Daily Deal Sites Get Discounted

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Daily Deal Sites Get Discounted
ReachLocal Inc. Chief Executive Zorik Gordon co-founded the Woodland Hills company in 2004 to go after the local Internet advertising market. Revenues skyrocketed from $4.4 million in 2005 to $146 million three years later.

The success of Groupon Inc. led many L.A. companies to jump into the daily deal market during the last year. But it appears the frenzy over the e-commerce phenomenon of local discounts is quickly dying down.

West L.A. people finder MyLife has pulled back on its deal offerings and Woodland Hills Internet marketing firm ReachLocal has shut down the deal website it bought in February. They’re following tech giants such as Facebook Inc. and Yelp Inc., which both recently stopped providing merchant discounts.

Industry insiders say the retraction of the market, which is dominated by Groupon and its Washington, D.C., rival LivingSocial, is a sign that offering steep discounts on everything from yoga classes to restaurants isn’t always the right recipe.

“The whole deal site hasn’t been as successful for us as we had hoped,” said Jeff Tinsley, founder and chief executive of MyLife. “I guess people just were not expecting to get deals through MyLife.”

The people-search website, which lets users look for everyone from old flames to nearby plumbers, bought deals website CitizenLocal in April. The technology was used to power MyLife deals from members who provide local services, such as Realtors or doctors.

MyLife hasn’t entirely eliminated its deals. Local businesses can still post discounts, but the site has stopped promoting deals through e-mails, effectively ending the experiment.

Earlier this month ReachLocal, which helps small and medium-size businesses – including doctors and lawyers – with online marketing, said it would shut down its Groupon competitor, DealOn.com, which it bought for $10 million in February. It recorded an impairment of $800,000 last month. The company eliminated the deals sales force for the DealOn website, according to a filing with the Securities and Exchange Commission. It did not disclose the number of people affected.

The company’s stock fell to $7.34 on Dec. 14, down 12 percent from the previous week, making it one of the top losers on the LABJ Stock Index (see page 18). The decline far outstripped the 4.1 percent slip of Nasdaq’s index.

ReachLocal declined to comment for the story, but said in a statement to the Business Journal that the acquisition of DealOn was for its technology, not its consumer deals.

“It was never our strategy to try and build a consumer deal-of-the-day business and compete head to head with companies like Groupon and LivingSocial,” the company said.

At the time of the acquisition, however, ReachLocal did not indicate that it planned to shut down DealOn’s consumer discount website. The company did say it planned on using DealOn technology to help its customers, primarily service providers such as doctors and lawyers, promote discounts through local deal publishers such as newspaper websites. That business is now called ReachDeals.

James Cakmak, an analyst with Sidoti & Co. in New York, said ReachLocal is trying to carve out a niche for itself in the deal space by dropping the consumer discounts at frozen yogurt shops and beauty spas, and concentrating on its ReachDeals service.

Even so, Cakmak said the company’s best chance for growth is focusing not on deals, but on its core advertising and marketing business, especially in untapped markets abroad.

“The main focus of the company is fueling international growth,” he said. “That’s where the largest opportunity is.”

Discount decline?

A number of companies – including Palo Alto social network Facebook, San Francisco reservation system OpenTable Inc. and San Francisco recommendation engine Yelp – also have recently shut down their deal offerings.

Chicago’s Groupon remains king of the daily-deal space, but even it is flagging a bit. The business raised $700 million when it went public last month in the largest initial largest public offering since Google raised $1.9 billion in 2004. But analysts are mixed on the company. It is not profitable and shares have fallen since it began trading, closing down nearly 14 percent to $22.55 on Dec. 14.

One problem is that the daily-deal business is fairly easy to get into but difficult to do well. Unaiz Kabani, data product analyst at New York deal aggregator Yipit.com, said the problem for many companies is developing the infrastructure needed to broker discounts and advertise them to consumers.

“It’s really difficult to scale a business like this,” Kabani said. “Groupon has had a local sales force since the beginning. But building that out and developing merchant relationships is not easy.”

Despite the examples of retraction, Kabani believes the market hasn’t reached capacity just yet. For every deal service that shuts down, another one starts. Take, for example, Primary Wave Media, a Pleasantville, N.Y., telephone marketing firm that rolled out its first 1-800-DAILY-DEAL service in Santa Monica earlier this month. Shoppers can call to find out about nearby discounts through the program.

What’s more, some L.A. technology companies aren’t backing down from their discounted offerings.

Over the summer, PriceGrabber, a Ladera Heights comparison shopping website, began aggregating deals from several publishers, including Groupon, on its website.

Jonathan Margolis, PriceGrabber’s senior director of new accounts, said the Experian-owned company has had initial success thanks to its business model: It combines retail inventory from hundreds of e-commerce sites so shoppers can compare products and receives a commission for generating a sale.

“We figured it was a natural extension to jump into the space,” Margolis said. “In the end, PriceGrabber is doing what we know best.”

Torrance electronics retailer PC Mall also entered the daily-deal space with its August relaunch of OnSale.com. OnSale had previously focused on reselling Apple computers and accessories. Those products can still be found on the site, but now its primary goal is selling local discounts on everything from frozen yogurt to oil changes.

Robert Rich, president of OnSale, said deals have worked for PC Mall because the company was already familiar with the online retail market.

“Having had that infrastructure and database of customers has given us a considerable head start,” Rich said. “Major brands are more willing to work with us to do major national deals because we’re an established operation.”

OnSale is still a fledgling business. The smallest of PC Mall’s divisions, it showed an operating loss of $749,000 for the third quarter on revenue of $13 million.

As some companies pull back from the deal space, industry insiders agreed that companies can find success with niche services, such as ReachLocal’s focus on local service providers. Sidoti analyst Cakmak said that could be the key to surviving in the highly competitive market.

“Companies that tried to take advantage of the excitement around it are finding that it’s not easy to compete,” he said. “I think you’re going to see a lot more consolidation because the market is very fragmented.”

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