By launching collective purchases – a fever in Brazil and around the world – Groupon, of the USA, begins a new wave of innovation that may change what we understand by commerce
SÉRGIO TEIXEIRA JR., FROM CHICAGO, AND ANDRÉ FAUST, FROM SÃO PAULO
ARON MONTGOMERY WARD WAS TIRED OF TRAVELING. He was a salesman for a wholesaler and was always on the train, visiting small merchants that supplied the rural population surrounding Chicago. Until the day he had an idea that would change commerce forever: why not sell directly to consumers? In 1872, with two employees and startup capital of 1 600, Ward inaugurated distance sales. His clients would choose the merchandise from a catalog and then send and receive the orders by mail. For 128 years, until going bankrupt in 2001, Montgomery Ward would be one of the most famous names in retail in the United States. The only thing left from the empire Ward created is the brand, today licensed to an online store. But, in one of the company’s old warehouses, in the downtown region of Chicago, converted into an office building, a new revolution in commerce is underway. The novelty has to do with the Internet, but it is not a purely technology company. It also has Ward’s pioneering spirit – and, like the creation of the catalog pioneer, it has been copied around the world. The innovation became known as collective purchasing, but the discounts at manicures and restaurants are only the beginning of a new wave of innovation that can once again change what we understand as commerce.
One of the most famous names from the Internet’s first great wave is the retailer, Amazon, founded in 1994. This time, Groupon took the lead, a company created by former musician Andrew Mason and two partners. The initial idea was “simple and obvious”, Mason told EXAME (read the interview on page 32). A spa, for example, offers a 50% discount coupon as long as at least 100 people agree to buy a massage session (the company name is a combination of "group" and "coupon"). The offers irresistible appeal, which generally does not last more than 24 hours, plus the Internet’s enormous reach, made the business grow in an extraordinary manner: Forbes called Groupon the fastest growing company in the history of the Internet. In just two and a half years of life, it is approaching revenues of more than 2.5 billion dollars this year – and it is still losing money (more on that in a moment). Over this period, the company gathered a user base of 83 million who have already bought 70 million discount coupons in 43 countries, including Brazil. In the beginning of June, the IPO process was initiated in the New York Stock Exchange. It could result in market value of 20 billion dollars. And Groupon already has company: Facebook, Google, Amazon and Microsoft, among other companies, have their eyes on this new intersection between local commerce and the Internet.
It all began by accident. Mason was studying public policies and he maintained a website called The Point, aimed at gathering people around a common cause (an example: build a roof over Chicago to keep the cold out). He also worked as a programmer at a technology company. His boss, Eric Lefkosky, thought the site could become a business and he invested 1 million dollars in the idea. Mason dropped out of college and began to dedicate himself full time to The Point. But it soon became clear the website would survive on selling advertising alone. Mason observed that the campaigns that generated the biggest audience were those that gathered consumers to make group purchases, thus getting discounts. “We set up a very simple, completely improvised blog, using The Point technology to sell coupons,” says Mason. “Apparently, it worked.”
And did it ever. On the sellers’ side, Groupon found a new way for companies, especially small enterprises, to do marketing and sell. On the buyers’ side, it began to offer discounts that were attractive enough for people to seek new experiences, whether a new restaurant, or diving classes, or even a helicopter ride. The money is collected by Groupon, and a percentage, generally 50%, is passed on to the sellers - along with a big number of new clients. The business model is elementary and it generates much, but very much, cash. An example: the Barnes & Noble bookstore chain offered 20 dollar purchase vouchers for 10 dollars. No fewer than 695 000 people bought the coupon. Considering an equal share of revenues, Groupon took in nearly 3.5 million dollars from that offer alone.
Its simplicity was responsible for its resounding success, but it also led to a huge problem. It is too easy to copy the model. There are an estimated 1800 clones of Groupon just in Brazil.
No one knows for certain how many there are in the world, but they certainly add up to tens of thousands. Groupon’s biggest competitor is Living-Social, a company from Washington present in 13 countries. The two companies are in a merger race, acquiring competitors from around the world and growing their user base. If there are no natural technological barriers against copycats, hopefully size will make the difference. "I see many parallels with e-commerce,” says Jeffrey Grau, senior analyst for e-commerce at the eMarketer consultancy. “There will be some large companies, but many others will drop by the wayside. And there will be those that will serve niches.” There are already collective purchase sites specialized in gays and lesbians, restaurants and travel, for example.
The problem of the comparison with online commerce is the inevitable memory of companies that looked great on paper, but were never able to prove their feasibility in the real world. Some analysts see a morbid similarity between the estimated valuations for Groupon and other large companies in the sector and the collective hallucination at the end of the 1990s. Groupon's IPO will probably be one of the major events on the American stock exchange this year. Although the company has not disclosed how much it intends to raise, it is estimated that the total sum is around 1 billion dollars. A lot of money? Not necessarily. In 2010, Groupon had losses of 413.4 million dollars. In the first three months of this year alone, it lost 113.9 million. Burning money at that rate, the billion dollars will not last long. “When we see investment opportunities for long-term growth, expect us to make them, despite the short-term consequences,” wrote Mason in his letter to investors. "I was surprised when I learned of the numbers," says Douglas Clinton, analyst at the investment bank Piper Jaffray, reflecting the opinion of many of his colleagues. “But it would not be possible to grow at that pace any other way.” Always remember: Amazon was founded in 1994, debuted in the stock market in May of 1997 and only recorded its first net profit at the end of 2001.
Part of the high expectations surrounding Groupon (and other technology companies that will debut in the stock market in coming months) is related to the shortage of shares in fast growth companies. But part also lies in the transforming potential of this kind of company. At the end of last year, Facebook launched its discount system. The idea is for users of the service, equipped with smartphones, to be able to discover offers nearby. Since Facebook has more than 500 million people registered and knows better than anyone else what they “enjoy”, it could prove to be an unbeatable way to unite sellers and buyers at the right time and in the right place. A few weeks ago, Google launched its version of collective purchases. Called Offers, the system can go beyond indicating promotions. With the expected inclusion of payment chips in cell phones (Google’s Nexus S model is one of the first equipped with this device), Google wants to show a map of discounts and handle the payments.
That’s why viewing collective purchase websites merely as sellers of discount coupons is an error. The objective is much more ambitious: to become a powerful marketing tool for any type of merchant. Groupon’s new system, called Groupon Now, allows a restaurant to create instant discounts when movement is below expectations, for example. “We are trying to offer small merchants a system comparable to airlines or hotels,” says Mason. LivingSocial also created a similar system called Instant. This type of sophistication demands size and money. Groupon has 7 000 employees. Of that total, 400 only deal with the texts for offer presentations – written in a journalistic style, with a touch of humor – which the company considers vital for selling coupons. The company also has an office with 100 programmers in Silicon Valley to develop its technological platform.
COMPETITION
Growth of leaders in both size and geographic coverage will certainly accelerate the mortality rate of companies that are mere copycats. A collective purchase website has become a sort of desired business. It is also easy to start. For 5 000 reais, a company called Ofertas Club promises everything needed to set up a collective purchase business – website, 2 000 business cards and commercial training included. On the Mercado Livre website you can buy the system that runs offers and promotions for 19 reais. Opening a collective purchase website seemed to be the ideal job for acupuncturist Aline Toledo, 33, after giving birth to her fourth child. Together with her husband, a biologist, Aline launched Agarre Fácil in December, a collective purchase website in Atibaia, in the state of São Paulo. But not everything went as planned. Few establishments seemed interested in the promotions. Selling coupons also proved to be more difficult than it seemed at first. After fewer than five months on the air, the offers were suspended. Aline and her husband intended to relaunch the website in São Paulo. "Maybe things will be different there,” says Aline.
Although there are nearly 800 collective purchase sites in Brazil, it is estimated that 80% of sector earnings, which should exceed 1 billion reais in 2011, is in the hands of the five biggest. In Brazil, the merger movement has also begun. Ofertas.com.br, the collective purchases website of the Multi Group, which owns the Wizard and Yázigi language schools, was launched in March. The initial investment was 20 million reais, which included ads on free-to-air TV. The idea was to begin with a database of 6 million potential users: the students in the group’s schools. "It’s not as easy as it looked,” says Charles Martins, president of Ofertas. com.br. “Starting from scratch, it is hard to reach the pace of sector pioneers.” In July, Ofertas.com.br is going to join forces with Oferta Única, one of Brazil’s five biggest collective purchase websites. The Ofertas brand will prevail, but day-to-day activities will be up to the creators of Oferta Única.
At Peixe Urbano, the pioneer and one of the market leaders in Brazil, the concern for now is with growth. Júlio Vasconcellos, a 30 year old economist from Brasília who returned from the United States focused on opening a company like Groupon, made 8 000 offers and sold more than 6 million coupons since Peixe Urbano started in March of last year. On a recent morning in May, he was participating in a weekly event at company headquarters in Botafogo, in Rio de Janeiro: the training of sales personnel. They had come from ten cities in the country and had been recently hired. They were there to listen to the instructions by Peixe Urbano’s president.
Instructing employees well in this business may be essential – around Brazil, they are the face of the company and responsible for capturing each one of the offers. During the training that began that morning, the new sales reps – mostly commercial representatives, but not rarely lawyers, psychologists, real estate brokers – learned strategies to negotiate promotions, explain the business model and argue at the moment of striking up partnerships (saying the company has TV host Luciano Huck as a partner is one of the tips). From three founders, Peixe Urban has grown to 300 employees at the end of 2010. This increase in personnel gives an idea of the company’s growth rate. Today, there are more than 600, spread about 86 cities in the country.
Fifteen months of life may seem like little for a company. But all experience, even if its short, can make the difference when dealing with a segment that still has so many loose ends. In the first months, it was not rare for promotions on collective purchase sites to cause chaos for partner establishments. According to Vasconcellos, those days are behind them now. “We learned that selling coupons is just the beginning of the story,” he says. The relationship with partners has evolved. Today, Peixe Urbano has a team of 30 people dedicated exclusively to after sales. At the helm of ClickOn, the third largest collective purchase website in the country, and in the market for one year now, administrator Marcelo Macedo, 36, also sees an evolution in the business model. Present in 66 cities in Brazil, ClickOn will soon debut a scheduling and reservations service associated with the sale of coupons. “The process is increasingly more controlled. We are thus able to avoid unpleasant surprises,” says Macedo. The model also foresees partnerships with media companies (the collective purchase website Bananarama, owned by the Abril Group, which publishes EXAME, functions together with ClickOn).
At the beginning of May, Mosaico, a Globo Organizations investment company, acquired 40% of ClickOn.
Missteps are natural in a new segment. Just as during the first days of e-commerce there were countless complaints about undelivered products and improper billing, collective purchasing is no different. They are growing pains. Today, e-commerce is approaching 1 trillion dollars in sales in the whole world and it is already part of day-to-day life for hundreds of millions of people. There is the risk for this discount novelty to lose steam. Auction fun made the sky the limit at eBay, but nowadays the majority of the company’s sales no longer depend on bids. A few months ago, people talked about “Groupon anxiety”: consumers who would stay up past midnight just to see the arrival of a new promotion. Today, with the multiplication of collective purchase websites – and the spam from websites that believe they will gain clients by sending out random messages – this anxiety can easily turn into tiredness. Another risk is the result for those making the promotions. If storeowners are unable to maintain at least one part of these new clients, they could simply abandon the coupon idea. That’s why investments in technology and user segmentation, as well as the new frontier opened up by smartphones, are key pieces to the future of these companies.
There is a collection of framed magazines in the Groupon reception area. The Forbes cover from last year with a smiling Andrew Mason is there. But it is surrounded by other entrepreneurs and companies that were only promises: Napster, MySpace, AOL. The walls at Montgomery Ward and the portraits that hang from them are a reminder that the market can be merciless even with pioneers.■