[risnews.com] Groupon’s announcement last week that it would file for an initial public offering to raise $750 million added fuel to the fire of discussions taking place around the fast rise of daily deal sites. As Groupon’s rapid expansion continues (and spawns imitators just as quickly), one question remains unanswered: Is Groupon a good deal for retailers?
Offering 50% to 90% discounts for products and services from local merchants, Groupon’s consumer benefits are clear. The advantages for Groupon are also clear; the company keeps approximately 40% of the revenue generated by coupon purchases.
For retailers, however, the benefits are less clear. Groupon and other daily deal sites have demonstrated their ability to drive traffic, but by their nature they come between retailers and their customers in ways that may make it difficult to translate that traffic into an ongoing relationship.
“It is great for driving awareness and traffic for the first time, but it is not sustainable,” says Greg Buzek of IHL Services. “The anecdotal evidence that we have seen suggests that these deals do not create ongoing customers, but rather low-margin customers that are only there for the deal.”
In addition to bringing low-margin customers, Groupon inhibits retailers from building long-term customer loyalty, because it only shares limited customer data with participating retailers. The site gives retailers the names of customers that redeem their coupons, but not e-mail addresses that allow them to cost-effectively follow up with marketing messages.
That’s not to say there are no benefits for retailers. Small to mid-size retailers can create awareness of their brand and drive traffic by offering deals in local markets through Groupon.
“Fundamentally, the purpose of Groupon-type deals is to introduce or re-introduce customers to a retailer they might not ordinarily buy from,” says Paula Rosenblum of RSR Research.
For other retailers, Groupon and sites like it can provide a vehicle for moving hard-to-sell inventory. Some retailers may use Groupon participation tactically, to move product with minimal promotion and marketing costs or simply to make room for newer inventory.
Major retailers are slowly jumping onto the daily deal train in an attempt to increase store traffic, however. Gap was the first national brand to partner with Groupon when it offered a deal in August 2010 for $25 off a $50 purchase in Gap stores. Last week, Gap-owned Old Navy became the latest major retailer to partner with Groupon, offering a voucher for $20 worth of summer clothing for just $10.
“Gap had seen a lot of customer defections and was hoping to bring them back into the store,” explains Rosenblum. “So the profit has to be on the back-side.”
However, Rosenblum explains that the effects of the deal aren’t always beneficial. “If it increases the lifetime value of a customer, of course it was worthwhile. If not, it isn’t going to do a thing but bring another cherry-picker into the store.”
Of course, larger retailers may have the clout to negotiate more favorable deals with Groupon or its competitors, arranging to get fuller access to the customer data Groupon collects. Groupon’s competitors may be more willing to engage with retailers in order to get a foothold in this lucrative market.
Despite the unclear meaning for retailers, the popularity of daily deal sites continues to grow. Since Groupon started in 2008, roughly 500 similar sites have emerged worldwide.
Search engine giant Google — whose offer to purchase Groupon for $6.4 billion last December was rejected — launched its own Google Offers site on June 2 in Portland, OR offering time-limited deals from local vendors. Other major names dipping their toes into the $1.25 billion online coupon market waters include AT&T, Facebook and Amazon, who also launched its AmazonLocal on June 2 in Boise, ID. This increase in competition for Groupon could spell disaster for the daily deal model.
“A proliferation of sites decreases the potential for success for all of them,” says Rosenblum. “The company with the best list wins.”