Is group buying turning into a graveyard for start-ups?

The Australian group buying industry has had all the tell-tale signs of an unsustainable bubble for some time – huge initial growth, a flood of new market entrants and now the seemingly inevitable decline.

That’s not to say there isn’t money to be made anymore. Consumer spending in the sector is expected to reach $600 million this year – a far from insignificant sum.

But in September, figures released by Telsyte show consumer spending on Australian group buying sites fell 5% to $117 million in the June quarter.

This follows a 14% fall for the March quarter and a 10% fall in the December quarter. Fierce competition for the remaining consumer dollars has seen several businesses merge.

Perhaps more worryingly, several start-ups in niche group buying categories – which hoped to thrive alongside the mainstream major industry players – are either struggling or have shut up shop completely.

So is group buying an empty “fad” that will see the demise of further start-ups? Or are we just seeing a blip in the industry’s development in Australia?

StartupSmart speaks to some of the key start-up players to find out:

How has it changed?

“The group buying industry in Australia experienced exponential growth in 2010 and early 2011 for service-based daily deals,” says Melissa James, co-founder of Kid U Not.

“The daily deal market then matured very rapidly and the large players cornered the market for service-based offers.”

“Out of this emerged the evolution by daily deal sites into offering products in a flash sale model to leverage an existing customer base.”

“The daily deal sites have trended toward product verticals to enhance and complement their original offering.”

Alongside the daily deal sites has been the parallel growth of pure flash sale sites, James says, such as brandsExclusive and OzSale, which offer discounted products across multiple verticals.

Geoff Drucker was one of the five founders of Liquid Deals, a now-defunct group buying site for discounted wine.

“We closed Liquid Deals down in December last year because the market became overcrowded with group buying wine deals,” Drucker says.

“This made it increasingly difficult to secure quality deals and, secondly, to increase the size of our database. When we closed the operation, we roughly broke even.”

According to Drucker, the complex arrangements associated with group buying also contributed to the downfall of the site.

“The wine was shipped twice – from the supplier to Liquid Deals and then to the customer,” he says.

“We also found customers were happier to purchase an untried wine in smaller quantities than ‘risk’ 12 bottles they might not fancy. This sometimes meant repacking a dozen cases into six-packs.”

However, Drucker is insistent the experience was a “wonderful learning curve”, and has resulted in some new ideas with regard to online retail.

“A fellow founder in Liquid Deals, Pete Burley, and I have developed the concept for the next chapter in online retailing and will announce it once we have the right investor partners on board,” he says.

Another niche site, RedLipDeals, is also struggling, despite entering the market with gusto less than four months ago.

“RedLipDeals has not fared well,” managing director Dean Wilson admits.

“We had an initial interest of visitors – around 10,000 visits in a month – but after street marketing, leaflet distribution and email campaigns, have been unable to attract the sort of interest from merchants needed to fund future growth.”

Wilson says he doesn’t believe the group buying model will continue, arguing it’s no longer sustainable.

“The majors are just turning into discount product websites… Group buying was a fad. We hoped a unique niche would give us a new market but sadly this is not the case,” he says.

Like Drucker, Wilson is also turning his attention to other new projects.

“We are looking at launching our own product-type websites for the future for niche eco websites that are the new trend, from urban living, self-sufficient gardens and small home living,” he says.

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