Is the Daily Deal Site on Its Death Bed?

The concept of the daily deal appeared seemingly out of nowhere, and in a (ahem) flash, it became the hottest thing in retail. First there was LivingSocial, then Groupon, and then hundreds of lookalikes flooded the internet. But the market is now crowded, and as the economic recovery continues there seems to be more bad news about existing sites — predominantly Groupon and LivingSocial — which prompts us to ask, is the daily deal dead?

Not at all, says James Moran, co-founder of Yipit. "While the industry isn't growing as fast as it was in 2010 and 2011, it's still a very large multi-billion dollar global industry," Moran explains. "And with Black Friday and the holiday season, it is shaping up to be one of the strongest years for the deal industry."

You wouldn't gather any of this optimism from recent news reports, though. Groupon's troubles stem from a figure head – founder Andrew Mason – who is a lightning rod for controversy. Investors have so little confidence in his ability to steer the daily deal giant as a profitable publicly-traded company that the stock dipped below $3 per share, down from a high of $25 at the time of its IPO. Groupon's Mason is being pressured to step down, or the board of directors may replace him. Neither has happened yet, but even Mason seems sympathetic to the sentiment. "Our stock is down 80% [year-to-date] ... it would be weird for the board not to be asking that question," Mason said recently at a conference.

The second in line, LivingSocial, isn't faring much better, as it announced layoffs of nearly 10% of its workforce, while parent company Amazon said it was writing off nearly all the $175 million it paid for the site in December 2010. Still, there's money to be made (and saved, if you're a shopper) with daily deals.

Despite Bad Headlines, Recent Sales Have Been Good

The industry recently experienced strong holiday sales, especially for gifts and physical goods, according to Sean Spielberg, data product analyst at Yipit. For example, over the seven days after Thanksgiving in North America, Groupon doubled its gross billings from last year, which is nearly wholly attributable to Groupon Goods.

Groupon's market share in North America is roughly 50% to 55%, according to Yipit. LivingSocial has 20% to 25%, and the remainder of the industry is composed of many smaller sites, including Travelzoo, AmazonLocal, and Google Offers, each having a market share under 5%. But as the economy recovers and business models evolve, daily deals are changing as well.

Groupon's Mason has been telling investors that selling products will be key going forward: not as an offering of vast product selections like Amazon, but rather deep discounts on specific items as they do now with Groupon Goods. Though they are reportedly less profitable for the company, the sale of these goods provide a more stable revenue stream than daily deals that work directly with local merchants.

Interestingly enough, the runaway success of daily deal sites has contributed to its decline. "At one point there were 600 to 700 sites," says Elkayam. But of those, maybe just 35 or 40 had active deals. A lot of those sites still exist, but run the same deals nearly every day, one after the other, and shoppers seemingly got burnt out.

Time Left to Adapt to the Changing Market

"I think it's premature to say the deal space is dead," says Elkayam. "Everyone can't be doing the exact same thing. We need to adapt, to tweak the model a bit." The next wave of daily deal sites are attempting to focus on niche markets, in that they offer deals to very specific and targeted audiences, like a site focused on pet products or fitness. The tactic is akin to how specialty retailers arose to compete with discount department stores.

Despite the crowded market, there are new daily deal startups entering the market. Koopedia promises a more streamlined and economical option for merchants and a focus on small business. Instead of paying per deal, Koopedia charges merchants a one-time membership fee and allows them to create a profile with numerous deals that they post themselves.

Also on the rise are deal programs similar to Foursquare, like the new Chicago-based Belly. Essentially a loyalty program for small merchants, Belly provides retail members with an iPad to display at the counter, loyalty cards, and a platform to engage with customers. Deals go out via email to Belly members who may have signed up in stores or were referred by friends. Deals are then claimed in-store, and loyalty points accrue over time.

There are new sites and services that pair retailer POS systems with loyalty programs like Groupon's. Breadcrumb and the New York-based Shop Keep, which just raised $10 million in private equity to develop its application, allow small businesses to accept credit cards for a lower swipe fee per transaction than the large credit agencies. These services also allow for loyalty programs, points, and deals to be programmed into the retailer's system. It's a benefit for small businesses and shoppers, both of whom initially looked to benefit from the daily deal — just like LivingSocial and Groupon promised when the industry began.

Readers, what do you think of the latest bad news for Groupon and its ilk? Will you continue to buy from daily deal sites that focus more so on products or niche subjects? What do you think of the latest innovations in the deal industry? Sound off in the comments below.

Front page photo credit: Gear Diary
Photo credits top to bottom: Dispatch and Dribble