Lesson From Gilt: Consolidation Means Growing Up for Daily Deals | Street Fight

Lesson From Gilt: Consolidation Means Growing Up for Daily Deals

Lesson From Gilt: Consolidation Means Growing Up for Daily Deals

Over the weekend, luxury goods brand Gilt Group announced a substantive round of layoffs at Gilt City — including president Nate Richardson. In addition to the personnel cuts, the New York-based company also said that it would be closing a handful of the deal site’s regional offices in smaller markets.

The cuts come in the wake of a report released last week by Daily Deal Media, which shows increasing consolidation in the deals space over the past six months — with close to 800 deals companies either going under or selling to larger companies during that time.

Until news of the layoffs began to spread earlier this month, Gilt City appeared to be positioning itself as a third entrant in the Groupon/Living Social deal-opoly. In early November, the company snapped up former number three BuyWithMe in a fire sale, gaining valuable penetration into mid-sized markets like Houston and Philadelphia.

Gilt continues to frame the cutbacks as a necessary evil in accelerating profitability during the company’s lead up to an initial public offering slated for late 2012 or early 2013. This may be the case, but Gilt City’s retreat points to a larger systemic issue for the deals space in 2012. With venture investment in the space waning, access to the type of funding necessary to scale the capital-intensive sales efforts is becoming much more difficult — and the potential for a relative newcomer to achieve Groupon or LivingSocial-like growth seems a lot less likely.

Gilt City may have been the last hope for a nationally scaled deals brand to take hold before industry consolidation becomes irreversible for the near-term. It seems that if Gilt, a recognized consumer brand nearing an IPO, could not scale a daily deal business, the prospect for substantive growth by other, even smaller players in the space is grim.

The imminent question facing the daily deal industry is whether this consolidation will result in a decrease in overall growth and innovation. For pure-play deals businesses, the answer appears to be yes, because daily deals are not an economy of scale. Outside of brand awareness, presence in one market has little effect on the cost-to-scale local sales efforts in another. Entering a new market is capital intensive, and gaining market share is far more difficult today since most medium-sized and large markets are already saturated with competitors.

Secondly, as Groupon CEO Andrew Mason has reiterated, Groupon, and the deals business as a whole, has a huge human component. “People don’t understand what makes Groupon great,” Mason told a crowd during a Q&A at the Digital Life Design conference in Munich on Monday. “There’s a human component, core to our DNA, that’s difficult for a full-on technology company to bolt on … look at the evidence.”

So, let’s stop pretending that the deal model is purely a tech play. Sure, targeting and recommendations technologies are important components in increasing relevancy, and back-end analytics and CRM tools are key to improving the value proposition for local merchants. But, without quality original content, and quality original content at scale, targeting and relevancy features are unusable.

Gilt learned quickly that scaling a profitable deals business is an arduous process that requires incremental growth over a sustained period of time. Acquisitions will help but, as the luxury brand realized, they will only get you so far. It appears for now, that the honeymoon period is over, and the deals space is finally coming back to the hard reality of the street. The industry isn’t dying; it’s finally maturing.

Steven Jacobs is an associate editor at Street Fight.

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