CHICAGO/SAN FRANCISCO, Mon Nov 12, 2012 – Groupon and its compatriots in the much-hyped daily deals business were supposed to change the very nature of small-business advertising. Instead, it is the daily deal vendors that are racing to change as evidence mounts that their business model is fundamentally flawed.
Groupon last week reported another quarter of disappointing earnings as its core business stagnated, sending its stock down 30 percent to an all-time low of $2.76. Its biggest rival, Living Social, is piling up losses, and part-owner Amazon.com earlier this month recorded a quarterly loss after writing down its Living Social investment.
Both companies are racing to diversify, venturing into more generic ecommerce areas like off-price sales through ventures such as Groupon Goods and LivingSocial’s Shop. Meanwhile, upstarts are developing new variations on the discount coupon theme.
“It’s clear that they need to have other models besides the email daily deals business,” said Aaron Kessler, an analyst at Raymond James. “The problem is that a lot of these newer businesses have lower margins.”
Critics say the torrid growth that enabled Groupon to go public at $20 a share just a year ago was fueled by merchants buying into a new type of marketing that they didn’t fully understand. The discounts offered through the Groupon coupons have turned out to be costly, and the repeat business they generate uncertain.