Shopping has gone all social media but is it really a bargain?

<em>Picture: Magnusb D</em>
Picture: Magnusb D

In his Scottish Technology Forecast a few weeks ago, David Mitchell, the senior research fellow from Ovum, identified a number of world-beating companies to watch in the course of 2011. They included obvious names like Microsoft, Dell and Google. But one which took some people by surprise was Groupon.

Mitchell defined it as “social media meets bulk buying”; others call it the “daily-deals website”. Since then, it hardly seems to have been out of my ken, either professionally or personally. In a little over two years, this Chicago-based start-up has shown quite astonishing growth.

Mitchell talked of it turning down an approach from Google last year. At that point, it was valued at $6 billion. Figures, seen by the Wall Street Journal, claim that the past year’s performance has seen “phenomenal growth”. The company’s revenues have apparently grown to $760 million in 12 months, up from a mere $33 million in 2009.

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The firm has also secured massive investment. Just last month, it got $950 million in new backing from ten investors. Since then, it’s raised a further $16 million, bringing the total equity raised since 2007 to well over $1 billion. They need this kind of cash to fund the people they need on the ground to make deals on their members’ behalf.

It currently operates in over 35 countries around the world and has in excess of 40 million subscribers. Within the last few days, it’s added China to that list by opening up a site called Gaopeng.com. It’s said to offer services in some 300 different markets. So what does Groupon actually do?

Its name is an amalgamation of “group” and “coupon”. Its business model is based on the purchasing power of a large number of people. Members are offered the chance to buy a voucher for a product or service within a given time. But they sometimes have to wait until a stated number of others have also bought it before their voucher becomes valid. This is usually not a problem.

In the UK, there have been various estimates over how much consumers spend on services like this – Groupon is not alone in the market. One figure suggests that we’re spending some £12m a month buying such goods and services at up to 90 per cent off the normal retail price. So why are people flocking in their thousands to sign up at £69 a head? The simplest answer to this was to try it.

That is why I spent this past weekend at Keavil House Hotel in Fife. My wife had already joined Groupon and, between Christmas and New Year, was given about 72 hours to decide on whether to accept what looked like a bargain: “Cosy Getaway For Two: For £99 Instead of £247.50, Enjoy a Luxury Overnight Stay with Full Scottish Breakfast, Buffet lunch, and 3 course Meal [sic]”.

In the depth of winter, it sounded like an ideal break – even though we would not normally have gone to a hotel so close to home. The deal had to be taken by the end of February and excluded the nights around Valentine’s Day. The result was that we only took the decision towards the end of the offer period. Thankfully, it was the first weekend when you really wanted to be out and about!

The hotel is part of the Best Western Group, a group of independent hotels which get together to share the cost of sales and marketing. It’s located in Crossford, about two miles west of Dunfermline, and is based around an old mansion with loads of history and atmosphere. But you can understand why it would want to be part of a deal – it’s not exactly on the main drag!

But was it actually the bargain claimed in the Groupon advert? It was claiming 60 per cent off the headline rate. But on checking in, there were leaflets in the rooms pointing out that the hotel’s “Winter Sale” was on. £99 would buy you dinner, bed and breakfast for two. The Groupon deal also gave you a bottle of wine and a two-course lunch. But the saving can only have been 20 per cent.

So it may not have quite been the value for money it first appeared. But the value in other ways was considerable. It took us away at a time of year when we probably wouldn’t even have thought about it. It gave us a rest when we badly needed one. It restored our faith in Scottish hotels and it particular their staff. We’d go there again.

The daily deals – they’re different in all the main Scottish cities and members have access to all of them – offer a wide range of products and services. I thought long and hard about the Supercar Driving Experience in the Highlands. My wife has been tempted by the Garra Rufa fish pedicure and a trip to the Falconry Experience. She’s even booked up for a pole dancing course!

Not all of the experiences have been positive however. We’re still in discussion with Groupon by email about a “Cooking Mania” event. All attempts to contact the organisers by phone and email were futile. The contact phone number demanded a “security code” which we didn’t have and all emails failed to elicit response. We await that outcome.

Groupon is said to be planning to float on the US Stock Markets later this year. It’s reported to have been deep in discussions with a number of merchant bankers. Talk of an IPO (Initial Public Offering) abounds with fairly eye-watering valuations being suggested. Understandably, the company itself won’t comment on such speculation.

Its problem could be that neither the concept nor the technology are unique. There are few barriers to entry. It already has a rival in the US called LivingSocial, which persuaded Amazon to invest $175m last year. Here in the UK, there’s a company called Keynoir which launched at the end of March 2010. It started in London and arrived north of the Border last autumn.

A more serious challenge however could soon appear. At the end of last week, the FT reported that Virgin was exploring the launch of such a “daily deals” service. The paper said that a former Virgin executive had approached Sir Richard Branson last year about “using its brand to enter the white-hot but crowded market for e-mailed, limited-time shopping coupons”.

Any launch would be conditional on raising external funding. According to the FT, the former executive has been pitching “Virgin Deals” to potential investors in the US and UK in recent months, according to people familiar with the plans. If the required funding is secured, the service will be launched in the UK later this year.

In the meantime, consumers can enjoy the fun of trying new things at a discount and can look forward to increased competition in this seemingly lucrative market.

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David Calder has been a broadcast journalist for over 30 years. Before moving to the Caledonian Mercury, he worked for the BBC (national and regional) as well as parts of ITV and the World Service. He worked for prestigious programmes such as The Money Programme, You & Yours, Today and The World at One. He spent two years making mini-documentaries for Radio 5 Live and was a regular correspondent for CBC (Radio Canada). He was a regular reporter on various news and current affairs programmes on BBC Scotland as well as producing or presenting (sometimes both) science, legal affairs and arts programmes. As well as his contributions to the Caledonian Mercury, he is also a freelance producer in Scotland for the satellite channel, Al Jazeera.