The Groupon Forest Through the Trees
Mixing way too many metaphors, we’re starting to see the light at the end of the tunnel for the group buying space. When we look back to 2009, we had very few entrants. Then, the number of entrants simply exploded. It’s not surprising, though, as once proven, the desire to take advantage of the trend takes place – from entrepreneurs and investors. We see this across all types of businesses and industry, those that simply make money to those that make headlines. The blessing and the curse with the internet is that it makes hiding harder, so those with proper capitalization and know how can become fast followers. For the performance marketing space, proper capitalization has generally meant just media buying. That, though, is not the case with other segments where product and technology take the majority of the time and the funds.
As for the daily deal space, Groupon made news as it looks like the company will indeed exit – not at the $25bn valuation initially sought but at a $12bn valuation, which is still double what Google reportedly offered. The lowered IPO doesn’t mean bad things for Groupon, and it doesn’t mean bad things for the industry as a whole. The same can be said for the consolidation soon to occur in the daily deal space. In the next couple of weeks, we expect to hear of at least one major change in the industry that will signal very clearly the deep consolidation yet to come. But, what does consolidation mean exactly? In this case, it means businesses starting to go under, perhaps hundreds of them.
What has started to change? It isn’t the negative press. It’s the broad realization from the thousands of people and companies who have tried to enter during the past 18 months that making money in the local deal space is hard. Very hard. It’s much harder than most people think, but until everyone gave it a go, and experienced it for themselves, no amount of others saying so would do. What did they learn? Bootstrapping or raising a little bit of money to capture a few markets can work, i.e., turn into a cash flow positive business, but enough people – entrepreneurs and investors – now know that going from a handful of markets to scale requires an insane amount of cash.
Those going to be impacted first are the smaller but direct competitors to Groupon and Living Social who have not hit scale and whose model / focus does not differ. In this case, scale means not holding a top three spot in multiple markets. It also means not having already a business with either healthy operating profits or eight figures in the bank. These under-differentiated properties will suffer first, but they won’t suffer as a result of being under-differentiated. They will suffer because they now realize how much money it will take to truly make it, money they don’t have and money others will most likely not lend. For the better, this industry has gotten less sexy.
So what should the future hold for the deal space:
Fourth, fifth, sixth, seventh, etc. entrants to markets in the US will shut down – not every smaller player will show down, but many of them started with the idea that they would either get bought or be able to grow more quickly than they have.
No more big checks will be written to allow modest players to try and become big players – this more than anything will cause the rapid deceleration of existing sites
Those with known brands will stay around, along with strong vertical players – the joke has been what do you call the groupon of the mommy space? Groupon. We don’t necessarily agree.
The industry as a whole will improve – this is the big one. How will the industry improve? The talk will shift away from the negative and back to the innovation – from tablets to retail stores. We will also see people focusing not on the vocal minority but the satisfied majority. This channel has legs, and we will finally get a chance to see it, instead of today where we can’t see the forest for the trees.
What does all this mean for the performance marketing space? It means a general pull back on spending from the small and the large guys. The small guys will just disappear so make sure you don’t have many outstanding invoices. The big guys will not need to spend as much and will be more careful with what they do spend. We’ll most likely see some short term pain, but it’s the best interest for the space surviving as a whole.
