Daily-deal websites boom; Some see a bubble building

“Yeah it’s time to blow our own horns, toot-toot…”
That’s  Kunal Bahl and Rohit Bansal — founders of Snapdeal.com — celebrating the little-over-a-year-old, daily-deal/group-buying website crossing 5 million subscribers on June 7.

Even as celebrations are still on, at least some observers are not very optimistic about the long-term sustainability of the initial success.

Snapdeal, a poster boy for the runaway success of daily-deal websites, gets local merchants to offer “deep discounts” on products and services to the value-conscious Indian consumers. For merchants, this offers an affordable route to promote brand and an easy way to sell the so-called ‘distress-inventory’ — such as empty seats on a last-minute flight.

Bahl, chief executive of Snapdeal, which claims 70% marketshare, says he is on track to close 2011 with Rs100 crore in revenues and plans on making Rs300 crore in 2012.

Bahl’s optimistic projection to news agency Press Trust of India, in March, captures it all. “The way we are growing and the way this segment is set to grow, I won’t be surprised if we touch a revenue of Rs500 crore by 2014.”

While there is little doubt about degree of initial success, questions remain about the long-term sustainability of the underlying business model of websites like Snapdeal, modelled after Groupon, which pioneered the concept in US.

Groupon bought Sanpdeal’s competitor Sosasta.com in January for an undisclosed sum.

Last week, Utpal Dholakia, a management professor at Rice Univeristy in Texas, published the results of comparative analysis of consumer and merchant behaviour on five daily deal sites in the US including Groupon, Livnigsocial, OpenTable, Travelzoo, and BuyWithMe.

Based on his analysis of 324 businesses that conducted a daily deal promotion between August 2009 and March 2011, Dholakia concluded: “Over the next few years, it is likely that daily deal sites will have to settle for lower shares of revenues from businesses compared with their current levels, and it will be harder and more expensive for them to find viable candidates to fill their pipelines of daily deals.”

Also among the nay-sayers is private equity investor Mahesh Murthy, a venture capitalist with investments in online enterprises such as Carwale and RedBus.

Murthy, founder and chief executive of Seedfund, has a very gloomy outlook on the sector.

“This daily-deal bubble will implode in the next 6 months - already youre seeing signs of companies dying out here and almost nobody making money in the business,”  said Murthy. According to him there is little room for differentiation between the deal sites and sometimes they all offer the same deals, eventually making them all look just the same to customers.

Players in the Indian daily deal site scene beg to be different, especially about the US study.

“The landscape is very different (in India),” says Bahl.

“Economics of small merchants in India is not the same as in US, where there is lower fixed costs and higher variable costs such as labour. It is the opposite here and that makes it easy for the merchants to offer discounts on longer term basis.”

According to data collected by Dholakia, less than about 48% of merchants said they would go back to a daily-deal site to do another promotion. Only about 55% of merchants said they made money by doing such. Promotions. Even worse, only about 20% of customers come back for deals, or almost always 80% of daily-deal customers in the US are first-time purchasers.

While Dholakia himself agrees that there are differences in consumer behaviour between Indian and US, he says that the broader implications should hold true.

“My point to merchants that be careful with daily deals and don’t stop building your brand just because you do such promotions, should apply,” Dholakia said.

Based on internal study, Snapdeal’s Bahl claimed that he has an 87% return ratio for merchants - much higher than what Dholakia found in the US. Bahl, however, declined to share customer return ration citing business confidentiality.

Success of Snapdeal.com has prompted others to jump in to claim their share of the pie. One of the better known names that joined the fray is Rediff.com.

“Such skepticism is normal considering the sudden rise that this industry has seen with the leading players reaching hundreds of millions of dollars in the US in a matter of months,” Ajit Balakrishnan, Rediff founder. “You will remember such scepticism greeted all the earlier internet models as well in their early days.”

Rediff, one of those internet day successes, is currently struggling to remain profitable.

“The business models in place now are primitive and will quickly evolve,” Balakrishnan said. “Remember, this is the new classifieds business and online penetration of that industry, even in India is still less than 5%. There is a long way to go and the game is just starting!”

In the US, where the game started a little earlier, the results does not seem to be much encouraging.

Groupon, in its filing to US market regulator Securities and Exchanges Commission as part its initial public offering or IPO, said its revenues grew from $30 million in sales in 2009 to $713 million in 2010 - although lion’s share of that is from costly acquisitions. More importantly, losses were $413million in the year to December 2010.

Sucharita Mulpuru, analyst at market research firm Forrester, in her official blog on June 8, in an article titled ‘An Open Letter To Anyone Planning To Buy Into Groupon’s IP’, had some stark warnings about Groupon, which is seeking a $20 billion valuation in its IPO.

“This IPO game isn’t about finding value, it’s about finding a greater fool who actually believes the valuation is true,”Malpuru wrote. “Trust me, you will be the fool.” Mulpuru has an advice too. “Give Groupon time to actually earn its valuation.”

Remains to be seen if the Indian story will be any different.