Groupon, Wicount and Vuvuplaza are just a few of the numerous group-buying projects that took South Africa by storm. Taryn Arnott questions whether they will survive as Zappon and Dealify close down in short order.
Group buying and daily deal websites are popping up and closing on an almost weekly basis. But when sites launched by media powerhouses Avusa (Zappon) and Naspers (Dealify) close down within months of opening, the future of this business model in South Africa appears to be pretty dismal.
These sites took off locally in 2010, when international sites such as Twangoo and Wicount awakened local interest in collective buying. Nick Duncan, COO of search engine marketing company Click Maven, says there are about 50 group buying sites currently operating in South Africa – although only a few really stand out.
Twangoo launched shortly after Wicount in 2010, but was bought by Groupon when it first recognised potential in the South African online market. The original Groupon company launched in November 2008 in Chicago, and uses collective buying power to offer discount prices, says Kate Jansen, marketing manager at Groupon South Africa.
The principle behind group buying websites, or daily deal sites, is that when a group of customers bring business to a merchant, retailer or vendor, this is rewarded with a discount. Using the principles of collective buying, group-buying sites negotiate discounts on services or products offered.
Jansen says deals are activated only when a minimum number of people agree to buy, which encourages subscribers to share the promotion with family and friends. Deals are ‘on’ when enough people purchase them, and are ‘off’ when buyers are refunded if there are not enough sold (though this seldom happens). Group buying platforms earn commission from deals that they advertise, and also offer a platform for advertisers.
Databases of customers then receive daily alerts about these deals, and have a limited time
Jess Green, managing director of group buying site UbuntuDeal, says beauty and treatment deals, food and drink specials, and accommodation and travel deals are the most common bargains offered on these sites.
Duncan explains that Groupon SA is the biggest group-buying site in the country, with over one million unique visitors a month. Groupon SA went live in January 2011 and currently sits in the top 30 most visited sites in South Africa, says Jansen. Japie Swanepoel, team leader at online strategy company Interactive Concepts, says Groupon SA is a clear market leader.
Second in the South African market is Wicount with under
100 000 unique visitors a month, and UbuntuDeal has around
50 000 to 60 000 unique visitors a month, says Duncan.
Deal aggregator sites are already emerging, adds Duncan. Aggregators such as DealZone and DealScout put a number of deals found on different group buying sites together and packages them in one daily alert for customers.
DealZone offers up to 200 deals from 20 group buying sites everyday, says co-founder and part owner Sagi Benbasat.
The growth of group buying sites in South Africa is a result of people wanting to “make a quick buck”, says Swanepoel. The barrier to entry for these sites is relatively low. Jorberg says it can be done for just US$100.
But when major companies such as Avusa and Naspers try their hand at these sites and fail, some question the stability of the group buying business model.
The industry is a tough one to crack, with many competitors over-running the market, says Green.
Naspers created the highly localised group buying site, Dealify, in June 2011. The site focused on deals in specific areas within cities, such as Johannesburg north and Soweto. But Dealify announced in early December that it would be closing down.
Groupbuying.co.za, the ‘go-to’ information portal for group buying sites in South Africa, reported, “Dealify is not profitable enough, or has simply spent too much for too little revenue thus far.”
This follows the closure of Avusa’s group buying site Zappon. “After the initial explosion of sites, we found that the group-buying model simply wasn’t sustainable in SA, unless you continued to invest large amounts of time and money into the project,” says Derek Abdinor, General Manager of Avusa Media LIVE.
“We therefore took a strategic decision that, rather than continuing to invest in Zappon, we focus our time and attention on growing the existing Avusa businesses and conceptualising new, more profitable ideas,” says Abdinor.
Abdinor suggests there is a flaw in the business model. “People are using group-buying sites but are not the wholly committed ‘deal hounds’ the industry needs; the news coming out of the US regarding Groupon does put both customer and merchant in two minds,” says Abdinor.
Abdinor says that suppliers are left with tiny profit margins after discounts, and the daily deals site is forced to continually search for new suppliers.
But Jorberg says these sites are not created in pursuit of building profitable businesses, and are rather about building databases and sites that stand the chance of being sold in the long term.
Twangoo set the pace when Groupon bought it less than five months after it was launched, says Jorberg, and other sites hope for the same.
Other larger companies are buying up independent sites, he says. Bidorbuy acquired UbuntuDeal in 2011.
Duncan says it is evident the model is working for some businesses, based on the number of Groupon SA deals and products sold. Despite the success stories, the business model has yet to prove itself, says Jorberg.
Groupon’s shares dropped over 15% within the first few weeks of its stocks going live on the Nasdaq. Investors have possibly realised that there are many Groupon clones raising competition for the site, according to a recent article on Memeburn.
But these sites will survive if they offer good deals and pursue large-scale marketing, says Jorberg. Swanepoel says they can be sustainable if they develop good databases of subscribers and offer good deals.
“Whether or not these customers keep coming back is obviously based on the service they received both through the group-buying site and the business itself,” says Duncan.
A brief search of customer service website HelloPeter.com brings up nearly 400 complaints about Groupon SA (November 2011).
Complaints include poor quality of service from merchants, cancelled deals that are not refunded, and vouchers that are not sent after purchasing them. Others show customers complaining of ‘discounts’ that are actually set at the normal price of what merchants offer and merchants who are unable to deliver services because they are fully booked.
Merchants are not always aware of what they have let themselves in for, says Jorberg.
This was the case when London bakery owner Rachel Brown nearly lost her business when orders for 102 000 cupcakes were placed after a deal for her Need a Cake bakery was advertised on Groupon, according to a report by the BBC in November.
The company did not set a limit on the number of deals that could be purchased, and were not equipped to deal with the 8 500 orders for cupcakes that followed. Brown told the BBC the expenses for extra staff and distribution wiped out her profits for the year.
But these deals can bring profit to small businesses if used cleverly, according to Swanepoel.
Groupon SA has created a powerful marketing vehicle for local merchants, says Jansen. “These sites offer a good way of getting exposure for lesser-known brands,” Swanepoel agrees.
The success for vendors lies in whether or not customers become return customers. “If services are good, businesses may gain new customers. But if deals are badly executed they may lose existing customers,” says Jorberg.
Also, if merchants convince customers to buy more than what they came for, they will be successful, says Swanepoel.
Duncan is positive about the future of these sites. “A select few of these sites will continue to grow substantially over the coming months,” he says. Duncan attributes their sustainability to the increase in internet usage in South Africa.
“Online marketing has become a critical success factor for any business in South Africa whose target market is within LSM 5 and up,” says Duncan.
While their true value will only be tallied when the group buying business model is tried and tested over time, these sites have the ability to offer effective services to customers and grow business-savvy merchants.
PHOTO: Kate Jansen, from Groupon
This story was first published in The Media magazine.