Group-Buying Coupon Business

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This is a re-post from dailyfinance.com

Facebook dipped a big toe into the group discount waters on Tuesday, launching a five-city test of its Deals on Facebook serviceand pitting it against industry stalwarts Groupon and LivingSocial, as well as host of other smaller players. But though it’s starting small and coming late to the game, analysts and merchants say they won’t be surprised if the social networking titan soon poses a viable threat to market leader Groupon.

Facebook offers merchants a far greater number of potential customers than competitors with its more than 500 million users, and its technology makes it easier for merchants to account for folks as they redeem their coupons, analysts and merchants say. That doesn’t bode well for Groupon or its investors as it eyes an IPO.

“Facebook made quite the momentous announcement,” says Karsten Weide, an industry analyst with IDC. “It has a lot of distribution to users for its service, so it’ll be challenging for Groupon. Facebook has a lot of traffic that they can drive to a deal offer that Groupon doesn’t have.”

Deals on Facebook was rolled out in Atlanta, Austin, Dallas, San Diego and San Francisco, with plans to potentially expand the test to other cities later.

Groupon declined to comment for this story.

Selling the Experience, Not the Discount

For local merchants that also engage in online sales, Facebook’s large network of users should be a major selling point. It was for Christine Tran, owner of Artisan Wine Depot in Mountain View, Calif., one of the retailers participating in Facebook’s Deals launch.

Other issues that contributed to her decision included Facebook’s technology, which allows her to use her Facebook account to track customers who sign up for the discount in real-time and then click on their names as they redeem it. She noted other group-buying websites tend to use a paper-and-pencil approach, sending merchants a document that requires them to scratch off customers’ names as they redeem the discounts.

The clincher for Tran, however, was Facebook’s approach of defining and emphasizing a customer experience in its advertising, rather than focusing on the size of the price cut. For example, the 25% discount Artisan offered for its limited-production wine tasting is displayed in smaller type than the headline that touts the tasting itself.

“Discount deals like Facebook’s are a loss-leader for us,” Tran says. “I consider this part of our advertising budget, but I also want to attract customers who’ll want to come back later, not just for the deals. Facebook seemed interested in building our customer experience.”

An Offer That’s Right on Target

Pete Katz, managing partner of Counter Intelligence, expressed similar concerns when signing on for the launch of Deals on Facebook. Katz’s company operates six franchises of The Counter, a gourmet hamburger chain, in the greater San Francisco Bay area and near Sacramento.

“One of the first questions is who is going to see this ad, are they in the right demographics and will they be new or existing customers using this coupon,” Katz says. “We’ve used smaller, targeted group-buying [Web sites] in the past, and have had mixed results on getting repeat customers. We decided to participate because it would part of Facebook’s Deals launch and we felt we would be targeting an audience that appealed to us because we’re going for the more upscale customer base, and we were launching with similar companies, rather than just the coupon chasers.”

Both Counter Intelligence and Artisan Wine Depot noted they had been approached by Groupon and other broad-based group-buying websites previously, but had declined because they didn’t see them as a suitable fit. Katz said he has preferred to work with more niche group-buying sites and may continue work with Facebook after the launch depending on the results this offer gets. Tran, meanwhile, says she wanted to experiment with Facebook’s program before branching out, and doesn’t want several discount programs going simultaneously, given that she — like most retailers — is using her group-buying discount as a combination of advertising and a loss leader.

Merchants note that group-buying offers can be a double-edged sword. By offering their products and services at a large discount, they may generate a lot of traffic. But the discounted prices that are paid are usually split down the middle with the group-buying website, almost certainly meaning the coupons are sold at a loss. In other words, merchants can’t make up their losses by pushing more volume in sales. If they don’t generate repeat business, the offers don’t work.

Consumers, in some cases, are also feeling poorer despite all the savings, given that discount frenzy can drive many to overspend on products and services that they would otherwise pass on.

Groupon’s Biggest Challenge (and It Isn’t Facebook)

Meanwhile Groupon, Facebook and their competitors face a challenge in the group-buying business too, and perhaps not the one you’d expect: For them, the real difficulty lies in finding the right merchants to host on their group-buying sites, says Sucharita Mulpuru, a principal analyst with Forrester Research.

“The greatest challenge is not attracting customers but is merchant acquisition,” Mulpuru says. “Groupon’s biggest challenge day after day is finding great, compelling deals.” Facebook, with limited resources and a limited ability to service advertising clients, may end up relying on partners to handle Deals on Facebook clients, she says — or it move to a self-service model where local merchants handle ad placement themselves.

But a self-service model could bring host of other problems, Mulpuru says. “You then get a lot of junky deals on the site and not very good merchants.”

Facebook’s entry into Groupon’s backyard is not the biggest challenge the group-buying pioneer is facing, she adds. “If Groupon doesn’t get renewals every year, it becomes harder for them to do business,” explains Mulpuru. “They will either have to reduce their profit margins and take less from the merchants, or spend more to increase the size of their sales team … an investor should be questioning this.”

Retail Chains Are Embracing Their Online Stores

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This is a reprint from the Los Angeles Times:

By Andrea Chang, Los Angeles Times

June 18, 2010

When shoppers at JCPenney Co. stores can’t find what they want, sales clerks are steering them to the Internet — not at their home computers, but at new online kiosks right inside the stores.

Action sports retailer Zumiez Inc. has opened more than 200 stores over the last four years. But this year, it has scaled back its openings to focus on building its e-commerce sales.

Even Macy’s Inc. is doubling down on its dot-com. The company whose name is almost synonymous with “department store” has seen its online sales rocket more than 50% in the last two years. It recently junked its standard cash registers for 50,000 high-tech ones that can check online for items that are out of stock in the store and place orders directly for customers.

Welcome to Online Retailing 2.0. Traditional brick-and-mortar retailers once outsourced their online sales to specialty “fulfillment” companies. Today they are running their own online operations — and increasingly challenging their executive brainpower to find more sophisticated ways to compete with online-only retailers such as Amazon.com Inc.

“When you look at the big retailers, they clearly have not grown online at the same rate as Amazon has,” said Marshal Cohen, chief industry analyst at market research firm NPD Group. “The online business has been the redheaded stepchild. That’s starting to change.”

To be sure, online revenue still accounts for a small percentage of total retail sales. Although online sales totaled $134 billion last year, the National Retail Federation estimates that’s only about 7% of all retail sales.

But growth has been rapid, with online sales soaring nearly 400% since 2000.

Macy’s, for example, said online sales last year topped $1 billion for the first time, accounting for about 4.3% of total revenue. That’s up from about 3.3% in 2008.

Analysts say economics is driving the trend. It costs less to process online orders than to lease retail space and field an army of sales clerks. There are almost no limits on inventory, and bulky items such as luggage can be shipped from a warehouse instead of taking up precious floor space.

Time-starved consumers also are finding it more convenient to browse items online instead of driving to the mall, where they may or may not find the right size shoe or the exact color bed sheets they want.

Jay Hou, 34, says he does 95% of his shopping online these days, as his job at a telecommunications company and his 14-month-old daughter take up so much of his time. When he needed a suit for his wedding, he turned to designer apparel website Bluefly.com.

“I ordered four because they had a good return policy,” the Santa Monica resident said. “I hung the suits up on the wall for about a month and kept looking at them and tried them on as the weeks went on. Then I decided on one and shipped three back.”

To get more customers like Hou, retail executives are spending much of their brainpower on the challenge of boosting online sales. To better compete with Amazon, for example, book giant Barnes & Noble Inc. shook up its top management this year, replacing its chief executive with the head of its online division.

And besides offering more discounts and deals such as free shipping, they also are moving into more sophisticated models of online selling. Those include combining e-commerce and store divisions and expanding online selections and services.

“It’s gotten to the point where you can’t think about online retail the way retailers have thought about it in the past,” said Kasey Lobaugh, a principal at Deloitte Consulting who advises major retailers on developing their online channels.

Lobaugh said his advice centers on making the buying process faster. He recommends systems that recognize customers and feature fewer clicks, such as a single-page checkout.

“It’s actually a massive undertaking for most retailers because they’ve built up their organizations with separate operations for the stores and for e-commerce,” he said. “All of that has to be redone and recast.”

Gap Inc. is expanding its e-commerce network to Canada and Europe in the fall; Ann Taylor Stores Corp. is expanding its online selection, implementing a faster checkout process and adding personalization capabilities to its website; and Kohl’s Corp., like JCPenney, is adding do-it-yourself online kiosks to its stores.
Nordstrom Inc., for example, has long focused on customer service to sell its pricey products. When the retailer found that many online shoppers had questions because they couldn’t touch and feel the merchandise, Nordstrom added a live Web chat feature and staffed it with specialists in beauty, designer brands and other categories.

The Seattle chain also found itself turning away customers online when its fulfillment center was out of stock on their desired items. So Nordstrom expanded the warehouse by 300,000 square feet and began filling online orders with inventory from its stores when possible, which increased merchandise availability.

And to better integrate the store and online sides of its business, and to respond to Web shoppers’ desire to get their products quickly and without having to pay shipping costs, Nordstrom, like other traditional retailers, implemented a “buy online, pick up in store” feature.

“The main thing is, does the customer feel like it’s one Nordstrom, versus these kinds of silos of business units?” President Blake Nordstrom said. For online sales, “our challenge now is things are accelerating.”

For its fiscal first quarter, Nordstrom said its direct sales division, which includes its online and catalog businesses, rose 38.7% from a year earlier and accounted for 7.2% of the company’s total sales.

In some cases, this is increasing competition between online-only outlets and old-school retailers that are no longer content to lose market share to Internet rivals.

As brick-and-mortar retailers seek a bigger market share online, they’re up against tough pure-online competitors such as Amazon and shoe seller Zappos.com, which have honed their websites through years of trial and which don’t have to collect sales tax in states where they don’t have a physical presence.

Henderson, Nev.-based Zappos began selling shoes 11 years ago and has since expanded to clothing, accessories and housewares; last year, it was purchased by rival Amazon in a stock deal valued at more than $1.2 billion at closing.

During an interview at Zappos’ headquarters, Chief Executive Tony Hsieh said that although physical stores are better able to “form an emotional bond” with their customers, purely online sellers have an edge because they are singularly focused on their websites and don’t have the overhead of running physical stores.

With those savings, Zappos can allow customers to return purchases with no shipping or restocking fees for up to 365 days. Hsieh said that has been a huge selling point for people who are wary of buying shoes online without trying them on first.

The company also set up its distribution facility — which stocks more than 4 million products — in Kentucky to be near the primary hub of UPS. The location enables Zappos to ship items faster and do surprise overnight-shipping upgrades.

“It’s innovation versus lack of innovation,” Hsieh said. “In the online world, there’s just much more of a culture of embracing change and experimenting.”

As e-commerce continues to grow at robust rates — the sector posted a 10% year-over-year sales increase in the first quarter, according to market research firm ComScore Inc. — experts have predicted that online sales could grow to as much as 30% of total retail sales over the next few decades.

“The entire retail industry, in one way or another, is becoming driven by digital, and the days of just going to the store and shopping are really declining,” said Andrew Lipsman, senior director of industry analysis at ComScore. “We’re really at the tip of the iceberg.”

No one expects physical stores to disappear. Even overnight shipping can’t deliver the instant gratification of bringing home a purchase right away, and in some cases, consumers still want to see an item in person before buying it.

But retail experts said stores are likely to wane in importance. Some say they might evolve into showrooms where shoppers try on or test out products before ultimately purchasing them online.

“To expect the consumer to come in and to convince them to buy a product that’s folded on a shelf is irrelevant,” said Cohen, of NPD Group. “No one shops like that anymore.”

It’s all about the online store.