap on Monday.

Local businesses are selling. Consumers are buying. But what impact are these daily deal sites really having on the future trajectory of U.S. economic growth?

The oft-quoted mantra is that small businesses have always led the economy out of a recession. If the U.S. economy is ever going to move out of second gear, small businesses will — once again — play a leading role. The sheer number of deals these sites offer via local merchants are helping to jump-start small businesses around the country, right?


Groupon Inc. team members work at the company's headquarters in Chicago, Illinois. (Tim Boyle - BLOOMBERG)
In the first quarter alone, Groupon sold 28 million new deals, worldwide. While some of the most popular deals on these daily deal sites feature national chains like Gap, the majority of these deals are local restaurants, spas, hairdressers and off-the-beaten-path destinations in need of some extra discretionary spending. Who needs a government stimulus package when you have people breaking down the Internet door to pay $50 for a $100 dinner at a neighborhood restaurant?

Over the short-term, there’s no debate that these sites can be a tremendous volume driver for small businesses. They get people in the door. But will competition among deal offerers get out of control? Will 25-percent markdowns quickly become 50-percent markdowns, forcing small businesses to compensate for razor-thin margins in other ways? While some early studies hinted that many small local merchants actually lose money on their deals if they are unable to drive repeat business, a study from Rice University shows that 66% of small businesses actually run profitable promotions.

When Groupon — the largest and most influential of all the discount daily deal sites — filed for its IPO earlier this year, it also had to reveal everything to investors. Now it’s clear that the company may not be the cash cow Wall Street investors initially thought. Despite doing over $600 million in revenue in the first quarter of 2011 and signing up over 50 million subscribers, Groupon continues to lose money. The silver lining on all of this is that Groupon is losing money, since it is so expensive to acquire new customers — all of the marketing and promotion costs are chewing up the profits.

That’s why Google’s renewed emphasis on daily deals is making things so interesting. With Google, there’s an opportunity to integrate the daily deal concept into Google Maps and Google Wallet — all of which is sprinkled on top of the Google advertising model. In short, there are enormous opportunities for Google to scale the daily deals business in a way that Groupon could not. The Dealmap acquisition means you can search for daily deals and see them pinned on a map, while the Google Wallet option means you can buy these deals by just aiming your phone at the cash register of your local merchant. At any point in time, anywhere in the nation, you can track down deals and pay with your Android phone.

At least, that’s the vision.

As The Winter of Our Discontent continues in Washington, these daily deal sites can become an immediate driver of economic activity and the savior of small businesses across the nation. With the jobs engine stalled and economic growth under pressure on the macroeconomic front, the sheer volume of discretionary income spent on these sites could help tip the economy into recovery. (Watergate Pastries, here we come!) Small businesses have always been the key to a rebounding U.S. economy, there’s no reason to think that won’t be the case this time around as well.

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By  |  06:00 AM ET, 08/05/2011

Categories:  Dominic Basulto, Business, Morning Read

 
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