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September 17, 2012 8:01 am
The daily deals industry is showing signs of flagging, putting increased pressure to diversify on companies such as Groupon and LivingSocial that rely on the online discounts for the bulk of their revenues.
A study from BIA/Kelsey forecasts a steep decline in growth rates in annual daily deals sales, dropping from 87 per cent growth between 2011 and 2012, to 23 per cent in 2013, down to mid-single-digit growth after that.
The firm estimates that consumer spending on online deals will reach $3.6bn this year, at the same time as they see consumers beginning to tire of the format. Peter Krasilovsky, vice-president of BIA/Kelsey, says the online deals market has consolidated and may be “near saturation.”
Seeing their business model easily replicated, both Groupon, the largest daily deals provider by sales, and LivingSocial, the number two, have been looking for ways to evolve beyond their core product. The market dynamics could force them to shift priorities more quickly.
Tim O’Shaughnessy, chief executive of LivingSocial, says daily deals still make up the vast majority of the company’s revenues, but predicts that within the next two years they will generate less than 50 per cent of sales.
“The daily deals business is and will continue to be a very large part of the pie over time,” he told the FT. “There’s a few bets we’ve made that we think have nice long-term potential.”
The company is relying on its currently healthy daily deals revenues to experiment with and develop other offerings, such as take-out food and delivery, travel deals, and full-priced, curated activities, such as day-long sushi making and sake tasting classes.
Groupon has been investing in technology to improve the targeting and efficiency of its deals operation, and has focused more energy on selling large retail items, including mattresses.
But its sales growth has slowed considerably, from 89 per cent in the first quarter of 2012, compared to the year before, down to 45 per cent in the second quarter, and an estimated 35 per cent in the third.
Merchants’ experiences running daily deals promotions is mixed. About a quarter of small businesses surveyed by BIA/Kelsey said they would be very likely or extremely likely to run a deal in the next six months.
Another recent study conducted by Rice University found that less than half of businesses running their first daily deal report profitable promotions. However, those that run multiple deals do better: three quarters of businesses that have run seven or more deals report profits on the deals.
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