Have I Got a Daily Deal For You: Groupon's Falling Marketshare

How many daily deals can a person devour in a day?

That's the big question looming for Groupon, and leading competitors including LivingSocial, in the fast-crowded daily coupon deal rage - and that's the big question investors will want answered when Groupon's IPO comes to market soon.

Less than a year ago some experts were valuing Groupon, still a private company, at more than $1.3 billion. Also, Groupon projected within the year the company is on pace to make $1 billion in sales faster than any other business, ever.

But that number may be discounted already.

The largest, and most original of the daily-deal kings, Groupon made daily deals a fast-growing phenomenon in the two years. Derived from the term group coupon, the Chicago-based company created by young upstart CEO Andrew Mason serves more than 150 markets in North America, plus more than 100 markets globally is the 294th-ranked website in America, according to data from Alexa.

There's no denying the company's prowess in the space.

Groupon, however, faces stiff competition in the market, as it is hard to corner the daily deal market - even when you are the original and you have a big, passionate following. After all, a deal is only a deal as good as the offering and anybody can do that, if retailers and services providers agree. And, Groupon's kitschy style is easy to duplicate, since there's lots of creative copywriters looking for work these days.

We've just learned that Groupon's share of daily deals slipped to 48 percent in may from 52 percent the previous month, potentially a significant drop for a company so focused on rapid growth - and significant for a company preparing for an IPO that some had recently viewed as potentially being the largest ever for a U.S. corporation.

Not long ago, Groupon spurned a $6 billion purchase offer from Google, and recently Groupon pushed more than 400,000 $50 for $25 coupons for Gap - in a single day. Now, its meteoric momentum may be coming to a crashing halt. Also, LivingSocial met with banks this week to discuss an IPO of about $1 billion, CNBC reported Wednesday. LivingSocial is expected to have about $1 billion in revenue this year and free cash flow by 2012, according to the report.

Groupon is still the daily deals leader, but LivingSocial is coming on strong. LivingSocial claimed 24 percent of the market in May, up from 20 percent in April, according to Yipit Inc, which says it studied online deals in 30 major North American cities. Yipit's researchers, according to Bloomberg, estimate Chicago-based Groupon made $64.7 million in sales in May, a figure that was still more than double what LivingSocial produced with $31.6 million in sales.

Many Players Have Entered the Daily Deal Space

The competition for Groupon doesn't stop there, either. There are currently five prominent daily deal providers in the United States, with more foraging for the red-hot space every day. The other players are not small, either, including the likes of Google Offers, Amazon Local, and Facebook Deals in addition to the largest two - Groupon and LivingSocial.

Right now, Google Deals, Amazon Local and Facebook deals are only available in limited areas, but one must question how long that will last. Facebook has an estimated 600 to 700 million users from around the world, and Google is in the process of field testing its new social media product, Google+, that is getting good reviews. Certainly, daily deals will continue to grow as emphasis for those companies if Groupon is indeed worth more than $1 billion after just a few years.

Google and Amazon may be big, for instance, but money talk that starts with a b as in billion always gets attention at those companies.

Also, with so many players now pushing daily deal coupons on consumers, one has to wonder how long the raging deal-of-the-day fad can keep its momentum with one big player taking the majority of the chips. Companies that use daily deal promotions have already learned the promotion comes at a price. Typically, promotions are not successful unless the deal offers 50 percent of more off the normal price of goods and services.

If a daily deal is for a $10 pizza, for instance, buyers of that coupon spend $5. The company promoting the special gets half and the business gets half, in that instance $2.50. Often the business are flooded with customers who come all at once, requiring more in labor costs.

Sure, the businesses get new traffic in their store, but at what price?

Grumblings are growing louder already, since for many, that price is too high - keeping up with the hassle, while losing money or breaking even only for the effort. The deals are best for new businesses that want to use the experience as marketing costs to showcase a new store or service or struggling businesses hoping to make one last push to show what they've got.

Even if businesses don't grow weary of the experience, and daily deals continue to grow and grow as many industry watchers suggest - and I don't disagree - the problem becomes whether one company that's not actively engaged in other areas of business, like Amazon, Google or Facebook can make daily deals a business that earns $1 billion in annual sales.

Lower Margins are Sure to Follow

Maybe, but consider only that the more crowded a space becomes competitively, the lower margins get quickly. Customer service at the sell-in phase to businesses is the only possible differentiating point that a company can develop and keep over time to win in the space long-term. When everybody has it there's not much else to do - daily deals become only a grommodity.

Similarly, if multiple daily deal propagators are calling upon businesses across America's largest metropolitan areas, how long will it be loose margins are crushed by business owners pushing one company against another competively. Sure, says the owner of one viable business, I'll do your deal, but I'm not paying you 50 percent of all sales. Don't want it? I'll call three of your competitors then, and see what deal they make.

Best guess is, margins will start dropping in the space - soon.

At this stage, companies like Groupon and even LivingSocial can get 50 percent of all sales generated because they hold competitive advantage. They are all the rage, after all, and rage brings a premium.

But once they are not, they have less bargaining power to stand upon.

It's not that Groupon isn't a good company, or that they and others like LivingSocial don't offer good deals and have a viable business model. They do. It's just that the rage may be bigger than the opportunity that's supposedly there for the companies in the leadership positions at the moment.

Groupon is here to stay, and so is LivingSocial. But other major competitors are already positioned in the space, and more are coming online with regularity - not to mention that fact that local entities like newspapers struggling to find ad dollars are already doing the very same thing in individual markets throughout the country.

Also, the coupon catered to local consumers has been around for a long time. Grocery stores called it the Wednesday flyer.

And as for deal shoppers, price matters more at the end of the day than a catchy name or digital means of delivery since everybody is doing it that way. Soon, daily deals will be so crowded online it will merely feel like reading the Sunday paper was back in the day. The inserts with all specials will fall out collectively together at log on, and ultimately, the best deals will be those taken.

It won't matter what company is selling them.