Groupon and its compatriots in the much-hyped daily deals business were supposed to change the very nature of small-business advertising

For Groupon, it’s a fight for survival

Groupon and its compatriots in the much-hyped daily deals business were supposed to change the very nature of small-business advertising. Instead, it is the daily deal vendors that are racing to change as evidence mounts that their business model is fundamentally flawed. Groupon last week reported another quarter of disappointing earnings as its core business stagnated, sending its stock down 30% to an all-time low of $2.76. Its biggest rival, Living Social, is piling up losses, and part-owner Amazon.com earlier this month recorded a quarterly loss after writing down its Living Social investment. Both companies are racing to diversify, venturing into more generic ecommerce areas like off-price sales through ventures such as Groupon Goods and LivingSocial’s Shop. Meanwhile, upstarts are developing new variations on the discount coupon theme. “It’s clear that they need to have other models besides the email daily deals business,” said Aaron Kessler, an analyst at Raymond James. “The problem is that a lot of these newer businesses have lower margins.” Critics say the torrid growth that enabled Groupon to go public at $20 a share just a year ago was fuelled by merchants buying into a new type of marketing that they didn’t fully understand. The discounts offered through the Groupon coupons have turned out to be costly, and the repeat business they generate uncertain. “A lot of people made the mistake of overlooking the price-promotion part of this model,” said Utpal Dholakia, professor of Management in Rice University’s Jones Graduate School of Business. “Normal advertising, yellow pages advertising, it really doesn’t have a price promotion, it doesn’t have discounting component. That’s what makes this difficult to do again and again.” A Raymond James survey of roughly 115 merchants that used daily deals services during the fall found that 39% of merchants said they were not likely to run another Groupon promotion over the next couple of years. The top reasons cited were high commission rate and low rate of repeat customers gained through offering a promotion. “I’ve always maintained that this is a hype driven business built on an unsustainable business model both for the merchants and for Groupon,” said Rakesh Agrawal, principal analyst at reDesign mobile, a San Francisco consulting firm. Existing customers interested in signing up for daily deals has waned – Groupon reported last week that the average revenue per active customer (defined as an account that has purchased a deal from the site in the previous 12 months) fell to $63.96 in the 12 months to September 30 from $76.49 a year earlier. The company has also suffered a string of high-level executive departures as its market value has shrivelled to just $1.8 billion, down from nearly $13 billion when it went public. Groupon has also been dogged by controversy over its accounting methods, though it said last week that it had $1.2 billion in cash and cash-equivalents with no long-term debt. Groupon cites an array of new services and features that it hopes will make the company a crucial partner for many types of merchants over the long run. WhaleShark and other competitors such as Coupons.com have focussed on bringing traditional coupons into the digital era. Such companies typically get a small percentage of revenue for each sale generated by their coupons. As such competition builds even as the original deals business flattens, there are no easy answers for Groupon. “The heyday for the daily deals is behind us,” said Bhatia.