Why the Demise of the ‘Groupon Clones’ Isn’t a Bad Thing

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JAY WEINTRAUB Expect in the next couple of weeks to hear of at least one major change in the deal space that will signal very clearly the deep consolidation to come. (And, it has nothing to do with the recent update that Groupon will soon begin its roadshow looking to raise money at a $12.5 billion valuation.)

What has started to change? It isn’t the accumulation of negative press. It’s the broad realization from the thousands of people and companies who have tried to enter during the past 18 months that making money in the local deal space is hard. Very hard.

It’s much harder than most people think, but until everyone gave it a go, and experienced it for themselves, no amount of others saying so would do. What did they learn? Bootstrapping or raising a little bit of money to capture a few markets can work — i.e., turn into a cash-flow-positive business — but enough people — entrepreneurs and investors — now know that going from a handful of markets to scale requires an insane amount of cash.

Those going to be affected first are the smaller but direct competitors to Groupon and Living Social who have not hit scale, with scale being defined as not holding a top 3 spot in multiple markets and a business with healthy operating profits. This industry has become less sexy, and that’s a good thing.

So what should the future hold?

• Fourth, fifth, sixth, seventh, etc. entrants to markets in the U.S. will shut down. Not every smaller player will shutter, but many of them started with the idea that they would either get bought or be able to grow more quickly than they have.

• No more big checks will be written to allow modest players to try and become big players. This more than anything will cause the rapid deceleration of existing sites.

• Those with known brands will stay around along with strong vertical players. The joke has been what do you call the Groupon of the mommy space? Groupon. We don’t necessarily agree.

• The industry as a whole will improve. This is the big one. How will the industry improve? The talk will shift away from the negative and back to the innovation — from tablets to retail stores. We will also see people focusing not on the vocal minority but the satisfied majority. This channel has legs, and we will finally get a chance to see it — instead of today where we can’t see the forest for the trees.

Cross-published at Jay Weintraub.com. Register here for the LeadsCon Las Vegas, Feb. 28-29, 2012.

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