Group coupon sites: Boom business, or bubble?

By Annie Lowrey
Sunday, January 16, 2011; G02

In the past few years, more than 50 million Americans have signed up for a "daily deal" or "group coupon" site. It works like this: You give the online company your Zip code. Once a day, it sends you an e-mail with a deal from a local business, whether a salon or a sushi joint. The discount is usually steep - generally, 50 to 90 percent - and the offer generally expires after a day or two. If you decide you want that $100 massage for $50, you pay up, then print your coupon.

The two dominant players in the field are LivingSocial and Groupon - and both are highly successful. Washington-based LivingSocial has more than 16 million members, and Chicago-based Groupon more than 44 million. Plus, both private companies have serious financial backing: LivingSocial has raised $175 million from Amazon, and Groupon turned down a $6 billion buyout offer from Google, instead raising nearly $1 billion from investors. The companies'' success has inevitably kicked up copycats: Groupon's chief executive recently estimated that 500 imitators have popped up since the site got big. That raises a question: Is this the start of a group-deal boom or a group-deal bubble? Or is it something else entirely?

To understand the phenomenon, let's survey the competitive landscape. LivingSocial and Groupon have at least a dozen direct competitors - big sites that serve a number of neighborhoods or cities, all looking to get a piece of the $133 billion that local businesses spend each year on advertising. There is BuyWithMe, which serves 26 markets with coupons offering discounts of 50 to 90 percent. It is backed by venture-capital heavies Bain Capital Ventures and Matrix Partners. Other big players in the group-coupon field include TownHog (44 U.S. markets, backed by hedge fund D.E. Shaw, among others), Eversave, KGBDeals and Mamapedia's Sweet Deals. (LivingSocial's chief executive is Tim O'Shaughnessy, who is The Washington Post Co. chairman Donald Graham's son-in-law.)

But the runners-up to LivingSocial and Groupon are distant runners-up. According to December site-visit data compiled by Experian Hitwise, a research and analysis firm, the two biggest sites account for 92 percent of the Web traffic in the "group buying" sector. The third-best-trafficked site, Mamapedia's Sweet Deals, clocks in at just 1.4 percent.

Beyond the national group-coupon sites, there are hundreds of others based in and aimed at local markets: New York City's Scoop St., Virginia's ScoopCoups, Georgia's SavvyLikeMe, the South's GetGrouby, Washington's Deals for Deeds, Seattle's Wrazz, and Phoenix's SnagAndSave. Given that the sites make money by getting more customers to buy more coupons, most are planning regional or even national expansions. And the group-coupon boom extends further still, with piggybacking businesses showing up in the last year or so as well. In fact, there are sites to aggregate the daily deals: YipIt, 8Coupons, and DealRadar, for instance. And then there are sites - Adility, Wantsa and Ponkle - to help businesses set up their own group coupons.

So what differentiates all the group-coupon competitors - the LivingSocial from the Wrazz? To be honest, not much. The Groupon copycats copy closely. Some sites, such as Deals for Deeds, give a portion of sales to charity. Some focus on certain types of customers or products - deals for parents of young kids or for restaurants and bars. But all follow the same business model: Local business offers serious discounts to local residents; group coupon site takes a cut. Strangely, they even all look the same, sometimes down to the page design and font.

Taken together, such sites have seen tremendous growth in the past year, despite recession-driven misery in consumer spending and the sluggishness of the advertising market. Experian Hitwise estimates that traffic to group coupon sites grew 610 percent from August 2009 to August 2010. Sales metrics are a bit harder to come by, as the companies are private. But estimates put Groupon's 2010 revenues at $500 million and LivingSocial's revenues at $200 million or so (though both of those numbers should be taken with a heaping pinch of salt). Add in the smaller competitors, and the sector's revenues are more than $750 million. That number is expected to top $1 billion in 2011.

Group coupons are nothing but a souped-up iteration of an old phenomenon: Coupons date to the 19th century, if not earlier. That raises the question of what comes next. Will Groupon and LivingSocial prove to be category killers, squashing those 500 little competitors with their wittily written ad copy and awesome deals? Will dozens of new competitors proliferate? Will fierce competition among Groupon, LivingSocial and their rivals thin margins for all the group coupon sites, forcing some out of business? Will a new form of local or social advertising, perhaps one backed by Google or Facebook, come in and blow all of them out of the water?

We don't know. But analysts predict massive growth in deal-based, location-based and social-network-based ads - and through multiple channels. So maybe it's better to think of group coupons not as a product distributed by a few companies, but as a method of advertising.

Take "flash sale" sites, which are cousins to the daily deal site. These businesses send members an e-mail based not on location, but on what customers want to buy. Many focus on high-end consumer goods and offer businesses access to a coterie of fashion-obsessed, wealthy clients: They offer a single item as a loss leader to draw in those customers. The wildly popular Gilt Groupe - founded in 2007, it feels like an eminence grise in Internet years - sends out offers for steeply discounted designer shoes, bags and clothes. The Aisle offers brides-to-be big discounts on boutique wedding dresses. For parents, there is Zulily; for home goods, One King Lane; for travelers, Jetsetter. Many more start-ups are in the works.

Advertising analysts also expect the daily deal/group buying/social discount sites to become a lot more sophisticated. For one, that means that some will start asking for more than your Zip code. (The more an advertising company knows about you, of course, the more valuable you are to it and to advertisers.) Some curated sites might request your profession, salary, hobbies - even your favorite restaurants or brands, or your exact block - to better tailor deals to you.

Finally, expect more big businesses to get in the game - with chain stores and social-networking sites starting to send out deeply discounted, tailored and location-based offers. In November, for instance, Facebook announced a new function inspired by the success of Groupon: "Deals." Users can check in at malls and coffee bars, and businesses near them can offer them discounts.

So it turns out that what makes Groupon and LivingSocial so successful may also be their downfall: They did not just stumble on a great idea. They stumbled on a valuable, scalable, transportable idea, one that just might become a new advertising staple. Forget the common copycats. Expect a daily-deal invasion.

Lowrey reports on economics and business for Slate.

© 2011 The Washington Post Company