The ‘Groupon’ effect

3 Feb 2011

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Sites like Groupon, LivingSocial and Yelp are driving much-needed business in the direction of bricks and mortar traders. But are Irish retailers ready?

Described as either social commerce or thrift commerce, the rise of services like Groupon, LivingSocial, CityDeals, Yelp and, more recently, Facebook Places Deals and Google Offers will be a difficult one for hard-pressed retailers, restaurant owners and other service providers to ignore.

As one executive told me recently, she and her friends have all taken wage cuts, with some of them now unemployed. The days of wine and roses are over and few can afford slap-up meals in restaurants and other luxuries.

“My friends and I would look for ‘deal of the day’ offers on sites like LivingSocial and CityDeals and some days there are deals that allow us to go for dinner for 50pc of the normal price,” she added.

The thrift-commerce movement led by Groupon, Living Social, Yelp and others has taken the online world by storm and – it could be said – has been born out of the recession, where cash-poor people simply don’t want to stop living. The other real boon of the Groupon effect is ordinary businesses in cities across North America can barely keep up with all the business being driven to their premises.

Groupon – a play on the words group and coupon – brings business directly to the door of local businesses. Groupon’s market is primarily composed of young, educated female customers and its deals focus on health, fitness and beauty products.

After spurning a $6bn offer from Google and taking on $950m in venture capital, three-year-old Groupon is now planning an imminent $15bn initial public offering. It recently made history for achieving the largest financing round for a start-up after it raised $950m in investment from Greylock Partners, Kleiner Perkins, T. Rowe Price and Morgan Stanley.

How Groupon works

Groupon works by using the web to enable groups of individuals to buy products in bulk. The site makes a daily offer to every community in the 230 markets it is active in. If a certain number of people sign up for the offer, the deal becomes available for all.

The site has more than 20m subscribers and plans to serve 300 cities worldwide by this year’s end. Groupon also has seminars and a training programme for merchants who have reported being overwhelmed by the amount of business the site has sent their way.

What’s interesting is established internet players like Google and Facebook are intent on muscling onto the scene. Google is already talking with small businesses to get them involved in a test run of a pre-paid offers/voucher service called Google Offers. Meanwhile, Facebook launched Places Deals this week.

Facebook is working with partners in France, Germany, Italy and Spain, including Starbucks, Argos, Alton Towers, YO! Sushi and even the R&B star Usher. Users will be able to check into shops, cafes and restaurants with their mobile phones, using Facebook’s apps for mobile together with the touch.facebook.com site and use vouchers or coupons to unlock deals.

In Ireland, tech entrepreneur Dylan Collins has also moved into the thrift-commerce game via Gruupy.com. A deal-of-the-day website, Gruupy gives punters cut-price deals on electronic gadgets if enough people show an interest in buying them.

Collins attributes the rise of social commerce not only to people’s appetite for thrifty deals but also to the growth of e-commerce.

“Gruupy was very much a cool little start-up that a bunch of guys I know got together on. It’s social e-commerce where the focus is on great deals for electronics but in a way that doesn’t take things too seriously. It’s definitely popular and right now I’m helping the team figure out what the next move is. They’ve been approached by a few VC funds to invest so it’s probably a direction we’ll go in to get scale,” explains Collins.

“The big differentiating factor about Gruupy is that it focuses on the community first and then the commerce aspect. We’re a niche community where people are all interested in the same kind of things. We’re not trying to be a Walmart or Amazon.

Collins adds: “Coupons have always been a huge business in the US, so to some degree this is more a re-presenting of a concept that has always worked. However, the sheer growth that some of these companies have seen is definitely testament to demand in the market.

“Undoubtedly, Groupon, LivingSocial, Gruupy and others have got their timing right. The other major trend this points to is the continued growth in e-commerce. A surprising amount of people outside of the US are still a little reluctant to spend money online but if anything will push them over the edge, it’s a deal.”

‘The profitable offspring of social media’

Social media expert Conor Lynch of Connector TV agrees with Collins: “We are witnessing the birth of the profitable offspring of social media e-commerce, namely social commerce.

“Collaborative consumer power for shared rewards is here to stay and is part of the wider social media revolution. Group purchasing is already going niche with copycat sites in market sectors like wine (Vinobest.com), and drink deals (Poggled.com).

“Swarm shopping with shared rewards will evolve, with the battle on for the largest and most profitable databases. The technology behind these sites is now being made available to buy so watch this space for more developments,” Lynch says.

The swarm culture is already resulting in interesting offshoots to obtaining products and services. One such example is the Irish firm MindHives, which helps people interested in courses – from piano lessons and sewing to cookery – to meet like-minded folk and discover the best teachers.

“Our philosophy is that people buy into people, not big institutions,” explains Gavin Bourke, one of the founders of MindHives. “It’s all about the power of the group getting together and improving themselves in areas they are interested in.”

Social commerce caution

Joan Mulvihill, chief executive of the Irish Internet Association, says the growth of social commerce can only be a good thing for traditional bricks-and-mortar firms.

But, before retailers and restaurateurs jump on the social-commerce bandwagon, Mulvihill cautions them to think carefully about the offers they put out there.

“Make sure you calculate the exposure for your business of a certain number of people taking up your offers. If everybody took up a deal in your restaurant you could be working for free for a week.

“The idea is you give a better price and loads of value, which works well theoretically – as long as you work out the costings properly.”

But does she think the Irish consumer is ready for social commerce? “Yes, we’re ready. We have a strong base of consumers who are comfortable shopping online. My advice to businesses is to think about how deals are calculated, negotiated and what they are trying to achieve.”

Discounts and the long-term picture

Collins agrees with Mulvihill’s final point: “No retailer can discount forever. Part of me wonders what the longer-term picture looks like for Groupon, et al. I’m fairly sure they’ll eventually move into actual product selling as a more sustainable business. Discounting is great for cash flow but pretty damaging in any long-term sense.

“In Ireland, City Deals (Groupon), Boards Deals and LivingSocial are already chasing the discount market for local services. Gruupy is obviously doing it with products. So I think there’s a fairly strong local current,” he says.

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Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com