Daily-deal sites multiplying, if not thriving

PITTSBURGH - Lara Bruhn, co-owner of Prantl's Bakery here, wanted to check out the daily-deal phenomenon popularized by companies such as Groupon and Living Social, so she subscribed to a few of the sites. That set off a steady stream of e-mail offers for yoga classes, restaurants, and numerous teeth-whitening services.

"How white can your teeth really be?" she joked.

At this point, Bruhn is regularly deleting the e-mails. "Can you tell I'm just a little jaded?" she said.

She also is fending off calls from numerous deal sites that think their lists of consumers would be a perfect fit for her bakery. The calls started around a year ago, but they have intensified in the last six months.

"I'm not kidding, I probably get a call a day," she said.

The daily-deal industry - and it seems to have become an industry almost overnight - began as almost a novelty but is now under intense scrutiny since some of the major players are seeking to sell stock. Groupon's planned initial public offering, in particular, has given investors a chance to analyze the numbers behind the three-year-old company's dazzling growth.

The Chicago company told the Securities and Exchange Commission that, as of June 30, it had 115.7 million subscribers in 45 countries.

How fast has it grown? Consider the company's disclosure that it sold 116,231 Groupon deals in the second quarter of 2009. Two years later, the same quarter brought sales of 32.5 million deals.

Also in the second quarter this year, Groupon reported a net loss of $102.7 million on revenue of $878 million.

In many ways things don't look good for the daily-deal industry. The biggest player is having a hard time making money. More than a few businesses have offered deep discounts that ended up costing them money. And the competitive marketplace looks like a bar fight.

The daily-deal field has grown to include more than 600 players, including destination sites, newspapers, radio and TV operators, and flash-sales sites, according to a report this week from BIA/Kelsey, a media consultant based in Chantilly, Va.

Time to get out, right? Bruhn has decided it's time for Prantl's to take a step in.

The bakery made its first-ever offer through a daily-deal site, working with Certifikid, a family- and children-oriented site that launched in the Baltimore/Washington area in May 2010 and entered the Pittsburgh market this month. For $1, customers will be able to buy a six-pack of cupcakes with sprinkles (regularly $6).

Bruhn took the plunge for a few reasons, even beyond the fact that Certifikid founders Jamie and Brian Ratner (he's a native of Greensburg, Pa.) were among the most persistent of her callers. "I kind of ignored them until they made a pitch that showed they understood the economics of my business," she said.

The bigger deal-site operators, she said, insisted she offer discounts good for a year, although they might reluctantly consider a six-month option. They wouldn't allow an online-only deal. They didn't seem to understand the thin margins and limited production capacity of a small bakery.

Prantl's deal through Certifikid is only good for online ordering, something many of the bakery's customers don't even realize is an option. The deal expires before the craziness of the winter holidays hits. Only 1,000 can be sold, limiting the bakery's exposure.

That sort of fine-tuning could help small businesses feel more comfortable tapping into what is still a massive opportunity, according to Utpal M. Dholakia, a professor of management at Rice University in Houston.

His latest research, done with Sheryl Kimes, professor of hospitality management at Cornell University, found only 16.7 percent of 3,933 consumers who took part in an online survey had even used daily deals. Among those surveyed who had, there was consistent enthusiasm for more offers, even if they were not the hefty 50 percent discounts that Groupon started with.

Typically in such offers, consumers pay up front by credit card, but they get $20 worth of food at a restaurant for $10 or something along those lines. Deal sites can take as much as 50 percent of the payment, in exchange for the service.