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DRAFT – NOT FOR RELEASE

The Daily Deal Phenomenon:


A Year in Review

March 2011

Local Offer Network, Inc.


research@localoffernetwork.com
200 West Madison Street – Suite 700/770
Chicago, IL 60606
v: 312.445.9990
f: 267.565.1094

www.localoffernetwork.com
Local Offer Network
The Daily Deal Phenomenon: A Year in Review 2

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Local Offer Network
The Daily Deal Phenomenon: A Year in Review 3

Contents
Executive Summary ............................................................................................................................ 4
Industry Revenue: A Staggering Growth Story .............................................................................. 5
Site Introductions and Expansion: The Land Grab......................................................................... 5
Deal Flow: “One Deal a Day” a Distant Memory ........................................................................... 6
Category Trends: From Burgers to Botox, and Everything in Between ...................................... 6
Prices: Rising Along with Category Diversification ....................................................................... 7
Discounts: Merchants Invest, Consumers Win Big......................................................................... 7
Multi-Voucher Purchases: Sometimes You Can’t Eat Just One .................................................... 8
Market Growth: Now Coming to a Hamlet Near You ................................................................... 8
Deal Duration: You Snooze, You Lose. Sort Of. .............................................................................. 9
Conclusion: Business Models Will Evolve, Momentum Will Continue ...................................... 9

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The Daily Deal Phenomenon: A Year in Review 4

Executive Summary
Social commerce, group buying, daily deals, flash sales. No matter which term or variation is
used, the trend triggered by Groupon, LivingSocial, Gilt Groupe and hundreds of other sites is
unrivaled in its meteoric growth. Driven by a dramatic increase in both the number of deal
services, the volume of new offers hitting the market and consumers’ insatiable demand for
quality products and services and great prices, the daily deal market is one of the most
intriguing and dynamic segments online.

Groupon’s success – highlighted by its spurning a rumored $6B acquisition offer from Google
and its expected IPO – is well-publicized. Yet to date there have been few comprehensive
reports of the detailed dynamics of the market in 2010 and expectations for 2011.

Local Offer Network is a leading provider of technology and services to the fast-growing
market for group buying services., The Local Offer Nework Deal Engine™ aggregates more
than 2,000 group buying offers per day from websites in 97 markets worldwide. As one of the
first and only companies to monitor nearly every deal across the web, Local Offer Network has
unmatched insight into how this market is evolving and key trends that will shape its future.

Key findings from the report include:


 The group buying industry will expand by 138% to $2.66B in 2011
 More than 63,000 deals were published in 2010, and nearly 40,000 in Q12011 alone.
 As a wider variety of merchants join the group buying movement, new entrants from
luxury and higher priced categories are moving average transactions higher in step.
While dining, spa and health-related deals still abound, group buying now cuts across
nearly every consumer category.
 Geographic expansion has been a major growth driver, with deal sites now in 80
markets across the country compared to just 48 in 1Q 2010.

Methodological note: The results in this report cover activity from January 2010 through March
2011, and incorporate analysis and projections based upon:

 a database of more than 90,000 offers collected and classified via the LON Deal Engine
 actual consumer purchases recorded across a broad spectrum of LON partner sites
 financial data provided by group buying sites

Specifically excluded from this report are:


 Sites monitored by LON in Canada, the UK and Australia
 National “private sale” sites

For more information, please contact Local Offer Network via contact@localoffernetwork.com.

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The Daily Deal Phenomenon: A Year in Review 5

Industry Revenue: A Staggering Growth Story

US Group Buying/Daily Deal Market


Local Offer Network estimates that group- Industry Revenue (Gross)
buying industry revenue totaled $1.12B in 2010, Source: Local Offer Network Estimates
and projects that the market will grow to
approximately $2.67B in 2011. This 138% growth $2.67B
expectation underscores the exceptional
consumer appeal of this phenomenon – and
$1.12B
explains the rush of competition behind it.

2010 2011

Site Introductions and Expansion: The Land Grab


The past year has brought an influx of deal providers, with well-funded national brands joined
by local market entries, vertical market specialists and legacy publisher-branded products. The
past six months in particular have seen a major surge, as sites that were in planning and
development earlier in the year made their debut.

To date, LON has monitored more than 320 sites US Group Buying/Daily Deal Market
offering local daily deals in the US. In addition, New Deal Sites Tracked 322
Source: Local Offer Network
approximately 70 sites in the US exclusively
offer national daily deals. New 205
Cumulative
LON has observed site churn of approximately
122 117
25%, driven partially by acquisitions but moreso 97 83
due to business failure or unexplained 61 61
36 25
dormancy. While such losses are unfortunate,
they are in line with expected overall failure
1Q10 2Q10 3Q10 4Q10 1Q11
rates for startup businesses.

The average US deal site operates in more than 10 markets; however, the 24% of sites that
operate in 3 or more markets provide deals to an average of 19 markets per site. This is driven
by both expansion of well-funded sites with local presence and several sites that publish
national or broad multi-market deals

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The Daily Deal Phenomenon: A Year in Review 6

Deal Flow: “One Deal a Day” a Distant Memory


A total of more than 63,000 offers were published in
the US in 2010 (N.B. An additional 15,000+ offers US Group Buying/Daily Deal Market
Total Offers Published
were published in Canada, the UK and Australia). Source: Local Offer Network 39,993
The industry growth explosion will have Americans
see an estimated 40,000 offers in 1Q 2011 alone,
driven by new deal brands and an increasing 22,163
19,676
number of sites publishing multiple offers per day. 14,462
Note slower growth during the holiday season; in
6,895
December consumers still spent on traditional gifts,
softening growth in the category.
2010-1Q 2010-2Q 2010-3Q 2010-4Q 2011-1Q (E)

Category Trends: From Burgers to Botox, and Everything in Between


Food and Drink offers have always been the leader in this market, though the category’s lead is
slipping as more diverse categories enter the mix. Note that home products and services (e.g.
Angie’s List) and Clothing and Accessories – categories that a year ago might not have been
considered a natural fit – are gaining importance.

US Group Buying/Daily Deal Market


Offer Distribution by Category
Source: Local Offer Network

2010- 2010- 2010- 2010- 2011- Grand


1Q 2Q 3Q 4Q 1Q Total
1 Food & Drink 31% 29% 28% 26% 24% 27%
2 Beauty, Spa & Massage 20% 19% 20% 20% 19% 19%
3 Fitness & Nutrition 6% 7% 7% 7% 7% 7%
4 Sports & Recreation 11% 9% 9% 5% 4% 7%
5 Home Products & Services 2% 2% 3% 6% 8% 5%
6 Health, Medical & Dental 3% 3% 3% 5% 4% 4%
7 Clothing & Accessories 2% 2% 2% 4% 6% 4%
8 Arts & Entertainment 5% 4% 3% 3% 3% 3%
9 Photography & Photo Services 2% 2% 2% 4% 4% 3%
10 Kids 1% 1% 2% 2% 4% 2%
All Other 16% 20% 21% 17% 18% 18%

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The Daily Deal Phenomenon: A Year in Review 7

Prices: Rising Along with Category Diversification


Prices began edging up noticeably later in the year, coincident with increased competitive
activity in the aforementioned luxury and higher-priced categories.

US Group Buying/Daily Deal Market US Group Buying/Daily Deal Market


Average Price per Deal Voucher Average Price per Deal Voucher - By Category
Source: Local Offer Network
All Categories
Source: Local Offer Network
$42.45 Health, Medical & Dental $60.41
Home Products & Services $52.78
Beauty, Spa & Massage $48.67
Photography & Photo Services $48.61
$38.04 Fitness & Nutrition $39.38

$37.34 All-Category Average $38.81


$36.86 $36.86
Kids $36.70
Sports & Recreation $35.64
Clothing & Accessories $34.14
Arts & Entertainment $31.15

2010-1Q 2010-2Q 2010-3Q 2010-4Q 2011-1Q Food & Drink $25.72

Discounts: Merchants Invest, Consumers Win Big


The average discount per offer (price of
US Group Buying/Daily Deal Market
voucher vs. stated value of services) has stayed
Average Reported Discount per Offer
relatively steady over the past year at 53%. Source: Local Offer Network
Higher-priced services such as medical/dental, -62% Health, Medical & Dental
home products/services and photo offers -61% Photography & Photo Services
provided the greatest relative discounts, in -58% Home Products & Services
order to come within reach of the broadest -58% Fitness & Nutrition
range of consumers. -55% Beauty, Spa & Massage
-53% Clothing & Accessories
No question consumers win in this business, -53% Arts & Entertainment
saving an estimated $1.26B over the course of -52% Food & Drink
2010 and looking forward to $3.0B in savings in -52% Kids
2011. The flip side: merchants have invested -50% Sports & Recreation
heavily to bring about this outcome with -53% Total - All Categories

$1.76B in forfeit revenue (net of discounts and


deal site revenue share). It stands to reason that other local advertising and promotion methods
will in turn pay a price, underscoring the need for legacy companies in local advertising to
determine how they will play in this market if they have not already set a strategy.

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The Daily Deal Phenomenon: A Year in Review 8

Multi-Voucher Purchases: Sometimes You Can’t Eat Just One


Whether because of purchasing as gifts, US Group Buying/Daily Deal Market
multiple uses or just on irresistible impulse, Average Vouchers Per Purchase
14% of transactions included multiple Source: Dealradar.com/Local Offer Network

vouchers for the same deal; 10% included 2 3 or more:


vouchers and 4% included 3 or more. 4%
1:
2: 10% 86%

Market Growth: Now Coming to a Hamlet Near You


Chicago remains the birthplace and still the
leader in the group buying phenomenon. US Group Buying/Daily Deal Market
However, there are now deal sites in 80 % Offers Published by Market
Source: Local Offer Network
markets across the country, compared to just
48 in 1Q 2010. There is still huge headroom in Chicago 7%
untapped markets, though a market must New York City 5%
have critical mass of buyers in order to San Francisco 5%
sustain a site that offers frequent, truly local Boston 4%
offers. This means that smaller markets can Los Angeles 4%
expect sites to provide deals with longer San Diego 3%
duration and/or national offers such as for Washington DC 3%
online retailers. Note: LON research shows Atlanta 3%
that smaller markets have a disproportionate Minneapolis 2%
skew toward online retail offers, highlighting Austin 2%
the challenge of building a deal business in Seattle 2%
such markets.

US Group Buying/Daily Deal Market


8% % Offers Published by Market
Source: Local Offer Network
6%

4%

2%

0%

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The Daily Deal Phenomenon: A Year in Review 9

Deal Duration: You Snooze, You Lose. Sort Of.


The concept of “one deal, one day” has long since
gone by the wayside, to the benefit of consumers US Group Buying/Daily Deal Market
and, in some cases, merchants who want more Average Offer Duration (Days)
Source: Local Offer Network
time to get in on the action. While the average 3.1
offer was available for less than two days a year
2.2
ago, that window of opportunity for savings has 1.9 1.9 1.8
jumped to more than three days, driven by some
offers that remain active for as long as a week or
more. In some cases, the tradeoff in urgency is
balanced by scarcity – e.g. Gilt City which offers
unusual products and experiences in limited 2010-1Q 2010-2Q 2010-3Q 2010-4Q 2011-1Q
quantity but for more than one day.

Conclusion: Business Models Will Evolve, Momentum Will Continue


Followers of the group buying industry often ask “is this evolution or revolution?” The market
trends highlighted in this report indicate that both are occurring. A critical mass of online
shoppers – who are online virtually 24/7 – created a perfect storm to connect online and offline
commerce in a revolutionary way. Yet group buying concepts long predate the current wave of
deal sites and even the digital age, and new deal site models continue to evolve.

Local Offer Network projects that in 2011, more than $2.5 billion in transactions will occur via
group buying sites in the US alone – a striking level of volume for a group of websites that did
not exist only three years ago. As the market continues to expand, the number and variety of
deals offered will increase significantly, and a wider range of sites publishers will deliver
promotions to their audiences.

While market consolidation and attrition will occur, Local Offer Network predicts that the
overall number of competitors will continue to grow. In turn:

 Consumers will enjoy access to thousands of deals a day, bought directly from sites of
all sizes, and cia convenient tools such as deal aggregators and personalized deal feeds.
 Merchants will be better-equipped than ever to measure the relative cost of consumer
acquisition from various channels, and will optimize their spending accordingly. Legacy
advertising methods will feel the pinch.
 Multi-channel and online publishers of all sizes will be driven to participate in this
market – if they are not already – to protect and grow their advertising revenue.
Increasingly, these companies will create and sell their own branded deal products and
channels to preserve their market relevance.

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The Daily Deal Phenomenon: A Year in Review 10

 Well-funded, top-tier deal providers will continue to increase the cost of competitive
entry by driving up cost of consumer acquisition. This will in turn force smaller sites to
differentiate their products and find creative and cost-effective ways to create scale.
 Geographic expansion will continue. Somewhat ironically, national online retailers may
enjoy the greatest advantage in smaller cities and towns because of the challenge of
gaining critical mass in these markets.

For the foreseeable future, the group buying movement will continue to grow unabated. And
consumers will continue to win, through access to products, services and experiences that may
not otherwise have been within reach.

About Local Offer Network


Local Offer Network (LON) is a leading provider of technology and services to the fast-growing
market for group buying services. Launched in early 2010, the LON Deal Engine™ aggregates
more than 2,000 group buying offers per day from group buying websites in 97 markets
worldwide.

LON products and services include the LON Deal Wire™, a web-wide distribution network
that allows group buying sites to achieve instant audience scale and publishers to tap new
revenue streams by syndicating offers from those sites; VoucherPro™, an offer creation
platform that enables the creation new daily deal advertising products; and Dealradar.com, a
convenient deal-shopping tool for consumers in the US, Canada, UK and Australia.

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The Daily Deal Phenomenon: A Year in Review 11

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