Daily Deal Smackdown: Groupon and LivingSocial Trade Barbs, But Are Brands The Losers?

Daily Deal sites are among the fastest growing online vertical. Leaders like Groupon, LivingSocial and Gilt Groupe dominate a category that has attracted $1.6 billion of VC investment this year so far, according to the most recent 2011 Daily Deal Investment Index.

“Globally, there are more than 3,000 total daily deal companies, including more than 1,000 in China, more than 900 in Europe, and more than 600 in South America," according to dailydealmedia.com.

Groupon expects August U.S. sales to rise 12% over last month, with marketing expenses down 20% and declining, as the brand’s focus moves from subscriber acquisition to securing paid customers. Its CEO, Andrew Mason, recently addressed rumors surrounding an imminent IPO: “When I read some of the press this weekend, I realized a rational person could read this stuff and wrongly conclude that we’re in trouble. The irony is hopefully clear: We’ve never been stronger.”

Mason accused competitor LivingSocial.com of “buying gift certificates from national retailers and reselling them to users to give the appearance of a 50 percent off deal,” to which LivingSocial spokesman Brendan Lewis replied: “No Groupon executives have access to our internal revenue or financial numbers, and thus any claims made by such executives should be met with deep skepticism.”

While Groupon was first out of the gate, LivingSocial, with 4 million monthly unique visitors (to Groupon’s 29 million-plus), offers deals in nearly twice as many cities, and is more attractive to SMB’s because it takes only 40% of the deal’s profit, versus 50% by Groupon. (Online Marketing Trends)

The fierce territorial battle will only heat up: nearly 50% of all online consumers will redeem digital coupons this year, according to eMarketer.

Despite the obvious advantages of daily deal sites, detractors say they may actually cannibalize brands. By routinely offering deep discounts, businesses may be lowering consumers’ reference price that they expect to pay. “Once the deals are over, they may be less likely to come back as repeat customers, and may instead shop solely on price. While sales pour in with the initial deal, they have proven to dwindle after the fact," the Harvard Business Review writes.

"'Churn and burn'—a term conventionally used to describe the actions of stock brokers who inflate their commissions via excessive trading—refers to the relationship with merchants. Although daily deals can work for a few categories, many business owners will find that deals are unprofitable,” reDesign Mobile’s Rocky Agrawal argues.

"'Pump and dump'—the practice of artificially boosting the price of stock—relates to investors. One of the scariest things about Groupon’s S-1 is the amount of money insiders have taken out of the business. In the past two rounds of financing, the company raised $1 billion from new investors. Roughly 80%, or $800 million, went into the pockets of earlier investors,” Agrawal continues.

LivingSocial’s CEO, Tim O'Shaughnessy, remains optimistic, anticipating $1 billion revenue this year, a valuation close to $3 billion, and bankers recently on board preparing for an IPO.

In today’s WSJ, asked if analysts’ reference to the daily-deal industry as a “bubble” bothers him, O'Shaughnessy said, “We just operate our business. If I took what pundits said as gospel, we'd be in a very different place than where we're at right now…We have over a million people that have bought from us three times or more. We are increasing our merchant base, our footprint [and] the number of merchants that are working with us again.”

The daily deal model remains disruptive, iterative, and a territorial imperative worth billions, as the leaderboard players jockey to refine and grow the business.