Daily deals giant Groupon has to be wondering what it did to anger the largest e-commerce player in the market. According to The Wall Street Journal, Amazon is not only launching a daily deals program, called Amazon Local, but the initial rollout is coming to Groupon’s backyard of Chicago.
Not only is Amazon trying to stick it to Groupon, the e-commerce giant has employed the services of its partner and Groupon’s largest competitor, LivingSocial, to be the sales force behind merchant partnerships with the service. The WSJ notes that Amazon plans on hiring its own sales force but it is a clever move by the company to outsource the sales team initially so as to ramp up the service quickly. Amazon has rolled out the service in Seattle, Boise, Los Angeles and Palm Beach, Fla. Groupon is in its six-month quiet period after filing its S-1 for an initial public offering and cannot (reasonably) comment on the proliferation of clones and competitors gunning for large slices of the daily deals pie. Will Groupon be able to withstand the mounting army of competition?
The short-term answer is yes. Groupon’s competitors are splitting into two groups – above and below. The below group consists of startups focused specifically on daily deals, including LivingSocial, Gilt City, Zozi, BuyWithMe (and others). These are being built from the bottom on up without existing infrastructures of users and consumer communication channels. Groupon is in the same boat as these, it is just ahead of the game with its merchant and user acquisition plans. So far in its history, Groupon has held off the upstarts by being bigger and more aggressive.
The competition coming from above may be harder to handle. Amazon, Google (through Google Offers), AT&T, American Express and other existing large enterprises are coming for Groupon’s business model and they have an advantage over the original daily deals provider – they do not have to pay nearly as much for user acquisition. Their users already exist and it is just a matter of extending an offers channel within their existing framework.
Amazon’s Infrastructure More Mature Than Groupon’s
Amazon is the most dangerous of this group, even with advantages over Google. Foremost, it understands e-commerce and how to treat customers and merchants, something that Google stretches for but is not in its corporate DNA. Groupon has struggled with merchants in the past and will continue to struggle with merchants in the future as it tries to continue its high velocity upward trajectory. Consumers trust Amazon while they are still wary of Groupon.
The daily deals industry was bashed by many when the particulars of the Groupon S-1 came out. Mostly, the ecosystem was appalled that Groupon made so much money yet was not profitable because the company spends so much on user acquisition. Yet, take away most of that cost and it is easy to see how daily deals can be extremely lucrative to a company that does not have to spend nearly as much on user acquisition. Amazon fits that bill.
Amazon has had its sights set on the daily deals market for a while now, investing $175 million in LivingSocial in December 2010. By enlisting LivingSocial as its sales force, Amazon is beginning to make some of that investment back. It would not be a surprise if Amazon just completely subsumed LivingSocial into Amazon Local if the deals sector proves to be a popular new market for the company.
