Daily deals near "saturation"

NEW YORK: Companies in the online daily deals sector need to diversify their operations as the category approaches a "saturation" point, according to BIA/Kelsey.

The advisory group reported that US shoppers would spend $3.6bn on daily deals, instant deals and flash sales this year, an increase of 86.9% on an annual basis.

Looking forward, growth will slow to 23% in 2013, when the segment generates $4.4bn. Expansion rates are then set to remain in single digits, as returns hit $4.8bn in 2014, $5.2bn in 2015 and $5.5bn in 2015.

"After astronomical growth in 2012, the online deals marketplace is showing signs of maturity," Peter Krasilovsky, vice president and program director at BIA/Kelsey, said.

"There has been consolidation in the space, deal conversion rates may be suffering due to over-familiarity and the market may be near saturation. Still, market leaders continue to exhibit growth as market awareness and penetration spread."

Groupon, the industry's biggest player, logged a net income of $28.4m in the last quarter, versus a loss of $107.4m a year ago. Its revenues also rose by 45% to $568m, but concerns grew over a 2.4% fall in margins.

"A sequential decline implies a rapidly deteriorating core business – i.e. the daily deals business – and Groupon needs to act fast to fill up this hole with new initiatives such as goods," said Mark Mahaney, an analyst at Citi Investment Research.

Sales of discounted goods made up 11% of Groupon's bookings in Q2 2012. "If you strip out the goods business, they were down 7% from the last quarter," said Ken Sena, an analyst with Evercore Equities. "It shows there is a softness in the deals side."

Living Social, part-owned by Amazon and the number two player in the category, has moved into fields like take-away meals, travel and high-end experiences, and believes deals will yield less than 50% of sales in the next two years.

"The daily deals business is and will continue to be a very large part of the pie over time," said Tim O'Shaughnessy, its CEO. "There's a few bets we've made that we think have nice long-term potential."

A survey of 165 small businesses by BIA/Kelsey found 26% were either "likely" or "extremely likely" to take part in daily deals and similar programmes during the next six months, while 49.7% were unlikely to do so.

"It's not like daily deals are going to go away," said Mark Fratrik, chief economist at BIA/Kelsey. Rather, the firm suggested, they are well-placed in areas such as mobile deals, promotions loyalty schemes, payment processing and ecommerce.

Data sourced from BIA/Kelsy, Financial Times, New York Times, Crain's Chicago Business; additional content by Warc staff, 18 September 2012

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