NPR

What's Next For The Daily Deal Business Model?

Despite their recent woes, "daily deal" companies Groupon and Living Social can be profitable, says analyst Arvind Bhatia. (NPR)

Are the days of "daily deal" coupons about to expire? Shares of email coupon company Groupon are down nearly 80 percent since going public last year. And its smaller rival, Living Social, plans to lay off as many as 400 employees, after reporting a net loss of more than $560 million in the third quarter.

Those struggles have raised questions about the future of the daily deal strategy, and whether a company like Groupon can stay in business.

"It's ... an evolution of the company that's happening," says Arvind Bhatia, managing director of equity research for the investment firm Sterne Agee, in an interview with NPR's David Greene. "They have a decent balance sheet," Bhatia says of Groupon. "As long as they continue to generate profitability, I think the business can survive." Stern Agee trades in Groupon shares and has an investment banking relationship with Groupon.


Interview Highlights:

On the coupon business model

"I think fundamentally, the model can work. But it needs scale. Keep in mind that Groupon was born out of the recession ... at a time when people wanted to see deals. So they were right in the sweet spot of what people really wanted. And they've grown really fast.

"But ... the daily deal business seems to be peaking. And in some ways, Groupon is a victim of its own success. It's hard for them to continue to grow the daily deal business the way they did before."

On the need for scale

"Both Living Social and Groupon — Groupon, in particular — have spent tons and tons of money in acquiring these customers. They have something like 160 million people whose email list that they have. That is what is attractive to merchants. So, you need scale to succeed."

On complaints about deals

"The deals that merchants offer are deeply discounted deals. And those are meant to be deals that bring customers in. And hopefully, customers like the product and keep coming back.

"Sometimes what happens is, the merchants that are using this product maybe don't know how to use it appropriately. And maybe their service isn't good enough — and they were hoping this would be this one last desperate move to get customers in before they go out of business. So, it depends on the merchant itself."

On the evolving "daily deal" business

"In the beginning, it was all about, let's acquire customers at all costs. Now, particularly for Groupon, it's OK, you've got the customers. Now show us how you can make money with this business model.

"So one thing they have to do is slow down on their spending. And they're doing exactly that."

On moving past email

"What they've talked about is tapping into, perhaps, search engines like Google and Bing to attract more customers. And that's a pretty significant move. Keep in mind that 25 percent of all searches ... are for local products.

"But right now, they're driving very little business from these search engines. So that's an opportunity for them to now go after customers that are looking for deals in general, not just through the emails."

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Transcript

DAVID GREENE, HOST:

You know, all those daily deals that come into your inbox? Well, they soon might begin to dwindle. The online coupon company Living Social, is letting go of nearly 10 percent of its global workforce, and daily deal trailblazer group Groupon, has suffered a stunning loss in the market this year. Its shares are down 80 percent since going public last winter. All of this raises questions about the future of the daily deal strategy.

And to talk more about what might be going wrong, we called up Arvind Bhatia. He's the managing director of equity research at Sterne Agee, an investment firm that has a banking relationship with Groupon.

Mr. Arvind, thanks for joining us.

ARVIND BHATIA: My pleasure.

GREENE: So what's going on? Is there problem with the model or customers just, you know, not really into this whole daily deal thing anymore?

BHATIA: Well, look, I think fundamentally, the model can work. But it needs scale. And keep in mind that Groupon was born out of the recession that we had worldwide, at a time when people wanted to see deals. And so they were right in the sweet spot of what people really wanted. And they've grown really fast.

But what we are now seeing is the daily deal business seems to be peaking. And in some ways, Groupon is a victim of its own success. You know, you mentioned Living Social again, another example of a company that doesn't have scale and that's why they're losing money.

GREENE: What do you mean by scale? Tell me a bit more about that, if you can.

BHATIA: Basically, it's pretty easy for anyone to get into the daily deal business. If the two of us decided to get into the daily deal business, you would have to contact some local merchants and we start offering deals.

GREENE: Let's get going. That sounds like a good idea. I like it.

BHATIA: Yeah. And however, to really be able to generate business for this local merchant, we need a database of a lot of customers and that's where it gets harder. Both Living Social and Groupon - Groupon, in particular - has spent tons and tons of money in acquiring these customers. And they have something like 160 million people whose email list that they have. That is what is attractive to merchants.

GREENE: OK, so you say Living Social needs more scale. You still think that their motto might work. Groupon, you still see a future for them. You say that customers still like the idea of daily deals, although not as much as they might have in a recession. What about the business side? I mean as I understand it, some businesses have come to just not like this whole thing very much.

BHATIA: So what happens is the deals that merchants offer are deeply discounted deals. And those are meant to be deals that bring customers in. And hopefully, customers like the product and keep coming back.

Sometimes what happens is, the merchants that are using this product maybe don't know how to use it appropriately. And maybe their service isn't good enough - and they were hoping this would be like this one last desperate move to get customers in before they go out of business. So, you know, it depends on the merchant itself. But I think Groupon, they're satisfying enough merchants for them to keep coming back to them. I think the repeat rate is something north of 50 percent or so.

GREENE: So is this just a matter of these companies, you know, they're not having the explosive growth they did in the very beginning, but that they're settling into sort of a new reality?

BHATIA: I think in the beginning, it was all about, let's acquire customers at whatever costs. Now, it's about OK, you've got the customers. Now show us how you can make money with this business model. So one of the things they have to do is slow down on their spending. And the question is as they do that can they still continue to grow?

And what they've talked about is tapping into, perhaps, search engines like Google and Bing to attract more customers. But right now they are driving very little business from these search engines. So that's an opportunity for them to now go after customers who are looking for deals in general, not just through the emails. So it's again, an evolution of the company that's happening. They have a decent balance sheet. As long as they continue to generate profitability I think the business can survive.

GREENE: Arvind Bhatia, I'll be waiting for your call if you want to start that company together.

(LAUGHTER)

BHATIA: Let's do it.

GREENE: Thanks so much for talking to us.

BHATIA: Thank you.

GREENE: That's Arvind Bhatia. He's an analyst with Sterne Agee, which trades in Groupon shares and does have an investment banking relationship with Groupon. Transcript provided by NPR, Copyright NPR.

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