Group deals love affair

The group buying sector is going to be worth over half a billion dollars in 2012 and the fight to keep customers loyal is going to be fiercer than ever.

The malaise in the local retail sector shows no sign of abating and with retail sales in Australia posting their weakest annual growth in 27 years in 2011 it looks like consumers just aren’t willing to part with their hard earned dough. However, while bricks and mortar retailers are feeling the pinch the Australian love affair with online group buying deals is only getting stronger.

The group buying phenomenon only hit our shores in 2010 but the market is now worth close to half a billion dollars and according to tech analyst firm Telsyte, it’s only going to get bigger. Telsyte expects the sector to grow an additional 30 per cent this year to $646 million and by 2015 it will be worth one billion dollars.

Its all about the discount 

Cash strapped consumers have one thing on their mind and that’s discounts. This appetite has fuelled the astronomical growth in the sector, which soared 642 per cent to $498 million last year. The other growth driver according to Telsyte senior research manager Sam Yip is the transition in customer behaviour, where they are willing to use group buying sites to purchase actual products not just services.

Physical products now account for 30 per cent of the total market and Yip says this shift could change the face of the industry and introduce competition between deal of the day and grocery and discount online department stores.

That’s just one of the trends that looks set to make 2012 a very interesting year for the sector.

Traditional retailers may have been slow to recognise the online threat but they are waking up to group buying and deals. Woolworths has joined the daily deals bandwagon with Doorbusters , while Myer and Harvey Norman have launched their own offshore websites  Myfind.com and BiG BUYS. However, diving into the online sector isn’t a cakewalk for retailers that have spent all their lives doing business the usual way.

“There is a lot of investment that has been made into instore merchandising, marketing and point of sales, so it’s a big shift,” says Yip.  

It will be interesting to see what role they will play in the market given that heavyweight foreign operators, like LivingSocial and Groupon, are making their presence in the market and according to some their indiscriminate cash splurge is starting take the shine out of the market.

Hey,  big spender

The former chief executive of Australian group buying pioneer Cudo Billy Tucker has told SmartCompany  that the extravagant spending by international players has hurt margins and profitability and their willingness to acquire customers at all costs was taking a toll on the industry’s reputation.

One clear evidence of this extravagance is the admission by LivingSocial’s local head Colin Fabig, who told the Australian Financial Review  his company had spent $10 million on marketing in the second half of last year.

There’s a reason why those who have the money are willing to spend as much of it as possible because 2011 has been all about getting the customers hooked to the group buying message. That’s probably going to change this year as the focus now shifts from customer acquistion to keeping them coming back for more. 

Discount chasing customers aren’t big when it comes to loyalty and Yip says that consumers will go where the best deals are and building loyalty is going to be top on the agenda of the big group buying sites. This will see a lot of loyalty and rewards programs coming into play and Yip expects credit card companies to start considering how they can get a piece of the group buying action.

One local group deals outfit that continues to rule the roost, despite the efforts of the overseas players, is Scoopon which is part of the CatchOfTheDay e-commerce group.

Scoopon’s chief executive Gabby Leibovich says he is mystified by the amount of money the likes of Living Social and Groupon are spending.

“I mean $10 million, do you know how long it takes for you to earn that money back?”  he says.

“They are getting their money from the parents in the US and they are happy to spend it, the business school I went to that not’s how you do it.”

King of the hill

Leibovich’s confidence is understandable because Scoopon has managed to retain its overall leadership position in the sector in 2011 and it has been able to do so without spending millions of dollars in marketing or an army of employees. With 95 per cent of the revenue in the sector generated by the top eight sites, Leibovich also says Scoopon is the only one that is making any profits.

“Spreets is losing money for Channel 7, Cudo is losing money for Nine Entertainment and the Americans are losing money for their parents in New York,” he says.

Profit numbers are usually closely guarded by group buying outfits and leaving Leibovich’s exuberance aside, the bottom line is that here’s a business that reckons its got it right.

The magic formula here again comes down to giving customers what they need and Scoopon’s membership base of 1.8 million members certainly shows that its working.

“Our customers aren’t hooked into joining us, they join because somebody told them to look for us. We don’t spend any money on marketing and 60 per cent of our traffic is generated by people actually typing in Catch of The Day and Scoopon,” Leibovich says.

As the sector enters another year of growth and change Leibovich is confident that Scoopon has the weapons in its arsenal to maintain its dominant position.

The first of these is the reliance on a word of mouth model that cuts marketing costs and in a way reinforces brand loyalty.  

“Our customers aren’t hooked into joining us, they join because somebody told them to look for us. We don’t spend any money on marketing and 60 per cent of our traffic is generated by people actually typing in Catch of The Day and Scoopon,” Leibovich says.

The other is a commission structure that lets Scoopon attract and retain quality deal providers and strong repeat business. Keeping customers on the site is important but a successful group buying outfit needs to be equally vigilant about keeping the businesses that supply the deals willing and happy to come back.

Scoopon also stands to make the most of the consumer shift to physical products because it has a centralised product sourcing, warehousing and distribution capabilities through its sister sites CatchOfTheDay and GroceryRun. That allows it to get the products to its customers as quickly as possible. 

Leibovich will need every one of these weapons if ihe wants Scoopon to stay on top because the competition isheating up and it isn’t just the overseas rivals who are willing to flex their substantial financial muscle. Major retailers are getting serious and with unlimited funds and sloid brand recognition the battle for the hearts and minds of customers is only going to get fiercer this year. 

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