Is Groupon’s Biz Model About To Implode?
Between Groupon, Living Social, Google Offers and other daily deal sites it is possible to be the most tanned, whitened teeth and massaged person in my zip code.
It appears that both consumers like me and retailers are suffering from daily deal fatigue.
To be valuable to a retailer daily deals need to attract at least one of two types of customers: Those who spend more than a coupon’s face value and those who return after redeeming the deal. But recent research reveals that group-buying services often fail to serve up either kind of customer.
In June, a survey by a Rice University professor polled 324 business owners who ran a daily deal promotion between August 2009 and March 2011. Fifty-five percent of them made money on the deals, while less than a third lost money. Yet more than half of the surveyed merchants did not express enthusiasm about running one again. And 65 percent of the restaurant and bar owners reported that they were done with daily deals entirely. The main reason: Only 35.9 percent of coupon-wielding customers spent more than a deal’s value, and just 19.9 percent of customers returned for a full-price purchase.
These statistics are not particularly good nor do they portend a terrific future for the daily deal business model. Groupon’s much-anticipated IPO in early November, which valued the market leader at $12.7 billion. Now its top competitor, LivingSocial, is reportedly set to close another big round of funding that would put its valuation at around $6 billion. While such nods of approval from Wall Street may offer some validation to Groupon, LivingSocial and the hundreds of imitators their business models have spawned, on Main Street, small-business owners still have their doubts.
The daily deal business model needs to be refined. Here’s why:
As a consumer I buy daily deals infrequently and only from retailers or restaurants I already transact with, know what I want to purchase or would continue patronizing – with or without a daily deal coupon. Ooops! Isn’t that basically the same as a regular coupon or incentive? Why pay a third party like Groupon to bring in the same customers that would come in otherwise? None. And that’s why daily deals need to be tweaked before the concept fades into the tanning bed fog.
“Dogs Never Stop Needing To Eat”
Subscription based business models are the “thing” among eCommerce brands these days.
In essence a subscription based business use a series of transactions to drive revenue. Great examples of this model are businesses like Netflix (pre-pricing fiasco) or even the gang at Dollar Shave Club. Revenue is locked and loaded for a period of time.
In the New York Times today there is an article about PetFlow. “Customers who sign up to receive regular deliveries of pet food can determine how much they get and how often it comes through PetFlow’s web site. They can also suspend or change delivery locations when they move or go on vacation. So far, company founder Alex Zhardanovsky said, only about 1.5 percent of his subscription customers drop the service each month — and many do so only because the pet has died.”
In its first month, July 2010, the company shipped about 60 orders; by January of this year, that number had leapt to 27,000. In 2011, PetFlow exceeded $13 million in revenue — with 60 percent of its sales coming on a subscription basis — and it projects revenue will exceed $30 million this year. “I’ve come to appreciate,” Mr. Zhardanovsky said, “that subscription models are, in so many ways, the holy grail of business.”
Other advantages of this model include the ability to maintain lower inventory levels – which can make or break many retail operations.
Perhaps the greatest advantage is developing a relationship with customers. Long-term customer relationships are invaluable to a brand not only because of the consistent revenue stream but also from a marketing perspective. Long-term customers are typically brand advocates or brand ambassadors – spreading the good word or your brand around, wherever they go! For free! As word of mouth always trumps paid advertising, brand advocacy stacks up pretty well against any type of paid advertising.
Subscription business models are not new. What is new are the products one can buy via subscription - razors, shoes, dog food. Subscription models are not for every product. Ideally there’s a naturally occurring need to replenish or there’s a passion for the newest/latest/greatest. Otherwise, if you’re selling tennis racquet of the month club…you’re probably in for a rude surprise.
But for every subscription transaction a customer signs up for, that’s one less trip to the store. I hope retailers are reading this!
Target Sportswear Store – Doomed To Fail?
Target announced plans to open a small-spaced retail location in San Francisco – selling only the company’s C9 apparel. The “C9 By Champion” brand of products, which include men’s and women’s exercise clothing and accessories such as yoga mats and water bottles, are produced exclusively for Target by HanesBrands. They have been sold in Target stores and the company’s website since 2004.
The C9 Active Apparel will be on the street level, while above will be a new Target concept, City Target, which is a scaled down Target store to facilitate high-density, high-rent urban placement.
Both ideas are good. But only one will thrive
The C9 store will fail unless the product is upgraded. Let’s peel back the layers to look at what’s going on with C9.
Pros
Style - C9′s style is basic, not over embellished (over-sized logo’s, etc.) and uses a safe color palette.
Price - C9 price points are attractive when compared to the biggest brand presence in the active/performance wear market Under Armour. Informal assessment put C9 at less than a third of the price of UA.
Cons
Style – Overstyling inhibits the performance attributes of some C9 products. For example a short-sleeved running shirt has inset panel of mesh (for breathability) and reflective fabric (for visibility). The seams required for the panels bind the natural stretch of the body fabric making for an uncomfortable fit.
Fit - C9 fit is not good. The brand seems to look and fit ok until directly compared to UA or Lululemon. This appears to especially true with shorts and pants made of rigid (non-stretch) fabrics.
Performance - C9 fabrics are inferior. This may explain a portion of the brand’s price competitiveness compared to UA but when it comes to performance factors like wicking and anti-microbial or anti-bacterial (to avoid the smell that naturally occurs when sweat and polyester or nylon fabrics combine) there’s no comparison. After 10 to 12 washing/drying cycles a C9 shirt smells within minutes of wearing. Not good.
C9 like most apparel at Target leaves me unsatisfied. Generally, the quality and fit are substandard. Based upon the style of Target apparel one can discern the product is aimed at a younger consumer who is less interested in quality but motivated by style and price. It’s unfortunate that the apparel side of merchandising has not delivered on the same level as groceries and pharmacy. Sure, Target has hit it big with apparel from Missoni for Target and Zac Posen had a great run with upscale women’s apparel.
It just seems odd that Target is unable to dial in on their customer and deliver own brand apparel that keeps customers coming back. It’s my opinion that Target missed a big opportunity to push the Gap over the ledge in recent years. I’d simply have taken Micky Drexler’s playbook and applied it to Target.
If you get a chance to visit Target HQ in downtown Minneapolis you’ll see little, if any, Merona or other Target brands worn by employees – even though they get a discount. That in itself speaks volumes about Target apparel.
Mobile marketers – LISTEN UP!
Among consumers who have signed up for text alerts from retailers and merchants, 26 percent say that the information they received has led them to purchase the promoted product in the store, while 25 percent say they have purchased a different product from the store, according to May 2012 survey results from Placecast. Similarly, 27 percent either bought the promoted product or a different one online.
Despite just 4 percent of the survey respondents reporting having signed up for such alerts, interest appears to be on the rise: 41 percent said they would be at least somewhat or very interested in receiving text alerts about new products, sales, and/or promotions on their mobile device. This represents 14 percent growth from 36 percent who showed interest in 2010, and a 32 percent increase from 31 percent who were interested in 2009.
A 25 percent conversion rate is hard to come by in almost every channel. That’s why this report’s findings are so stunning.
Even if you amortize all channel costs to entice consumers to opt in for alerts, with conversion rates pushing one in three the return on investment for mobile marketing looks pretty attractive.
When smartphone ownership numbers are added into the equation – mobile marketing becomes even more interesting for marketers. According to the Pew Internet & American Life Project the number of Americans who are smartphone owners now stands at 46 percent, an 11-point increase since last May. Smartphone owners now outnumber the 41 percent of adults who own a cellphone that is not a smartphone.
As smartphone ownership has grown over the last year, there has been a corresponding shift in the specific types of phones that Americans report owning:
- Android devices are used by 20 percent of cell owners, up from 15 percent in May 2011
- iPhones are used by 19 percent of cell owners, up from 10 percent in May 2011
- Blackberries are used by 6 percent of cell owners, down from 10 percent in May 2011
If mobile marketing is not part of your connection strategy for the next 18 months – you may want to be re-thinking that plan.
Thanks to Rick Mathieson for bringing this study to my attention.
While waiting for coffee at the Starbucks in a Target yesterday, I noticed a half-dozen signs suspended from the ceiling around a larger “The Shops – We Couldn’t Help But Fall In Love With”.
The signs were “cute” enough but what was it? Where were the shops?
Apparently Target execs in their travels visit stores of all types. According to the “Shop” commercial, they want to “bring a little piece of the boutique experience to Target.”
A lofty goal that’s way easier said then done and will take more than a few signs.
Go to any boutique or independent shop – what’s the first thing that happens? You are greeted by the owner or employee. Have you ever been acknowledged by Target employees until you check out? Probably not.
Why go to a boutique? Service, quality and unique style. Go to Target, but probably not for those reasons.
The shops we love concept is interesting but most likely a bigger lift for the Polka Dog Bakery and Cos Bar (a couple of the shops they couldn’t help but fall in love with) than it will for Target.
This concept illustrates Target’s prowess in marketing and operations and exposes their weakness as innovative merchants.
If you want the boutique experience…go to a boutique. If you want a great price on strawberries…go to Target.
Today is Best Price Friday. According to the sticker on the front page of the Minneapolis StarTribune that means, “best prices start today…and last until the goods are gone. every 1st and 3rd friday. every month.”
I support JCPenney’s desire to wean shoppers from the markdown mentality that has become the norm among most retailers. Markdown mentality causes retailers to markup products, say 100%, so they can offer the same product at 50% off and still make a profit. Markdown mentality drives consumers to buy products only when they are on sale. Markdown mentality makes for dumb merchants and dumber shoppers.
I first wrote about JCPenney’s pricing in February. In the post, “JCPenney Pricing Strategy Will Pressure Competitors To Change” I explained the company’s strategy as, “JCPenney’s new strategy is to have a three-tiered pricing format which includes everyday pricing, month-long value pricing and “best price” (the last is in lieu of clearance but is designed to move out goods quickly).
According to my explanation, today is the start of clearance. Clearance of what…I’m not 100% certain.
JCPenney execs may have overestimated the intelligence of the American consumer. Consumers love finding deals; they relish in hunting for bargains. When you follow the JCPenney model, you are in danger of removing some of this excitement from the equation. In other words, you’ll never have any real leverage in getting people to act now. Why should they? The same deal will be available a week or two from now.
“I really miss my coupons”, wrote Robyn Anderson on the company’s Facebook page. Ms. Anderson may not be alone. Consumers and some employees have difficulty explaining Fair and Square Pricing.
“Rather than inundating the customer with a relentless series of sales, coupons, rebates, and retail gimmicks, JCPenney will host 12 promotional events each year, on a monthly calendar,” reads a JCPenney statement.
“We want customers to shop on their terms, not ours,” said CEO Ron Johnson. “By setting our store [sales] monthly and maintaining our best prices for an entire month, we feel confident that customers will love shopping when it is convenient for them, rather than when it is expedient for us.”
I understand the concept…and I think it is a move in the right direction. The question remaining is if the strategy drives away the coupon clippers like Robyn Anderson – where do new, smarter consumers come from?
2012 Retail Trend – Automated Retailing
Reimagining retail. That’s a powerful thought…and long overdue. Retailing today is largely mundane and disappointing.
If Coinstar has its way automated retail, aka vending machines, will remedy the problem for many transactions. Coinstar is the company that is behind the Redbox entertainment kiosks. Redbox started as an experiment by a division of McDonald’s in 2002. Coinstar has refined and enhanced the service over the years, delivering more and more convenience and choice to consumers. Redbox kiosks are located at grocery stores, mass merchants, drug stores, restaurants (I’ve seen them in McDonald’s in rural locations), and convenience stores. Each one takes up less than twelve square feet—a small footprint for a box that has revolutionized the home entertainment industry. Approximately 68% of Americans live within a five-minute drive of a Redbox kiosk!
Coinstar is not stopping with videos and DVD’s. I’ve heard they are launching a business selling new and refurbished consumer electronics via vending machines. Sound crazy? Once launched automated electronics could be another serious blow to Best Buy – unless they are the ones behind the concept.
In the US we are way behind other countries in vending or automated retail. Japan has the highest number of vending machines per capita, with about one machine for every 23 people – and these numbers are from 2009!
Considering the lack of knowledgeable staff and spotty inventory in many stores – I’d much prefer to transact with a machine. Just me, my credit card and automated retailing. Now that’s a retail experience I can get behind.
Wolverine Worldwide Buy Collective’s Brands
Wolverine Worldwide, makers of rugged work boots, since 1883, is adding several classic footwear brands to its stable of products.
In a joint acquisition effort with Blum Capital and Golden Gate Capital, Wolverine is buying Collective Brands, which owns brands such as Sperry Top-Sider, Keds, Saucony and Stride Rite along with Payless Shoes. Wolverine gets the brands and the investment groups get the retail operation.
On the surface this appears to be a solid acquisition for Wolverine. In the U.S. Wolverine sells boots for work and outdoor. They also have a good selection of casual footwear. I saw their apparel line at a trade show earlier this year and was impressed.
Wolverine is a unique brand. It’s rugged heritage is its core. Steel-toed boots, 6-eyelet lace-ups and even Gore-Tex waterproofs make up the majority of the brands offering.
Here’s where the brand gets interesting though. A quick view of their store locator shows retailers like Sears, JC Penney, Tractor Supply and Cabela’s. But some of Wolverine’s models, like the Clapton 6-inch Lace Up Boot are found at retailers like Eddie Bauer, Urban Outfitters and Gilt Groupe. How’s that for a broad range of consumers?
The Clapton is part of the company’s 1883 Collection shows the brand’s hipper side. Styles like the Seger are clearly not your farm store work boots. To me the 1883 Collection indicates the brand has upside potential to penetrate new markets and gain share with new customers.
Elevating Payless, which last year closed 352 of its 4,300 stores globally, is daunting. For Wolverine, however, applying their smarts to great brands like Sperry and Keds seems like a no-brainer.
Microsoft Invests In Nook
Microsoft’s investment of $300 million in Barnes & Noble’s Nook Division signals interesting intentions for both companies.
For Microsoft, the 17.6 percent stake in Nook gives them some skin in the tablet game.
For Barnes & Noble the move is far more important. In fact it’s safe to say this is a lifesaver for the company. On it’s own, Barnes & Noble is a retailer looking to connect with consumers.
What I see is this:
- A Retailer With A Long View – This is a strategic move by a retailer to move its retail experience to a new level. Aligning itself with Microsoft insures that Barnes & Noble has access to a deep-pocketed marketing, sales and R&D partner. This is critical as Barnes & Noble looks to create distinction in the market and to avoid becoming the Best Buy of the reading material sector. For example Barnes & Noble has announced that its ebooks will be making a push for the education market
- More Ammo For Fight With Apple - With 61 percent share, Apple’s iPad dominates the eReader market. Worldwide consumer tablet sales are forecasted to reach 118.9 million units in 2012, according to market research firm Gartner. The figure represents a 98 percent increase from 2011, when Gartner says 60 million media tablets were sold
- Positioning For Digital Content Creation - It’s no secret that digital content is desirable in the foreseeable future. If Barnes & Noble is successful at leveraging their expertise in delivering content its consumers want with Microsoft’s technology abilities, Barnes & Noble could be in a position that would be envied by Amazon’s Kindle Division
Immediate reaction to the announcement was to send Barnes & Noble stock up 52 percent to a 12-month high, closing at $20.75. The long-term will have to play out but it is fair to say a Barnes & Noble with Microsoft in the pocket is far stronger that a Barnes & Noble without the technology giant.
Starbucks Grocery Stores Coming Soon?
Kid. Cup of Joe. Good to Go!
Starbucks, the company formerly known as Starbucks Coffee, is about to be a brand you’ll see in great depth in groceries, convenience stores and mass merchants.
The premise was introduced here at Thought-Tech On The Horizon last September in a post “Starbucks Eyes Grocery Stores As Next Frontier“. At that time I predicted the Company’s spend of $9 million on R&D in 2010 for new food, drinks and equipment had to be leading to more than the launch of Blonde.
Starbucks 1Q Earnings call on January 26, 2012 was revealing when CEO Howard Schultz stated, “The Starbucks’ blueprint for growth is proving to be a differentiated and unique approach that allows us to integrate and build off of our global retail footprint, our deep and unique connection with our customers and our rapidly expanding CPG business. While some companies may be able to execute some portions of this strategy, we strongly believe that Starbucks is the only company in the world with a global footprint of company-owned and operated stores, a growing CPG business, best-in-class social and digital media assets, a cutting-edge experience with mobile payment and millions of registered Starbucks cardholders as part of our loyalty program.”
When Schultz inventories Starbucks assets as he did in the statement above one gets a big picture perspective on multiple dimensions of Starbucks today. While the “CPG business” is definitely early stage, Schultz’s identification of social/digital media assets, the mobile payment system (which I use and love!), and the loyalty program are significant as the foundation of a brand reaching into new territories.
In a lively discussion with Brandon Scholz, CEO of the Wisconsin Grocers Association, I asserted that within 5 years Starbucks would “own” entire aisles or sections of various grocery stores. While he didn’t completely disagree Scholz sees logistical impediments…as he should. He’s an operational guy. Our discussion ended with a wager.
I can’t wait to upload my winnings from our bet to my Starbucks Gold Card.
