Daily Deals Industry Moving Into Consolidation Mode

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With over 600 companies currently in the daily deals space in the U.S., industry consolidation is bound to occur — with larger companies buying up smaller rivals while other competitors go belly up. Given Groupon’s and LivingSocial’s ongoing acquisition spree and the departures of Facebook and Yelp from the deals game, it seems like this consolidation is already beginning to happen.

To find out more about what to expect in the deals space, Street Fight recently spoke with two industry watchers from local media adviser BIA/Kelsey, vice president Peter Krasilovsky and economist Mark Fratrik.

Krasilovsky sees opportunities for differentiation around strong and scalable tech infrastructure, a large email list and superior curation of deals. With regard to curation, he points out that several companies, like B2B deals site MarketSharing, have begun to stand out by narrowing their audience to specific verticals: “I love the niche. Every day I can’t believe how creative they’ve been,” he says. Taking the comparative slowness of business decision making into account, “the deals have a longer lifespan…it’s one of the greatest niche sites I’ve ever seen developed.” With a naturally smaller user base, but higher-priced dea ls, the site has seen good results and plans city expansions beyond its current list of 14 later this year.

It’s in reaching out to specific demographics and successfully personalizing deal content, Krasilovsky believes, that deals companies will thrive, rather than merely survive.

Technological capabilities are at the forefront for successful white label platforms that connect merchants with deal publishing opportunities. One example cited by Krasilovsky is Group Commerce (a company he blogged about on September 28), which supplies the back end technology for niche deals providers Daily Candy (targeting young women) and Thrillist (targeting young men).

Despite the acquisitive nature of some big players, the deals space is still technically expanding. Fratrik comments wryly that “there are some consumers that haven’t been inundated with deals yet.”

Like Krasilovsky, Fratrik is watching for expansion in vertical plays targeting a demographic or activity, “flash” deals where consumers are targeted by current location, and travel deals like those that have come out of Groupon’s recent partnership with Expedia. Sports-related deals sites, for example, could potentially counteract scalpers’ activity by supervising discounted ticket sales.

For some time now, smaller firms in the deals space have been closing up shop or selling to larger players. Fratrik comments that, “while this is notable, it’s hardly alarming.” Just as the financial and structural barriers to entry are low in the deals space, the barriers to exit are also low — in many instances, key assets simply include an email list (a common reason that larger players buy competitors in the first place).

As expansion and fragmentation continue, flexible and intuitive aggregation tools may be a godsend for deals recipients.

“The key thing,” notes Fratrik, “is getting people to actually register with you. … The second step is that you have good deals.”

Top-five destination deals site BuyWithMe has already acquired several deals companies in the last few months. Beyond their treasured email lists, small players sometimes bring unique marketing behaviors to the mix. Krasilovsky cites the example of Scoop St., a recent BuyWithMe acquisition. Scoop St. had established strong relationships with area merchants, holding several “street fair” events whose structure made it likely that participants would take advantage of several deals at once.

Fratrik isn’t particularly concerned by Facebook’s brief and apparently unsuccessful foray into deals: “Facebook has always had the enviable problem of, ‘What should I be doing? Do I get into games, or other opportunities?'” Fratrik believes that “too many people are reading too much into their visit [to the deals space].”

He compared Facebook’s dabbling to the broad experimentation of fellow behemoth Google. “Google’s been in and out of so many industries, I can’t keep count.” We know, of course, that Facebook now says a desire to reallocate engineering resources led to the shift in strategy.

“And how much did it cost them to try out? Five markets for 3-4 months,” Fratrik concludes.

At the other end of the spectrum are extreme vertical plays. Fratrik has his eye on religious vertical deals (Jewpon.com and Jdeal.com have met with success) and those focused on single activities, such as golf.

When asked about the development status of daily deals in emerging international markets, Krasilovsky comments that some Groupon and LivingSocial clones exist, but that differing cultural characteristics make a true copycat structure unlikely. Additionally, credit cards may be less widely used in emerging markets, making spontaneous deal purchasing more cumbersome. Finally, the lack in some regions of an Amazon e-commerce equivalent may make online deal formats unfamiliar for consumers.

Rather than this, Krasilovsky surmises, most deals companies would “go where the money is,” which — outside of the U.S. — is Western Europe and Asia.

In terms of the big boys, LivingSocial and Groupon have shown themselves to have widely different cultures, both in terms of the deals they offer and the people they hire. Krasilovsky remarks that it was recently determined that Groupon targets 54% of its deals to restaurants, while only 38% of LivingSocial’s offerings are restaurant-related.

Other evidence points to LivingSocial’s appeal to people who are slightly older, better educated and more likely to own a home, while Groupon’s base is slightly younger and more urban.

Despite this, Groupon does deliver more homeowners due to a larger overall user base. LivingSocial, in the “Avis” market position, is certainly working to shape itself as a lifestyle brand.

What happens to deal aggregators as deals companies establish niches in terms of products or audiences? Thy are likely to still play a key role in helping overwhelmed users filter the deals that are best for them, without having to limit their deals environment to a site like Thrillist or Daily Candy. In fact, as expansion and fragmentation continue, flexible and intuitive aggregation tools may be a godsend for deals recipients.

Find out more about the future of the daily deals industry from top executives at the Street Fight Summit on October 25th and 26th in New York.