Will Australia’s Groupon bubble burst?

You can call it the great Groupon gold rush.

In just 12 short months, more than a dozen new group buying sites have been launched in Australia, all modelled on US group buying pioneer Groupon, which has annual revenue of about $US350 million and a valuation approaching $1 billion.

In some cases, even the names sound similar – as well as market leaders like Jump On It, Cudo and Spreets, Australian sites Scoopon and Zoupon are also jostling for a slice of the market.

And while Australia’s group buying explosion might have a dotcom bubble feel to it, that hasn’t stopped investors including Microsoft, PBL Media, Ten Network, venture capital veteran Roger Allen, US company Living Social and original Facebook investor Klaus Hommels leaping into the sector with at least $15 million in venture capital.

The most successful of the Australian sites claim to be turning more than $2 million in revenue per month, but already the industry’s main players are claiming the market is overcrowded and it’s only a matter of time before smaller players, which include Ouffer, Zizzle, DealMe and Crowdmass, will begin to fall away.

Groupon president Rob Solomon told SmartCompany the company has noticed the huge number of copycat businesses – and it’s a trend that won’t last.

“There are a lot of clones in Australia, or Britain, and China. All over the world they are jumping on the market. But there just isn’t going to be room for 20 to 30 players, there’ll be room for one or two main ones, and then maybe some niche sites.”

“You’re going to see consolidation over time. It won’t happen overnight, but merchants don’t want to work with 10 guys, they want to work with a successful business.”

Cudo chief executive Billy Tucker says the consolidation will happen sooner than most people think.

“I think we’re going to see consolidation over the next three to six months. I’ve already seen some of these businesses evolve in their models, and they’ll do everything they can to try and change their business.”

The group-buying model

The Groupon model is simple. Sites partner with small businesses, (ranging from restaurants to retail stores), to offer discounts on a particular product or event.

But these deals only work if a certain amount of people sign up, and that magic number changes every time. If one deal requires 300 buyers, and you have 300 customers when the time ends, then the deal goes ahead. But if you only have 299, then it’s a no-go.

It’s a strange model, but it works – and spectacularly well when done right. The best of these companies are making tens of millions of dollars a year.

Most of the deals are for local businesses like restaurants, but some are serious revenue-raisers. Groupon’s biggest deal so far was with Gap, which earned $US11 million in a day for offering 50% discount deals.

“I don’t think we’ve seen a space that has been copied so quickly, or as shamelessly,” Solomon says. “But getting millions of subscribers is the difficult part. Throwing up a site and doing some deals, well, a lot of people can do that.”

Australia’s growing market

Within six months of Groupon starting up in 2009, Australia’s first group buying site began – but exactly which site was the first to market depends on who you talk to.

Gabby Leibovich, who runs daily deals site Catch of the Day, launched Scoopon on April 1. He claims the company hasn’t used a single cent on advertising so far, and instead has leveraged Catch of the Day’s 500,000 strong mailing list.

“The site was launched in April. We spotted the trend months ago, just as everyone else, but it took us some time to get programming. We were inspired by the success of similar sites in Europe and the US.”

But competitor Spreets believes it was the first to launch. Founder Dean McEvoy says the company began in March, but didn’t receive its $2 million in funding from investor Klaus Hommels until after April.

“We came into the market competing against them, because while we were the first to launch we didn’t really receive our funding until after Scoopon launched. They already had a huge database and we were competing against that.”

Some of the larger offerings include Jump On It, backed to the tune of $1.3 million by veteran investor Roger Allen and with $5 million from LivingSocial.com, and the PBL/Microsoft venture Cudo.

Billy Tucker, chief executive of Cudo, says the company is the latest player in the race, having launched in September. But Tucker says he has already managed to gain a significant foothold.

“I’m still not comfortable just yet, but to be honest, Microsoft and PBL are prepared to do what is necessary to grab a share of the market and they know what they need to do.”

Tucker refers to official Nielsen data, which shows that for the month of September, Cudo came in second for group buying sites in Australia, with 343,000 unique browsers.

Jump On It was recorded as having 410,000 unique browsers. Spreets maintained third place with 294,000 uniques, (although McEvoy says this figure is actually underrepresented compared to Google results), while the Nielsen data shows Scoopon recorded just 166,000 browsers. However, Scoopon claims this figure is actually over 266,000 for September.

OurDeal came in last, with 64,000 uniques, but chief executive Julian Holman says the company is “tracking well on budget” and experiencing solid growth.

How lucrative is this sector?

If it’s hard to pin down the companies on user numbers, it’s even harder to get a sense of their revenue.

At the top end, Jump On It has previously claimed to be turning over $2 million a month, which would put them at the top end of the sector. However, Zoupon chief executive Adam Schwab says that figure is “extremely unlikely”.

“I don’t think that’s even close to being correct. At the moment I’d be happy with $7-10 million. To get $24 million you’d need to be doing about $40,000 a day.”

Spreets also claims to have made $2 million during September. However, recent research conducted by marketing firm Altima show these sites may not be earning as much as originally thought.

Analysing deals made by Jump On It, Ouffer, Scoopon, Spreets and Schwab’s Zoupon between September 1 and October 25, Altima says a total of 183 deals were made, generating 123,736 purchases and a transaction volume of $4.8 million.

Altima said Spreets was the largest player with $1.7 million of the full volume, followed by Scoopon with $1.3 million, while Jump On It came in third with $1.3 million. These three, Altima argues, are clearly the leaders of the market.

McEvoy did say Spreets now has more users on its email list than Scoopon, which Leibovich says has more than 100,000 addresses.

“We’ve not only got a large database, but we’ve overtaken them,” McEvoy says.

But Leibovich isn’t forthcoming with many details. He says the entire Catch of the Day network turned over $60 million during 2009, before Scoopon launched, and the network is set to turn over $100 million this year – but he won’t say how much of that is due to selling coupons.

But Jump On It claims to be the biggest of the lot in dollar terms. Chief executive Colin Fabig says the company is on track to reach $50 million in revenue, will expand its employee base to 150 in the next four months and plans to offer multiple deals each day for capital cities.

The company says it has over 700,000 subscribers on its email list, (along with the LivingSocial platform), along with another 100,000 Facebook fans, and will reach more as it expands.

The company just received a $5 million investment from group-buying giant LivingSocial, and will also handle the company’s local operations. Together, Fabig says the companies will control the group buying space.

“You’ll be able to get deals for your city and then go out and get them locally, that’s what the two platforms offer us. A person may get multiple deals from competitors, but we are able to give them multiple deals from the one site.”

It’s also necessary to point out that these sites don’t see all of their revenue. Cuts are split between the company and the businesses putting their deals on the site, and none were willing to disclose just how much money is going to either side.

But even that amount can vary. Schwab says while the industry standard is for merchants to hand over 30% of the revenue to group buying sites, this can change.

“The rates vary, but these deals can run anywhere between 10%-100%.”

Points of difference

While none of these companies are exactly forthcoming with just how much money they’re making, what is clear is that they are all frantically trying to gain as many members as possible and grow their email lists.

Cudo is using the backing of Microsoft and PBL to spread television ads across a number of different capital cities.

“We’re promoting our business typically twice a day, and we think we’re able to show our vendors that they are able to get on TV with our offering.”

Leibovich says his company hasn’t even spent a cent on advertising. Instead, the company believes its doing fine by bringing customers over from Catch of the Day.

“I think the number of categories for deals will grow. Vendors will become familiar with the space, and then the amount of offerings will grow and there will be a lot more variety. That will help the industry as a whole.”

Leibovich points to Scoopon, Jump On It and Cudo as the main players. The rest, he says, won’t last for long. But McEvoy from Spreets says Cudo will die off due to the sheer amount of money being spent on television ads.

“The largest players in the market are us, Jump On It, Scoopon, and some would say Cudo because they have the backing of Channel Nine and Microsoft. But I think they will die, because they’re throwing heaps of advertising behind it but they’re not selling as much.”

“I think someone will buy them up, or at least they’ll be bought for someone else.”

But it’s hard to compete with the success of the Cudo’s advertisements, especially given the company rocketed to second place in terms of traffic in just one month, according to Nielsen. Tucker says as long as the company keeps pumping the ads, they will maintain their position.

“The number of people we put in our email database is secondary, because we think the advertisements are doing their job. Our email base is large and growing quickly, but it’s not the main issue for us.”