Group buying startups have managed to succeed where many .coms have failed before: local. By offering attractive, time-limited deals on goods and services from local vendors, companies like Groupon are proving that local commerce is as big an opportunity online as it has been hyped to be for more than a decade.
But national companies face many of the same challenges local businesses do, and on the surface, there's no reason the group buying model can't work with deals from national brands.
Yesterday, Groupon proved that it can work when it teamed up with Gap to offer a voucher good for $50 worth of clothing for $25 at Gap stores in the U.S. and Canada. Before noon, Groupon had already sold 200,000 of the vouchers, making the Gap deal Groupon's biggest seller yet.
So is this the beginning of a new phase of the group buying trend? Perhaps. The success of the Gap deal will certainly pique the interest of other large retailers in markets where group buying is mature. But that doesn't necessarily mean that the success of the Gap deal isn't also somewhat deceiving.
There can be no doubt, of course, that Groupon is happy selling hundreds of thousands of vouchers in a single day. It almost certainly made out very well. But as many have noted, it's far less clear whether the deal is really all that good for Gap. One on hand, some argue that Gap will do alright as customers using the vouchers will likely buy more than $50 worth of clothing when they visit the store. On the other hand, some argue that Gap will almost certainly lose money on the deal.
So who is right? Only time will tell, and it's difficult to gauge the true ROI -- or lack thereof -- on any of these deals without hard numbers those involved are unwilling to share.
This said, I'm not sure that, from a business perspective, the Gap deal is worth getting too excited about. While it's quite clear that group buying is not going anywhere, and probably still has the potential to experience significant growth despite the already high level of popularity, I think there's a lot to dislike long-term, at least for the businesses participating.
The reason: successful businesses don't simply move product; they acquire profitable customers. It is yet to be seen whether or not that's something that is consistently being delivered to businesses by group buying, especially in an economic environment in which more and more consumers are more loyal to bargains than they are to the companies behind them. The risk for businesses relying on group buying sites like Groupon is that they're moving product (and lots of it) but may not be acquiring profitable customers.
This is particularly true on a national level, and I think big sales numbers will mask the challenges big companies face with group buying. Gap, for instance, has been slumping for some time now. Same store sales dropped 4% in the last quarter alone, and CEO Glenn Murphy, referring to the company's latest earnings, stated "I was disappointed in our inability to generate the sales that we had expected to." He noted that Gap stores weren't offering enough tops to compliment the jeans it sells. The question for Gap: will hundreds of thousands of people coming in to buy $50 worth of clothes for $25 generate repeat, profitable customers? Maybe, but in the absence of the company fixing what the CEO knows is already broken, probably not.
From this perspective, I think the group buying trend can be beneficial in helping business, both local and national, remember that selling and selling profitably are two different things. Wal-Mart may move a lot of product because of its low prices, but it has built a business model and economies of scale that enable it to do so profitably. Hoping that a large number of loss-leader sales will deliver profitable customers the next time around is a far riskier bet.