It wasn't long ago that Groupon and LivingSocial were all the rage. Everybody who could rub two digits together was starting some variant of a daily deal site. But the excitement has worn off as analysts and merchants gain experience with the deep discount strategy.
Groupon is increasingly being seen as a bad deal on Wall Street. Investors dumped Groupon stock after the company announced disappointing third-quarter results last week, driving its stock price down 90% from its IPO level and slicing 31% off the company's balance sheet.
Groupon's problem revolves mostly around cash. It has about $1.2 billion in the bank but owes about half of it to its merchant partners. Groupon takes in cash from consumers who buy its coupons and sits on it for a month or so before paying it out to retailers.
This was OK for Groupon when it was growing quickly but now that growth has leveled off as merchants do fewer deals and fewer new consumers sign up, the company's balance sheet is showing more growth in the liabilities column than investors like to see.
Retailers getting savvier
And then there's those pesky retailers. The whole daily deal thing seemed like a good idea when it was introduced but merchants have quickly learned that giving away their products at deep discounts doesn't necessarily win them new customers for life. In fact, many of the coupon clippers are already customers who simply get a great deal on something they would have bought anyway.
Retailers eventually caught on to this and began wondering why they have to wait longer to collect less revenue. Anyway you slice it, this will work out to their offering deals that, while they are still daily, are not quite the barn-burners customers have come to expect - a trend that consumers are catching onto.
Nor is No. 2 LivingSocial exactly on the upswing. The DC-based site appears to be facing the same retailer and merchant fatigue as Groupon, although since it is not publicly traded, it doesn't release detailed financial statements. But published reports say LivingSocial is facing the same cash crunch as Groupon, without the ability to raise capital in the public markets.
What to do
Assuming both sites get through the holiday season, crunch time could come next year. Most observers think Groupon would be a logical candidate to buy LivingSocial. Even though LivingSocial is thought to be only about one-fourth as large as Groupon, taking it out of the picture would allow Groupon to raise revenue and slash costs.
What's all this mean for shoppers and merchants? The most obvious advice for consumers is to use those daily deals coupons quickly.
And for merchants? Well, it's not our place to advise merchants but taking good care of your existing customer base - and maybe even rewarding your regular customers with loyalty promotions and great service - is always a good place to start.