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    Will the Groupon Bubble Ever Pop?

  • Their time on top may be temporary, but experts say they’ve changed consumer buying permanently.

    With an innovative cooking method, market-specific menu options, and franchisee interest across the globe, better-burger chain Smashburger would seem to have it all. The five-year-old company has already grown to about 155 U.S. stores and more than $130 million in annual sales, with a few hundred more units and Middle East expansion already in the works.

    But Smashburger is still trying to place one very important piece to the puzzle: how to attract new customers to the brand. And like many quick serves and other retailers, the company is turning to a daily-deal site to accomplish it.

    “As a relatively new brand in most of our markets, we really do think about the Groupon spend as a media spend,” says Jeremy Morgan, senior vice president of marketing and consumer insights for Smashburger.

    “For my budget I’ve got to allocate the same way I would a newspaper ad, or the same way I would a radio buy. As a cost, for us, Groupon is very effective at bringing people in and, as a new brand, we’re looking to activate a lot of new customers.”

    Three years ago, Groupon may have sounded like a funny word to come from a major executive at a fast-rising fast casual. Today, however, the name of the leading daily-deal site has become synonymous with the deals industry, a collection of hundreds of websites that are trying to persuade consumers to visit businesses by dangling almost-too-good-to-be-true coupons in front of them.

    The infant industry is catching on quickly, so quickly that some have suggested the bubble could soon pop, especially considering the number of new services cramming into the space. To date, there are hundreds of versions across the country, with crazy names like Yipit, Woot!, and TravelZoo to help buyers distinguish them. But for now, at least, consumers can’t seem to get enough.

    According to a 2011 study by customer experience researcher ForeSee, about 65 percent of online shoppers subscribe to at least one daily-deal e-mail; 46 percent of them subscribe to more than one. Meanwhile, almost two-thirds of deal subscribers had purchased a deal in the past 90 days, and 89 percent of them had redeemed it.

    Another study, from Utpal Dholakia, professor of management at Rice University, found that about two-thirds of people who purchased deals for restaurants had bought three or more deals in the past year.

    Although coupons and discounts have always wooed cash-conscious shoppers, the daily-deal industry is turning the notion of saving on its head. By offering deeply discounted—often 50 percent or more off the regular price—services and products to shoppers via daily e-mails, deal sites have encouraged consumers to spread their patronage around to the businesses with the best offers.

    The industry has also changed the way operators approach the issue of attracting customers. Its model, in which customers purchase a deal upfront and it’s only redeemable if a certain number of people buy it, all but guarantees an audience.

    “It’s a totally new way of marketing that’s never been an option to [retailers] before,” says Julie Mossler, director of communications for Groupon. “If you compare it to radio advertising or newspaper, before you would put money down for an ad and there was no guarantee that anyone would ever come to your door. With Groupon, you know these people are coming in because they already purchased it upfront.”

    Groupon, of course, is not the only major player in this space, but was one of the earliest products to market and is easily the most popular service to date. According to the ForeSee study, 51 percent of online shoppers subscribe to Groupon, a full 27 percentage points higher than second-place service LivingSocial.

    Chicago-based Groupon launched in late 2008, born out of a start-up called The Point that sought to bring groups of people together to tackle various social issues. When the founders discovered that users were more interested in gathering in large numbers to get discounts on retail items, they realized there was market demand for a service that offered group-based coupons. So they refocused the company as Groupon to fit the niche.

    The company has since enjoyed a meteoric rise in popularity that culminated in filing an IPO and going public in November. The company, which has made a billionaire of 30-year-old CEO Andrew Mason, grew to every major market in the U.S. and many abroad, and has swelled to more than 10,000 employees. Despite the fact that the marketplace is crawling with imitators, the vast majority of the competitor start-ups are minuscule compared to Groupon.

    Smashburger’s Morgan says the decision to choose Groupon over a smaller start-up or localized service was based on exposure potential. Smashburger’s $6-for-$12 deal was for all corporate stores across the country (it was also optional for franchisees and eventually ran in roughly two-thirds of the chain’s stores).

    “Because of the awareness and trial portion of what this is, it’s a little bit like being in a local paper versus a national paper,” Morgan says. “LivingSocial and Groupon are really the elephants in the room, and if you’re going to do one of those deals, you might as well get the reach that comes from the size of their companies.”

    Indeed, LivingSocial has also grown into a venerable contender in the daily-deal industry. The service, which was founded as an app developer but became a daily-deal site in 2009, offers essentially the same model as Groupon, but provides full payment to merchants faster than its rival (15 days after the deal ends versus Groupon’s 60 days). It also offers more of a localized twist than the deals leader, says one company representative.

    “Unlike anybody else in the industry, we’ve got a boots-on-the-ground strategy, which means we have actual LivingSocial employees in every single market,” says Maire Griffin, director of communications for LivingSocial.

    “We believe you should shake the hand of the person you’re doing business with if you want. Especially if you’re working with a mom and pop, it’s really reassuring to sit down face to face with someone. But also from a consumer perspective, we’re able to actually check out that restaurant, salon, [or] spa, to make sure it’s something we want to feature.”