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IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio valued for its depth and scope, the company equips clients with the insight necessary to make better business and investment decisions.
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  • Daily Deals do More Harm than Good for these 10 Industries 1 comment
    Jul 21, 2011 1:08 PM | about stocks: SBUX, KR, SWY, SVU, GRPN, GOOG
    By IBISWorld Consumer Products Analyst Mary Gotaas


    Small businesses have embraced daily deals offered by companies like Groupon and LivingSocial as a way to drive sales amid a sputtering economy. But, the strategy to increase revenue by using daily deals is not the wisest move for businesses with small profit margins and only a few locations, especially those in the 10 IBISWorld industries highlighted in this report. Companies present in these industries have already experienced poor performance during the recession and daily deals are unlikely to bring them back to prerecession levels. In fact, these deals might be detrimental to their performance, pinching profit margins further and enhancing the risk of closure.

    Struggling during the recession
    Industries that provide discretionary products and services to consumers have experienced declining clientele in the past three years, and a strong rebound is highly unlikely. These industries, including interior designers, tour operators and nail salons, offer luxury services that are heavily dependent on consumers’ willingness to spend. It is no surprise that these industries have not fared well amid markedly high unemployment and low disposable income during the Great Recession.

    Consumers shifted their spending patterns substantially and switched to cheaper substitutes to save money. For instance, instead of paying for an expensive espresso, many Americans opted for standard coffee. Other consumers chose to give up certain luxuries altogether, such as acupuncture and vacations, which hurt revenue for alternative healthcare providers and tour operators, respectively.

    Although the shift in consumer spending affected almost all American industries, those with high competition, low concentration and low profit margins have had more difficulty recuperating. These industries operate with many competitors and gain business by offering price-competitive services. Price has been one of the major determinants of consumer purchases during and after the recession, leading consumers to visit the shop that is the most affordable. Further pressure is placed on profit margins in these industries as consumers stay cost conscious. Additionally, low profit margins increase the risk that a firm will be affected by a shift in sales. For instance, when sales declined 8.9% in 2009 for the Hair and Nail Salon industry, 3.5% of the salons closed. Also with low profit margins like those in the Supermarkets and Grocery Stores industry (2.0%), firms hesitate to lower prices further because they fear the price change will not boost sales significantly enough to increase or keep profit margins at the current level.

    Enter daily deals
    After struggling for a few years, many of these industries have tried to increase their sales by offering group discounts through websites like Groupon and LivingSocial. Despite many firms’ reluctance to lower prices amid sluggish growth, firms increasingly use daily deals because it does not cost anything upfront to gain customers. Providing group discounts through websites can also increase the company’s visibility because these sites generally have a very large number of subscribers that are unfamiliar with many of these retailers.

    There are substantial risks for small businesses that use daily deal websites to drive customer traffic, though. The discount is often too steep that the company only breaks even or even loses money on their offerings, leading to a decline in profit margins. Most group discount providers take a fraction of the revenue reducing the companies’ gains from the discounts.

    Furthermore, many customers who purchase such discounts do not become regular customers, defeating one of the main purposes of the coupon. This is especially true among highly competitive industries, such as coffee shops and snack shops. Consumers may go to the local coffee shop to use their coupon one day and then return to their normal habit of Starbucks the next day. This trend is also apparent with more experimental services. Some consumers want to try acupuncture but don’t intend to make it a regular habit. In sum, by accepting a large number of daily deals, small businesses actually experience a drop in profit margins and fail to acquire new customers—this is a losing strategy.
    Here are the 10 IBISWorld industries that are most adversely affected by using daily deal websites to drive revenue:

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  • ckubby
    , contributor
    Comment (1) | Send Message
     
    A year ago daily deals websites were at their peak surfacing all over the place bringing the cool factor to the coupon. Gen Y’ers were a great target audience along with moms who have young families who were touted as the buying audience who were going to turn around their local, suffering economies with promises of daily deals that would save them up to 50 – 90% off their favorite places to eat, go and see.

     

    Small business owners were promised a chance at driving traffic into the doors of their failing businesses only to find that they couldn’t keep up with the demands of increased traffic, loss of revenue by paying the daily deal company 50% of their sales, and were unprepared that a lengthy redemption period would cost them hundreds even thousands of dollars hurting their already struggling businesses and in some cases causing a situation that was worse off than when they agreed to sign-up with the daily deal website company to begin with.

     

    Giants like Groupon and LivingSocial built their memberships with the concept before these smaller companies came on the scene while not necessarily building a trust-worthy brand. We’re now seeing the effects of these giants take a nasty fall with declining revenues, members who have signed up with competitors and aren’t particularly loyal to any one company which makes for a fickle audience of buyers who are simply looking to take advantage of trying something new for a great price not necessarily going back to those merchants again by becoming a regular customer.

     

    So the “keeping it local” concept is starting to show that it’s failed miserably by spreading itself too thin with a different daily deal website who’s just duplicating the efforts by offering the same things that the competition is doing.

     

    A few daily deal websites make the promise that they’re different by donating proceeds of their profits by donating to local schools and organizations of the purchasers choosing. But at the end of the day, they’re just contributing to lining their own bank accounts while small business owners who aren’t savvy enough to know that this will end up hurting their business vs. helping it and proving that it’s not about keeping it local to improve local economies, it’s about taking advantage of and hurting local economies for their own personal gain.
    6 Sep 2011, 10:57 PM Reply Like
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