What’s going on with group buying in Australia?

feature-group-buy-200Group buying may not be dying, but it’s certainly sick.

In the two-and-a-half years since the industry hit Aussie shores, there’s been a dramatic swing in its success. A year ago, there were 100 players, including major names like Scoopon, Groupon, Spreets, Cudo and LivingSocial. Today there are about 40.

Fewer than 10 control the majority of the $500 million market. Revenue growth declined most of this year and has been flat in the last quarter. Smaller companies have fallen away, either through low sales or, in the case of disappearing company SoSharp, financial turmoil.

The pain isn’t limited to smaller players. Earlier this year, Yahoo! said it would stop handing over performance payments to its subsidiary Spreets, and Cudo chief executive Billy Tucker recently said he left the industry at a “good time”.

Insiders question the industry’s profitability and revenue forecasts. “What’s happening with some of these businesses and their spending is just not sustainable,” says Billy Tucker. “Something has to change.”

Industry consolidation has continued due to fatigued merchants, consumers and overly ambitious marketing budgets. Many companies are not profitable. There’s also in-fighting – international companies accuse media-owned businesses of going down the tubes, and vice versa.

But still, analysts believe existing players are in a good position.

“I think there’s an opportunity for improvement here,” Telsyte senior research manager Sam Yip tells SmartCompany.

“And there are plenty of opportunities for the existing businesses.”

The international downfall

Groupon has lost 80% of its value since its initial public offering last year. Accounting problems aside, things are also pretty bad in Europe, where sales are slow.

But the Australian fallout is not the result of an international trend – this is a domestic problem. And not all of what’s about to be described can be attributed to any sort of executive failure. These are industry trends affecting some of the biggest companies in the country.

Consider the following:

  • Last year, there were 100 group buying companies. Now there are less than 40.
  • The industry is worth $500 million and continues to grow but most of those 100 group buying companies were producing no substantial revenue.
  • Yahoo said earlier this year it would stop giving performance payments to Spreets. A source told The Australian Financial Review the “gloss has worn off the space”. Industry sources have told SmartCompany that Spreets is in trouble.
  • In June, it emerged Spreets founders Dean McEvoy and Justus Hammer had moved on to other ventures. Yahoo! said the move was “part of a planned management transition”.
  • Cudo chief executive Billy Tucker left the company to pursue his own ventures and told the Financial Review he left at a good time – and the industry faced plenty of problems.
  • DealsDirect shut down its daily bargains site, DealMe.
  • The Fair Trading Commission said in December last year it had received a large number of complaints about deals bought through group buying websites.
  • Smaller sites, such as RedLipDeals, began to lament that the industry was no longer sustainable.

Now, industry insiders say the major companies are struggling. While Scoopon is said to be profitable, the media-owned group buying sites are reportedly performing poorly.

Cudo, owned by Ninemsn, Spreets, owned by Yahoo!7 and OurDeal, owned by Ten, are “not doing well at all”, according to industry sources. However, Cudo chief Mike Sneesby tells SmartCompany the company recently had its best month ever due to a deal for SeaWorld – although admits the industry is changing quickly.

“If you look at today’s market, I’d say there’s room for three or four players. We’ve heard more businesses have been pouring money into themselves to keep it running.”

“From my perspective, it can only go on for a certain amount of time.”

LivingSocial chief Adam Rigby says these media companies are the ones shackled by the whims of their parents, saying they’re “sucked up in corporate infrastructure”.

Mid-tier sites have also been snapped up. Deals.com.au bought Ouffer earlier this year – and Catch of the Day has bought another deals site of its own. Before Groupon was able to use the local name, it also bought a couple of local, smaller sites.

According to a recent report in The Australian Financial Review, Groupon and Scoopon hold about 50% of the market, while LivingSocial controls about 14%. The rest of the market is shared between the other major and minor sites.

So what’s happened?

The industry’s problems differ depending on who you speak to.

For Billy Tucker, indiscriminate marketing has been a big problem. Specifically, he means the international duo: Groupon and LivingSocial.

“The sites are just pleasing everyone and it was never meant to be a marketplace, as it is now,” he says.

He’s referring to businesses now offering more than one daily deal. Instead, they offer dozens, putting pressure on businesses to come up with more money and staff to manage merchant relations.

“The merchant used to get promotion out of this, but the information coming at the buyer is a lot to take in.”

Sam Yip agrees, although says the industry’s problems are broader. “There were low quality merchants that didn’t understand how to utilise the group buying model, and consumers who didn’t know what to expect from these new sites.”

One critical factor, Yip argues, is that sites started offering deals that lasted more than 24 hours, which cheapened the value of the deals on offer. The more you do that, he says, the more these sites become like department stores – the very type of retail offer they had tried to avoid.

“The whole 48-hour deal thing is a critical factor. Once you start holding deals over two days, then you lose the ability to come up with new deals every day that seem fresh.”

“A large portion of the control needed is found in innovation. These companies have the tools to innovate.”

Deals.com.au head Adam Schwab is more direct in his criticism. The sheer amount of emails bombarding consumers is an annoyance, he says. In a quest to make group buying more customisable and focused, users are hit with emails two or three times a day.

“A lot of my friends are happy to receive emails multiple times a day, but you lose a lot of people in the process of doing that and it becomes frustrating for them,” says Schwab.

The massive amounts of marketing spent by both Groupon and LivingSocial, subsidised by American parent companies, have allowed them to control large slabs of the market – although Groupon still far outstrips LivingSocial in market share.

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