Is the Daily Deal Model Dying a Slow Death?

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As we enter the most deal-crazed time of year, daily deals sites such as Groupon and LivingSocial try to adapt to the changing marketplace — while facing the possibility that the original coupon model may one day soon be viewed as an odd, short-lived fad.

The backlash against the once ultra-hot daily deal market began in force last year, with consumers and businesses both citing “Groupon remorse”—the catchphrase for the feeling that, in retrospect, the decision to purchase (or run) a daily deal was unwise. One year after Groupon’s IPO, its stock price is down more than 80%. Groupon’s main competitor, LivingSocial, has also been recording substantial losses.

More and more, it seems, the selling of $10-off coupons for restaurant meals, manicures, and maid service hardly comes across as a feasible business model.

The holiday period, when shoppers are primed to bite on bargains, should be a heyday for daily deal sites. What role, then, might daily deals play during the frenzied holiday shopping season? The consensus seems to be: not much of a role at all. In a survey conducted for the listing service Manta, 82% of small businesses said that they “have not, and will not, run promotions with Groupon or other ‘daily deal’ sites this year.”

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Reuters cited data indicating that the daily deal model, in fact, is likely to face strong headwinds for years:

A Raymond James survey of roughly 115 merchants that used daily deals services during the fall found that 39 percent of merchants said they were not likely to run another Groupon promotion over the next couple of years. The top reasons cited were high commission rate and low rate of repeat customers gained through offering a promotion.

The survey also found that 32 percent of the merchants reported losing money on the promotions, and nearly 40 percent said the Groupon offer was less effective than other types of marketing.

A recent Bloomberg Businessweek featured an online retailer called GreenCupboards as an example of one of the many small businesses that have soured on the daily deal model, and that have no plans to run such an offer during the peak shopping weeks ahead:

“We did three different LivingSocial deals last fall, and … it did not pencil out enough for us to continue,” says [Josh] Neblett, who started the 55-employee, $15 million Spokane, Wash., company in 2008. “The average net loss per order was significant, and the average customer we gain through our own marketing initiatives repeats business with us at a significantly higher rate.”

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Many shopping trends for the 2012 holidays have already been established. To name a few: “showrooming” and the increased usage of smartphones while shopping, price-matching, layaway, extra-long Black Friday sales, and a major push toward online shopping in general. The daily deal is rarely mentioned as a hot ticket for holiday shoppers nowadays.

Daily deal or “flash” sites haven’t disappeared, of course. A survey for the behavioral marketing firm SteelHouse offered up this factoid to make the case that flash deals are still relevant:

58% [of consumers said] they intend to purchase gifts from flash sale sites if the right products and offers are presented.

That sounds like a lot of shoppers. But upon closer look, is this much of any endorsement? There’s a big “if” in that statement—if the right products and offers are presented. In other words, consumers will bite if they’re presented with the absolute perfect deal. Well of course they would! The way the statement is phrased, you’d think the percentage would be much higher.

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The truth is that even as daily deals received major hype during the holiday season of 2011, spending on these sites represented a teeny-tiny fraction of e-retail sales, let alone all overall retail sales. In a 2011 Washington Post story pumping up the soaring growth of the hot flash deal model, analysts said that daily deals would count for a mere 1% or so of total online holiday sales.

The percentage is expected to small once again. That doesn’t mean daily deal sales are on the decline. Consumers and small businesses alike may be tiring of “$5 for $10 credit” offers at restaurants and spas, but daily deal sites are evolving and expanding how and what it is they’re selling. The daily deal aggregation and research site Yipit anticipates a strong growth in holiday sales because Groupon, LivingSocial, and the rest aren’t relying on the same old types of daily deals.

“Due to industry growth and a greater emphasis on gifts, we expect holiday daily deals to reach at least $150 million in sales this year in North America,” Yipit data analyst Sean Spielberg said in an e-mail. “This represents significant growth from 2011, when holiday deals accounted for roughly $100 million in sales.”

Spielberg pointed to Groupon’s Goods Wish Book—and its Toys section in particular—as examples of how the daily deal giant is expanding into sales or actual products rather than just more coupons. LivingSocial is also placing a greater emphasis on products, most obviously by producing its first-ever Holiday Gift Guide, which will be available to the public starting November 18.

(MORE: Holiday Shoppers Can Look Forward to an Extra Bloated Black Friday)

So what can consumers expect in the way of holiday deals from Groupon and LivingSocial? Dan de Grandpre, CEO of dealnews, said that the “only notable deal” from Groupon during the 2011 holidays was a $20 Old Navy credit that was sold for $10. “However, it had run that same deal twice before in 2011,” said de Grandpre. LivingSocial ran similar deals with retailers such as OfficeMax, and hosted a McDonald’s Big Mac and fries special in early December.

Yet this season shoppers shouldn’t necessarily anticipate offers on part with those from a year ago. “In the past year, both Groupon and Living Social have purportedly fallen out of favor with retailers large and small,” said de Grandpre. “I would guess that you’re more likely to see weaker deals than last year from both daily deal sites.”

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