Born from the depths of the recession, the Daily Deals Sites industry has experienced extremely fast growth in the five years to 2012.
But does the category really have a sustainable future?
While US industry revenue is expected to grow 16.6 per cent in 2012, some problems are emerging, according to research house IbisWorld, which has released a comprehensive study on the US market.
IbisWorld estimates revenue to rise at an annualised rate of 304.2 per cent to a whopping $1.7 billion as industry operators benefit from a customer base that is short on disposable income and a large number of retailers trying to get customers in their recession-battered doors.
But the research house questions whether such high growth rates are sustainable longer term as consumers loosen their purse strings and retailers are less willing to discount so heavily to get product out of warehouses.
IbisWorld industry analyst Kevin Culbert, says “a number of companies entered the industry as a wave of publicity swept the media and excitement gripped the cash-strapped public”.
But the industry has already started to experience consolidation.
“Low barriers to entry, high marketing costs and steep competition have prohibited most companies from gaining a foothold in the industry. These factors have caused many companies to experience a net loss since the industry’s inception,” concludes the report.
In the five years to 2012, IbisWorld estimates that the number of industry firms will increase at an average of 175.3 per cent annually to 632.
“However, With a large number of players flooding the Daily Deals Sites industry and significant marketing costs, some operators have seemingly entered the industry and left the industry at the same time,” says the report.
Furthermore, the industry’s largest players continue to operate at a loss in a bid to gain subscribers and market supremacy. The top two firms, Groupon and LivingSocial, were among the first to enter the market and were able to scale and export their business models to additional markets much faster than competitors.
Says Culbert: “Their strong brand recognition and institutional investor backing has enabled them to grow their subscriber and merchant bases worldwide.”
Groupon and LivingSocial benefit from scale, as they are able to offer a higher volume of relevant deals to larger subscriber bases, generating higher purchase rates than the industry average. However, while Groupon and LivingSocial have been able to capture significant market share, they operate in a highly competitive industry with a large number of firms that have copycat business models.”
In the five years to 2017, IbisWorld projects that industry revenue will increase, though at a slower pace than the previous period. Revenue growth is expected to slow considerably from the previous five years, as per capita disposable income rises and consumer spending normalises.
“Industry operators will also have an increasingly difficult time finding new subscribers. This factor will lead companies to focus on the bottom line rather than growth.”
Daily deal sites have also taken advantage of the increasingly connected population, with the number of mobile internet connections growing 57.6 per cent in the five years to 2012.
