Get 'Em While They Last: 'Daily Deal' Sites Dying Fast
By SHAYNDI RAICE
Wall Street Journal
SEPTEMBER 19, 2011
The online business of serving up daily deals has attracted millions of dollars in venture capital and spurred dozens of clones of market leaders Groupon Inc. and LivingSocial Inc. Now the industry is starting to shake out.
Nearly one-third of all daily-deal sites nationwide—or 170 of 530—have shut down or been sold so far this year, according to daily-deal-site aggregator Yipit.com, including sites with names such as Scoop St. and RelishNYC. Even big operations such as Facebook Inc. and Yelp Inc. that could capitalize on their large audiences to build a daily-deals business have recently pulled back on the service.
The daily-deals business has turned into an "arms race," with competitors spending money to attract subscribers and hundreds of employees and making it more difficult for other sites to keep up, said David Ambrose, the 26-year-old co-founder of Salesscoop LLC's Scoop St., which was sold last month to rival BuyWithMe Inc. for an undisclosed sum.
At the heart of the winnowing is the shifting economics of the daily-deals business. Setting up a daily-deals site—in which the site takes a cut of the online coupons it offers consumers—requires just a website, some emails and local merchants willing to offer a discount. But as the industry has started maturing, the costs of running such a business have soared.
In particular, the cost of acquiring subscribers who redeem a daily deal has skyrocketed during the past two years, said executives at daily-deal websites. While snagging early adopters who were curious about daily deals initially required little marketing, it now takes more spending to get to remaining consumers and to cut through the noise created by so many competitors.
For example, Groupon, the daily-deals market leader that filed to go public in June, spent about $7.99 to acquire each subscriber who actually redeemed a daily deal in the first quarter of 2010, according to regulatory filings. By the second quarter of 2011, that figure had nearly tripled to $23.46.
Overall, Groupon spent $378.7 million in marketing initiatives in the first half of 2011, up from $35.5 million in the same period a year earlier, according to regulatory filings. Many smaller websites don't have the war chest to compete.
At the same time, daily-deal sites also increasingly have to hire more salespeople to line up coupon offers from local merchants. Groupon has 990 sales employees in North America, up from 201 a year earlier, according to its regulatory filings. LivingSocial, the No. 2 player in the space, has beefed up its sales force to 700 employees from 191 a year ago, said a company spokesman.
Groupon pays sales associates about $35,000 a year, and those salaries can jump to as high as $100,000 with commissions, according to a person familiar with the matter. Smaller sites that typically hire only a handful of sales employees and pay on a commission-only basis are hard-pressed to compete against those compensation packages, industry executives said.
At Scoop St., Mr. Ambrose said he didn't raise enough money to keep up with the escalating costs of running a daily-deals business. While investors offered as much as $10 million in 2009, he ended up taking a smaller investment of $1.2 million. By the first half of 2010, he had spent close to $200,000 on marketing and found that consumers either weren't purchasing vouchers or didn't turn into repeat customers.
Scoop St. had 50,000 subscribers when it was sold.
The daily-deals business is "not as simple as people think," Mr. Ambrose said.
Meanwhile, Waleed Khabbaz, 31 years old, started working on RelishNYC LLC in October 2009 by racking up $30,000 in credit-card debt. He launched the RelishNYC site in May 2010 and RelishCharlotte, a deals site in Charlotte, N.C., a few months later.
Mr. Khabbaz put all his money toward developing the sites, leaving no funds to pay for marketing or employees. He said that he split the profit from deals with his four sales associates, so they would earn about $100 per deal.
To lure more merchants to offer daily deals on his sites, Mr. Khabbaz in June 2010 went from asking for a 50% cut of a coupon price to just 20%. Often, he wouldn't take any cut. He also tried offering smaller deals in the $4 and $5 range, but those didn't bring in enough money.
Mr. Khabbaz said that without marketing, it was "impossible" to get new subscribers and he was rarely able to attract more than 20 customers to a deal. He had about 10,000 subscribers when he shut down his sites in April.
"I shouldn't have followed the gold rush," Mr. Khabbaz said.
Even large websites have run into similar issues. Facebook said it would test its own daily-deals service in April. But it kept its internal daily-deals sales staff small before moving ahead with a bigger launch, said a Facebook spokeswoman. The company had 11 partner sites such as Gilt Groupe Inc.'s Gilt City offering deals through the social network. Yet it wasn't enough of an investment and Facebook last month said it was ending its daily-deals business.
A spokeswoman for Facebook said the company determined it would be better served focusing on other core social experiences instead of daily deals.
Meanwhile, local business-review site Yelp said last month that it would ratchet back its daily-deals business. In a blog post, Yelp Chief Executive Jeremy Stoppelman said the San Francisco company would slash its daily-deals sales staff by half.
In particular, Mr. Stoppelman said users were unhappy when Yelp would email deals in Berkeley, Calif., to subscribers who lived in other nearby cities such as San Francisco.
In contrast, sites such as Groupon and LivingSocial offer hyperlocal deals that can be tailored by neighborhood.
Mr. Stoppelman added that the daily-deals space "faces some real challenges."
A Yelp spokeswoman declined to make Mr. Stoppelman available and declined to comment further.
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