Daily Deals Leaders Groupon and LivingSocial Dying Business Model

The future of the daily deals market looks bleak as industry leaders Groupon and LivingSocial each faced serious issues in the past week. “The field is going through some growing pains,” Yipit research firm’s Unaiz Kabani told CNN.

Analysts have seen signs of distress for months, as Groupon’s stock slowly dipped 80 percent below its 2011 IPO, and Amazon was reported a loss in October after it was forced to write down its 29 percent state in LivingSocial.

In fact, Reuters spoke with several analysts about the daily deals vendors in early November, and the consensus was not a good one. Rice University professor of management Utpal Dholakia said the business model was simply not one that could retain repeat business.

“A lot of people made the mistake of overlooking the price-promotion part of this model,” Dholakia said. “Normal advertising, yellow pages advertising, it really doesn’t have a price promotion, it doesn’t have discounting component. That’s what makes this difficult to do again and again.”

Redesign mobile analyst Rakesh Agrawal of San Francisco agreed.

“I’ve always maintained that this is a hype-driven business built on an unsustainable business model for both the merchants and for Groupon,” Agrawal said.

LivingSocial announced Nov. 29 it would be laying off 400 of its employees. It will move some customer service positions from the company’s Washington, D.C. headquarters to its call center in Tucson for cost-saving measures—creating jobs in that market—but other editorial and sales jobs will be abolished entirely.

“We’ve gone through two years of hypergrowth, from roughly 450 employees to 4,500,” company spokesman Andrew Weinstein told CNN.

The layoffs “will free up additional resources for the company to invest in some of the critical things in our business, like mobile efforts,” Weinstein added. “We thing this actually puts us on the right path for long-term growth and profitability.”

Eric Eichmann, LivingSocial’s international operations president, has also resigned. Although Weinstein said the resignation is unrelated to the layoffs, the company’s international operations have been its least profitable division, and it exited some international markets. According to Weinstein, LivingSocial is currently reviewing its international strategy, and he could not speculate if additional overseas layoffs will occur in the future. Only about 24 of the 400 layoffs were based overseas, he said.

LivingSocial posted a third-quarter net loss of $566 million.

On the same day LivingSocial announced its layoffs, news broke that some Groupon board members wanted to oust company founder and CEO Andrew Mason, much to Mason’s surprise. After the information leaked, Mason was forced to defend his role at a conference in New York instead of promoting Groupon as planned.

“Here’s a news flash,” he told reporters. “Our stock is down about 80 percent since we IPO’d a year ago. It would be weird if the board wasn’t discussing whether I’m the right guy to do the job. It’s actually their chief responsibility to ask that question, as they have asked that question in the past. The only thing unusual is that it’s showing up in the newspapers.”

Groupon shares rose sharply in afternoon trading, closing up 11 percent. The increase suggested investors were either pleased at the prospect of Mason’s expulsion or with Mason’s response to the leaked information.

Mason guided Groupon to unexpected success—growing from a startup to $2.5 billion in revenue in less than four years—and the company continues to turn a profit despite its disappointing stock. Perhaps certain board members, however, felt it was time for Groupon to follow in the footsteps of other fast-growing companies and retire its founder in favor of a more seasoned business professional.

“It’s an oft-told, oft-expected story that the genius entrepreneur steps aside when he or she succeeds at building a company big enough to need an experienced CEO,” University of Michigan business teacher Erik Gordon told Bloomberg. “The Google guys did it, and the results were spectacular.”

Mason didn’t think so, though.

“If I thought I wasn’t the guy, I, as the founder and creator of Groupon, as a large shareholder, as a customer who loves the products that we’ve created, I care far more about the success of the business than I care about my role as CEO,” Mason said at the Business Insider conference. “I don’t need that to feel good about what I’ve achieved.”

And in the end his board agreed with him—at least for now—voting to keep him on board.

“The board and the management team are focused on the performance of the company and they are all working together with heads down to achieve Groupon’s objectives,” Paul Taaffe, a spokesman for Groupon, said in an interview.

The news may have been good for Mason, but shareholders apparently weren’t pleased. Following the announcement of the board’s decision, Groupon’s shares fell, closing 8.7 percent down.

Only time will tell how Groupon and LivingSocial will fare following their “growing pains.” If they daily deals market isn’t dead in the water, they certainly may triumph in the end based on their market share—Groupon currently holds between 50 and 55 percent of the market share while Living Social ranks second with somewhere between 20 and 25 percent, according to data from Yipit. Kabani feels those numbers may keep them alive. And he has a prediction on the future of the market, too.

“Groupon has headed more into the selling actual goods, while LivingSocial has been focusing more on local, like live events and concerts,” he said. “They’ll all continue to overlap, but you’ll see some specialization, too.”