Much has already been said this week about James Packer’s first foray into the group buying space.
Packer’s Consolidated Press Holdings and New York-based Tiger Global Management teamed up with Andrew Bassat, co-founder of Seek, and Glenn Poswell of Gannet Capital in a consortium bid to pick up a 40% stake of group buying sites CatchOfTheDay and Scoopon for $80 million, valuing the combined enterprise at $200 million.
Even more has been written about the acquisition of Spreets by Yahoo!7 for a reported $40 million. Spreets was little over 10 months old at the time of its purchase, making the sale one of Australia’s most successful start-up flips ever. (We are yet to be made aware of a faster launch and exit for such a significant sale figure.)
Far less has been said about Groupon’s recent acquisition of Melbourne group buying play Crowdmass, which was launched by high school buddies Tim Wu, David Wei and Ying Wang in 2010, or its latest local spin-off, Wimdu, which is less than two weeks old.
In fact, it seems that the only player among the majors not crowing about its achievements, is the one with the biggest wallet.
The fastest growing business in history
We’ve been keen observers of the meteoric rise of Groupon, and the reverberations its success have triggered down-under.
We were curious to first hear that the Chicago-born company had raised $30 million from Facebook backers Accel Partners in December 2009.
We were astonished to learn that the upstart had raised a further $135 million by April 2010, from Digital Sky Technologies, a Russian investment firm, giving it a valuation of over one billion dollars. (The business was less than two years old!)
We were simply gobsmacked to hear about its rejection of Google’s $6 billion acquisition offer in January this year.
We’ve watched Australian competitors amass, launch fast and some exit just as quickly. Like many, we jumped on the group buying bandwagon, grabbed the reigns and yelled, ‘Giddy-Up!’ (Indeed, Anthill launched its own group buying experiment, Antmart, in March.)
During this time, we also saw the same set of questions asked again and again (and again).
The space has become too cluttered too quickly. Will it last?
Is this whole group buying fad over-hyped?
From January 2010 through January 2011, Groupon’s U.S. monthly revenues grew from $11 million to $89 million. Total 2011 U.S. revenues were an estimated $460 million. In February 2011, its monthly revenue dropped to $62 million. Groupon’s 2011 estimated revenues are in the $3 billion to $4 billion range.
How do are Australian companies compare?
The following chart was prepared for the Altima Interactive blog to outline the volume of deals that five of Australia’s leading group buying web sites reported for the period of 1 September to 25 October 2010.
(If you are interested in this topic, it’s worth visiting the Altima Interactive blog to download its full report.)
The model is clearly full of steam. But will it puff itself out?
Gold mine or dead swamp?
It’s tempting to think so.
When any organisation grows rapidly, as many of the group buying companies have already done (Spreets had acquired over 500,000 email addresses from a nation of 20 million in less than 10 months), it’s hard not to wonder whether the growth is sustainable.
Naturally, every market has a ceiling.
Furthermore, anyone over 30 years of age has been conditioned to believe that every bubble must eventually burst. And, in most cases, this learn-ed opinion (the cynical and jaded) will be correct.
After all, nothing lasts forever.
However, it’s also true that sometimes — just sometimes — technologies converge to make the improbable possible.
Group buying is the new black. But black’s been around for ever!
Finding ways to assemble a posse of like-minded purchasers to get a better deal is nothing new.
It’s what retail owners have been doing for thousands of years — creating physical spaces to assemble buyers to achieve economies of scale.
It’s what car-brokers have been doing for decades — creating hard-earned Rollerdexes to assemble buyers to broker better deals.
More recently, ‘swarm’ sites have also emerged — providing a virtual arena to assemble posses that usurp the role of the retailer and the broker.
What is different, however, about the group buying sites is that they combine age-old selling techniques with new-age mediums.
How to sell… anything! (This is important)
When Anthill was a print magazine, I would often front a conference or lecture theatre and tell my story.
I would conclude each presentation by revealing my not-so-hidden agenda.
With a wink and a smile, I would explain:
“In a moment, I will offer you something to buy. But before I do that, I plan to introduce a ‘price anchor’. This will be something that you consider to be expensive.
With that anchor top of mind, I will then — and only then — reveal what I want you to buy and the cost of that item. You will notice that what I want you to buy is markedly cheaper than the anchor.
To further emphasise the bargain, I will then drop my rate… because you are poor students, bean-counting accountants, entrepreneurial mums… whatever!
For the fence sitters, I will then conclude by offering an incentive of ‘high perceived value’, before creating a ‘sense of urgency’.
Are you ready!”
You can probably guess what would happen next.
I would point out the cost of a subscription to a more expensive competitive magazine, reveal the price of an Anthill subscription, before offering a discount.
I would then reveal the “free”, “bonus” DVD that I planned to give away — with the caveat that I only had 10 DVDs in my possession for the first 10 buyers to come say hello at the end of the presentation. “Yes, I only have 10 DVDs to give away!”
No one was ever surprised to learn that I always had at least 50 DVDs on hand when the 11th (or 49th) buyer came calling.
In this way, I created an impulse buying scenario, coupled by a sense of urgency.
This worked surprisingly well. But what it lacked was a way to help my eager buyers ‘share’ my message and promote my offer for me.
What Groupon, Spreets, Scoopon, Crowdmass and many others have managed to do is add this final element to what was otherwise a traditional sale.
Back to that question: Does the market have a ceiling?
On 14 June 2011, I will be asking Scoopon and Catchoftheday founder Gabby Leibovich that very question.
Gabby has kindly agreed to allow me to interview him for Anthill’s next Entrepreneurs Night Out networking event in Melbourne. (Book tickets here.)
The answer, however, is, seemingly, an unknown.
I’ve heard it said that competition will dilute the ‘pie’. But we all also know that competition can grow it.
I too have been asked this question. One of the greater challenges of Anthill’s experimental foray into group buying was (and continues to be) lack of seller education. I have already made it clear, in another post, that Anthill is embracing and celebrating competition.
But, mostly, I believe that the question is flawed.
Group buying can’t have a ceiling. It can’t even have a pie. And here’s why.
While there are nails, there will always be a need for hammers
Several years ago, Anthill received a small pile of applications for its SMART 100 Index featuring the same business model.
Yet, each application described its service as “original”, “novel” and even “unique”.
What they each had in common was a marketplace, directory, community or other job-board that would take a fee from… well… just about any industry you can name.
Classifieds became the ‘Golden Child’ of traditional media at the turn of the century. Big bucks were invested. Significant consolidations took place. But it wasn’t long before the technology used to run these sites became easily available and the market quickly fragmented.
Niche listing boards emerged and, soon, they became just another part of your average online community.
While people have something to sell, group buying sites will now exist.
What about the sleeping giant… it’s about to rocket
Earlier, I made the point that only one of the major players is not crowing about its achievements.
Silently and with stealth, a small group of representatives from German incubator Rocket Internet are making their presence known in Sydney as the Australian managers of Groupon’s local play StarDeals.
Rocket Internet deserves an entire article in its own right (and this article is already long enough). But to summarise, the incubator was founded by the Samwer brothers and has already made one significant exit in the group buying space, selling its CityDeal site to Groupon, no less, in March last year. CityDeal was active in 80 cities, 16 countries and employed around 600 people around Europe at the time of the acquisition. (Holy Bratwurst Batman!)
But that isn’t the Samwer brothers’ main claim to fame.
The trio are better known in Europe for selling Alanda, an eBay ‘clone’ (it was a one to one copy of Ebay, just in dark red) for $50 million after only 100 days of trading. Their next company Jamba/Jamster, five years later, was sold to Verisign for $270m. Since then they have built, launched and sold scores of ventures.
They are widely regarded as Germany’s most prolific startup investors. And they have arrived in Sydney.
While we have no idea what are the terms of the commercial relationship Rocket Internet has with Groupon — perhaps a paid fee, plus upside in equity — it’s clear that Groupon has asked Rocket Internet to look after its interests in the antipodes while it cements its position closer to home.
What does this mean for group buying sites in general
Within the past two weeks, Rocket Internet has already taken steps to launch its next Australian venture — an accommodation sharing marketplace called Wimdu.
An Australian manager has been recruited (consultant and former Melbourne Business School ‘mover and shaker’ Greg Green) and local ‘supply-side’ partners are being sought. Here’s the promo video. It’s kind of cool. (Very German.)
But what does this mean for group buying websites in Australia, in general?
Firstly, some will grow large and make some people a great deal of money, mainly through liquidity events caused by market consolidation. We have already seen this begin, and it shouldn’t come as a surprise. The evolution of events is surprisingly similar to the ‘classified advertising’ spending spree that many news organisations bought into earlier this century.
Does anyone remember how much Sensis paid for the Trading Post? Sydney incubator Green Lane Digital was also a beneficiary of that last ‘online’ consolidation, following the sale of CountryCars to Fairfax Media in 2007.
Now, listing sites are yesterday’s news. They are part of the patchwork that is the modern internet.
The next wave… niche? Here comes everyone!
If the evolution continues to follow a predictable course, the main players will continue to consolidate. (If you’re already in the game, start spruiking!)
However, the smart money will be on those who segment — take a niche and get good at catering for that niche.
The market has already witnessed the launch of wine, baby, business and even car sites. There are already many more in Australia and soon there will be too many to mention.
The final stage is the development of tools that will allow a single business to create its own group buying deal. It might be a widget, it might be a marketplace… but you can be certain that it will be in no way remarkable.
The market might now be cluttered. But clutter educates. The Germans have arrived! But they too will be on the look-out for investment opportunities.
In other words, it’s just same old, same old.
Collective buying is a fad. But it’s a fad that’s here to stay.