Ever since Groupon filed its s-1 to go public, there's been relentless backlashing against the adoration that followed its initial rise to prominence. The model's sustainability has been called into question in the face of financial transparency, peppered with a few negative merchant testimonials.
All the while, the company can't launch a PR campaign due to the SEC mandated quiet period leading up to its IPO. The IPO, speaking of which, was at one point postponed due to uncertain financial markets. This provided even more fodder for Schadenfreude among the ranks of Groupon haters.
Meanwhile, Google has entered the space with a willingness to undercut the market to boost awareness, while others giants like Amazon loom. We've also seen Facebook and Yelp -- local stalwarts and naturals for the deals market -- pull back on their core deal products.
So what does all this point to? Is the deals space imploding? Forrester seems to think so, with a recent report and never a missed opportunity for hyperbole:
"Consumers will grow so conditioned to micro-impulse offers that they'll lose practice at considered decisions - in all walks of life, not just when buying spa treatments," wrote Forrester analyst Shar VanBoskirk, "Facing a cultural descent into maladroit judgment, employers (and spouses) will blacklist impulse deals to keep people intentional."
Different, Not Dead
Here's what's going to happen. Growth in the space will decelerate, but there won't be any implosions. It won't be as wildly profitable on an EBIDTA basis as many thought, and there will be a shakeout. But it will still see healthy growth as deal structure, delivery, and economics evolve.
Before I get into those details, BIA/Kelsey recently released a forecast on this space (disclosure: authored by two of my colleagues). The firm predicts the deals market will increase from $1.97 billion this year to $4.17 billion in 2015, with slowed growth into the outer years.
First, we'll see the deep discount begin to recede. Things like better targeting and mobile delivery will replace the deep discount as the "hook" that drives appeal. That's a good thing: the deep discount largely attracts deal seekers who don't come back for the intended "customer acquisition".
The space, as a result, will move away from acquisition and more towards loyalty as an objective and guiding principle for deal design. This will involve post-PC era delivery models like mobile and tablets. Many are already applying mobile to loyalty models like Foursquare and SCVNGR (LevelUP).
Second, Deal providers of all stripes won’t take such a big cut of revenue. The 50 percent that remains after a typical daily deal is then split with the likes of Groupon, so merchants get about 25 percent of the take, usually equaling cost of goods sold (COGS) at best.
As the market begins to shake out, competition among deal providers will cause downward pressure on this provider margin share. And again, deep pocketed Google is already undercutting Groupon in this respect. Market pressure and the need to retain "fatigued" merchants will likewise alter deal terms.
Darwinism on Crack
All of this will be driven by market pressure but the effect will be improving merchant margins and delivering more value and relevance to users. This will force deal providers to be more innovative, and will surely thin out their ranks. But don't believe it's all just going to go away.
Like many backlashes, the pendulum has swung. It's the very definition of a backlash; having a noise level in its negative contention that matches the arguably overly positive adoration that preceded it. Generalist tech & business media jump on board and around we go.
As for other evidence of impending fatality, it's been likewise over exaggerated and in some cases misreported. Facebook didn't drop out of deals; it's just delivering them differently. Similarly Yelp dropped its emailed daily deal but is still going hard and heavy after mobile and location based deals.
In the same way that these two leaders didn't abandon deals but rather altered their model in a nascent market, the deals space itself will adapt. For starters, deals will be more perpetual and location aware -- dropping the "daily" moniker and growing legs.
This is Darwinism on crack. Natural evolution in the 64x fast forward of a digital age. Put another way, the space will look a lot different in 2 years, but it won't be dead. Neither will Groupon (which continues to gain market share). At that point it will have its SEC muzzle long-removed and will have lots to say.
Disclosure: The author is an analyst for research firm BIA/Kelsey but has no connection with any other company mentioned in this article.
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