Daily deal fatigue is trending. The e-bubble created by Groupon, LivingSocial and Google Offers is springing leaks. Groupon, the granddaddy of the genus, is hitting the proverbial wall in earnest. Some of its early backers are jumping ship, the Wall Street Journal reports, potentially indicative of a larger loss of faith in the business model as a whole.
Andreessen Horowitz, purchaser of 5.1 million shares at $7.90 each has sold them all; Fidelity sold one-third of its stake (down to 13.2 million) between March 31 and June 30; Maverick Capital retains fewer than 2 million shares as of June 30, down from 6.3 million three months earlier.
Since its November IPO, Groupon shares have dropped 82%, making it now worth $3 billion, about half of Google’s purchase offer in 2010. Groupon is not alone in disappointing expectations for investors and analysts as Facebook and Zynga join a collective memory of the dot-com bust in 2000. Daily Deal Media reports that 798 daily deal sites closed down between July and December, 2011.
“Many of the other competitors have retreated or scaled down ambitions,” Jordan Rohan, a Stifel Nicolaus analyst, told the New York Times. “There are no real barriers to entry, but there are fairly significant barriers to success.”
Groupon's draw for early capital was its meteoric growth: $313 million revenue in 2010, 22 times greater than 2009. But keeping its first customers (merchants) content became an increasing challenge, while second-level customers (consumers) bought deals in numbers that overwhelmed the businesses, spending just the minimum required, and only once.
Mississippi Studios & Bar Bar exemplifies Groupon deal fall-out. The bartender had to complete paperwork for each coupon, slowing business to a crawl. “It was a huge boondoggle for us, and we were counting down the days until it was over,” co-owner Kevin Cradock told the Times.
The mania of investments in companies like Groupon pre-IPO ended in January 2011 as the fallacy of sustainable valuations for such young companies became evident. "Groupon would never have gotten this big without that late-stage money," said Bill Gurley, a general partner at venture capital firm Benchmark Capital, which did not invest in 2009. Hindsight being cheap, Gurley told the WSJ, "The guys that backed Groupon early—even at today's prices—they made lots of money."
Andreessen and others, including Starbucks’ CEO Howard Schultz, who resigned as a Groupon director in April, CEO Andrew Mason that an IPO was premature, and would put the company under pressure to increase marketing expenditures exorbitantly to obtain new customers, among other things.
A key complaint from Groupon users is frequency of e-mails. According to a study by McKinsey Global Institute we covered recently, more than one quarter of the average employee’s day is spent reading and responding to e-mails, making it the second-most time-consuming activity after “role-specific tasks.”
Other complaints include quality of the actual offers. One consumer told the Times: “I once got a Groupon for teeth whitening. I went to the office and the receptionist gave me some bleach and told me to do it at home. She said it would be extra if I wanted the dentist to do it.” A sign that the honeymoon is over is the counter movement of sites like UnsubscribeDeals.com for those wearied by daily deals.
Edwin Hermawan, co-founder with Lea Pische of Unsubscribe, summarized the experience that led to the start-up: “I have a buddy who owns a hair salon. He was cutting my hair, and I was like, 'Bro, you look a bit dazed.' He was like, 'I’ve just been giving blowouts. All day. Blowouts. I wanna die.' He did a deal, $20 for a $40 blowout. Everybody just came in once, and my buddy was like, 'You wouldn’t believe all the blowouts I’ve been doing. I never want to do a Living Social ever again.' He was like, 'You’re my first actual haircut this week.' And it was a Thursday.”
As Groupon’s business model slips and slides, several key pre-IPO investors have held or boosted their stock: Kleiner Perkins holds 8.2 million shares bought in January 2011; Morgan Stanley increased its stake to 39 million shares, up from 19 million over the three months ending in June; and T. Rowe Price now holds nearly 12% of Groupon stock, having recently tripled its holdings.
Whether it’s the death knell of the daily deals business or a bumpy evolution remains to be seen, as well as what that iteration will be in the subsequent step of social technologies’ digital land grab.