As Groupon Preps IPO, Google And Startups Grab Mer
This story appears in the Nov. 21, 2011 edition of Forbes magazine.
Steve Chen owns 5A5, one of San Francisco’s better steak houses. He’s been contacted by 100 daily-deal companies over the past year to sell happy hour and porterhouse discounts. He thought about going with the leader of the pack, Groupon, but went with a startup called Bloomspot. It provides some things Groupon does not. Bloomspot guarantees a certain check size and gives Chen the ability to target more frequent diners and limit the deal to just Sunday through Thursday nights.
Jonathan Umbel suffered the Groupon experience Chen was trying to avoid. Umbel is the owner of the Tackle Box, a seafood restaurant in Georgetown that bills itself as Washington, D.C.’s “first and only lobster shack.” He lured thousands of customers by offering bargain-priced lobster rolls and fresh oysters on both Groupon and LivingSocial, the other big local-deals player (now backed by Amazon). That goosed his revenue but hurt his margins. He has no hard data to indicate if diners made return visits, which was the whole point, and now he thinks that the steep discounts hurt his brand,cheap Nike Trainer. Umbel isn’t planning any more deals.
Groupon went from being the fastest-growing, greatest tech startup of 2010 to a deflated bubble with merchant fatigue on the side. It will try again to go public in the coming month, but an IPO that was supposed to yield a $25 billion to $30 billion market capitalization is now likely to xyzxyz37xyzxyzyield $11 billion. That’s still big for a company that didn’t exist four years ago, but concerns about large losses, a run-in with the SEC over disclosure of non-GAAP metrics that exclude marketing costs, growing competition and worries about consumer deal fatigue have raised the question about the viability of the local-deal business model.
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A passel of startups is looking to prove there’s a good business here, just not the way Groupon does it. San Francisco’s Bloomspot can guarantee merchants that, with a deal offering $40 for an $80 meal at a restaurant, the average check size will be at least $120. It does this by targeting customers likely to spend larger amounts. Bloomspot also guarantees a certain percentage of customers will return after using a deal, and it takes its commission, typically 40%, only if it meets these numbers. To attract loyal and high-quality customers Bloomspot gives customers a credit of 25% of their bill toward their next visit to the merchant. “Consumers only get the best deals if they demonstrate they’re good patrons,” says Jasper Malcolmson, Bloomspot’s CEO.
xyzxyz46xyzxyzWomply, a startup cofounded by former LivingSocial general manager and head of sales Brandt Squires, offers a simple proposition for consumers. They can buy deals on Womply.com with any credit or debit card; then they just pay at the merchant using the same card and get a credit sent back to their card. As with Bloomspot, no coupons or phones are required.
“My friends would be giving me sh-- for months if I pulled out a Groupon in the middle of a nice dinner,” says Womply cofounder and CEO Toby Scammell. Womply doesn’t send a mass e-mail each day to its members,xyzxyz50xyzxyznike blazers sale. It only pings customers who have shown a preference for that business. Womply also seeks out longer-term marketing deals, rather than quick ones that bring a crush of customers. “It’s much less of a get-rich-quick idea and more of a sustainable marketing plan over the long run,” says Scammell.
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Groupon generated xyzxyz57xyzxyz$1.12 billion in the first nine months of 2011 but did so with massive spending on marketing, $613 million over the same span,xyzxyz50xyzxyznike blazers vintage. Groupon has begun trimming its marketing, but that isn’t likely to reverse what may be diminishing returns. Data from results in Boston show that the number of coupons sold per 1,000 subscribers dropped from 541 in the third quarter of 2010 to 357 in the same period this year. A recent xyzxyz61xyzxyzstudy by researchers at Harvard and Boston University found that Yelp ratings of merchants using Groupons declined soon after a deal. Tony Lucca, who owns the Washington restaurant xyzxyz63xyzxyz1905, says customers tend to redeem their deals in the first six weeks of eligibilityand then again in the last two weeks. “It’s the last two weeks that make everyone on my staff, including myself, so miserable we want to burn the restaurant down,” Lucca says.
Groupon is taking steps to address the holes in its model. It recently launched xyzxyz67xyzxyzGroupon Now, a mobile app that lets merchants near a customer’s location push out deals at specific times. Groupon also recently started a loyalty program, xyzxyz69xyzxyzGroupon Rewards, so that customers who opt in and buy more than once at a store can be tracked and get extra deals once they spend, say, $50 or $100 at a specific business.
Groupon’s bigger headache may be xyzxyz73xyzxyzGoogle, which reportedly tried to buy Groupon for $6 billion last year. Its xyzxyz75xyzxyzGoogle Offers program is live in 17 cities with plans to add 23 more soon. Google is testing putting deals in place of regular text ads on search results. It’s also building its own sales force but may turn to self-service sales for merchants looking to post deals, something Eric Rosenblum, director of product management at Google Offers, doesn’t dismiss. That strikes at the heart of Groupon’s expensive direct-sales model. “We are very willing to invest in this,” says Rosenblum. “It’s a very high-level priority.”
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