The death of couponing

IT MAY NOT HAVE BEEN in the same league as Amazon or Alibaba, but Groupon was still an e-commerce star. The Chicago-based company, set up in November 2008 offering discount deals at selected restaurants, spas, retail stores, and more, had revenues of $3.2 billion in 2014 (Rs 20,214 crore at current rates) with operations in 48 countries, including India which it entered in 2011. But a couple of months ago, Groupon announced it was shutting operations in nine of them. India was not on the list, but here too Groupon effectively closed in August, giving way to Nearbuy—a new company in which it does not have majority stake.

What prompted the closures is not clear. “Evolution is hard, but it is a part of our journey,” says Rich Williams, Groupon’s chief operating officer, in a blog post, without elaborating. But the makeover in India provides a pointer. Although its financials were never disclosed, Groupon India seemed to be doing well with a network of 25,000 merchants across 12 cities, selling 7 million coupons in 2014. And yet the parent chose to reduce its exposure in it.

Nearbuy offers much the same deals as Groupon India, but with one important difference—it has added services such as confectionery delivery, auto servicing, and pest control. Indeed, there is a strange reluctance to acknowledge its former focus on discount deals. “We’re a local-commerce player,” says Ankur Warikoo, former head of Groupon India and CEO of Nearbuy. “We never thought of ourselves as a deal site.”

Groupon India’s biggest rival Mydala seems equally keen to shed the “discount deals” tag. Offering a similar bouquet of coupon deals on restaurants, wellness clinics, travel, and entertainment, along with a few products, it claims to have 100,000 merchants in 200 towns and cities with 50 million unique visitors a month. It has also attracted private equity funding of around $7 million, the largest chunk coming from Info Edge, which has a 45% stake in the company. Significantly, Mydala recently added grocery deliveries to its offerings. Arjun Basu, the company’s co-founder and chief financial officer, echoes Warikoo. “We’re not a discount-deal company,” he says. “We’re the largest local services marketing platform.”

DISCOUNT DEAL companies proliferated in India following the success of Groupon. Some, like Groupon India and Mydala, focussed primarily on services, others like CouponDunia included products and services in equal measure, while those such as CupoNation and CouponRani concentrated largely on products, offering discount coupons which could be redeemed on buying from various online retailers. These discounts were in addition to those the retailers themselves offered—a strategy dubbed affiliate marketing. There are also sites like CashKaro which offer cashback, returning part of the money the customer pays for specific purchases.

All such sites make money from the commissions the merchants—whether online retailers or offline stores and restaurants—pay on completed deals. “Merchants have marketing budgets, part of which they can spend on offering discounts instead of advertising in the media or on hoardings,” says Rutvik Doshi, director at venture capital firm Inventus Capital, who earlier co-founded the discount deal site Taggle.

In a price-conscious market like India, the success of such ventures seems assured. But that is not how things have panned out. Overall, no doubt, the discount market is growing rapidly. A 2014 report by Google and Forrester Research on online shopping growth trends in India pegs the coupon business at 13.5% of the total e-commerce business—which it estimated at $12.3 billion in 2013—and growing at 62.9%. But the growth has also led to cutthroat competition. “There are 236 coupon and cashback sites working on our affiliate platform,” says Manish Vij, founder of digital media network Tyroo Media.

The first shakeout was in 2011-12 when a number of discount sites such as Taggle, Dealsmagic, Dealivore, Vamoose and MasthiDeals were forced to close. Others, such as Snapdeal—which also began as a deal site—radically changed direction. “Several factors were responsible,” says Sandeep Ladda, technology leader at consulting firm PwC. “There were irrational price wars, with sites offering excessively deep discounts, which led to unsustainable business models. All the sites were offering similar deals and so differentiation became an issue.”

Also, merchants were not always open to offering large discounts, fearing it would dilute their brands. More important, the cost of customer acquisition was often prohibitive. “Getting a customer for a top-class restaurant would cost us around Rs 700,” Doshi adds. “But our commission from the restaurant, based on the customer’s spending, could be as low as Rs 50.” Customer loyalty was another issue—there was no guarantee a customer would not choose a rival site next time.

Undeterred, many more have chosen to enter the segment. Leading the pack is CouponDunia, started in 2011, in which Times Internet, Bennett, Coleman, and Co.’s new-media arm, acquired a majority stake in May 2014. It counts 2,000 online brands and 5,000 restaurants among its merchants, getting around 10 million visits a month.

“It is certainly hard work to make the unit economics work, especially when there are so many competitors,” says Satyan Gajwani, CEO, Times Internet. “But we are very excited about the segment and its possibilities.” Sameer Parwani, CouponDunia’s CEO, feels much has changed since the early deal sites collapsed. “The space has grown in the last few years,” he says. CouponDunia too recently entered groceries delivery.

THE PLAYERS WHICH survived the first crash, along with the later entrants, have found succour in one development: the smartphone boom. Mobile users accounted for 40% of Groupon India’s customers in 2014, up from 10% the previous year. At Mydala, which has a strong base in tier II and tier III towns, the figure is as high as 80% to 85%. “We have strategic partnerships with all the major telecom companies,” through which the company serves deals to telecom subscribers, says CEO Anisha Singh. These tie-ups have been key to the company’s growth.

But the proliferation of smartphones has also led to a new challenge in the form of hyperlocal apps, which have taken off in the last few months. They focus on the same services the discount sites target, but do not use the coupon route. Instead they directly connect merchants in specific areas with customers.

Since January, hyperlocals have raised $135 million from investors in 27 deals, according to YS Research and Venture Intelligence. Take Little, which provides hyperlocal lifestyle deals, was set up by the co-founders of online apparel seller Zovi, Manish Chopra and Satish Mani, in July. It has already raised $50 million in a funding round led by Paytm, SAIF Partners, and Tiger Global. “We want to bring merchants who are predominantly offline and struggling to sell inventory, on to an online platform,” says Chopra. “Restaurants, wellness, and entertainment are humongous industries, and bringing even a small percentage of them online is a huge opportunity.”

Some maintain hyperlocal apps and discount deal sites can co-exist. “Hyperlocal apps will have to come to us because we have a huge database which they can use to send e-mailers,” says Chandan Luthra, country head of CupoNation, backed by Rocket Internet. “We can send mailers on their behalf and give them banner space on our social media channels.” Others claim the spheres of activity do not entirely overlap. “Discount coupon websites are a marketing service,” says Parwani of CouponDunia. “Whoever wants business has to get their message across, and if that message involves giving discounts, it is in their interest to work with us. The [hyperlocal] guys are not disrupting our business. Anything that increases online transactions is a benefit for us.” Still others, like Nearbuy’s Warikoo, believe the market will expand to accommodate all.

SOME CLASH is inevitable. Deepak Ravindran, founder and CEO of Bengaluru-based hyperlocal app Lookup, says coupon sites cannot survive. “No one logs into a website just to look for discounts. Discounts will have to be integrated with a larger product.” The Lookup app has a notification feature which alerts users about local deals. CouponDunia also has a similar feature.

A consensus is emerging: Competitive discounting is a cul-de-sac—and not just for deal sites. Even behemoths like Flipkart and Snapdeal have built their business on deep discounting, and the winners in the long haul will have to find other ways to keep customers loyal and stem the cash burn. “This is an extremely difficult space in which to make money,” says Ravi Adusumalli, managing partner of VC firm SAIF Partners. “But when the dust settles, there will be a handful of valuable companies left.”