Wins or Warnings for Groupon? Clutter and Competition Thin the Daily Deals Space

Yelp Halves Staff for Yelp Deals as Facebook Gives Up Altogether

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Yelp, a website that collects local business reviews, is scaling back its year-old deal service, following Facebook's retreat from a market where consumers and merchants say they're becoming inundated.

Yelp will cut its sales staff dedicated to Yelp Deals by half, the company said Monday. Facebook, the world's largest social network, said on Aug. 26 it would shut down its Deals local-discount feature, decamping from a business it entered in April. Both services were started to compete with Groupon.

As hundreds of companies jump into the online-coupon market, consumers and merchants may have begun to grow weary of offers. At the same time, increasing competition among websites threatens to squeeze margins, making it harder for them to earn a profit from the deals.

"The big players are exiting because the business is not making a dent in their revenue numbers," said Sucharita Mulpuru, an analyst at Cambridge, Mass.-based Forrester Research. "The space is not as large as everyone thought it was."

In July, 38 daily-deal sites closed -- more than the 36 that opened -- while the industry experienced a 7% drop in revenue from the prior month in top North American markets, according to research firm Yipit. Groupon and LivingSocial are the top two deal sites, which offer discounts on restaurants, hotels, events, and other goods and services.

At San Francisco-based Yelp, about 15 salespeople will be reassigned to other areas of the business, and the number of deals emailed to users is unlikely to grow, Vince Sollitto, vice president of corporate communications, said in an interview yesterday.

"Rather than offer more and more deals of inherently declining quality to more and more folks over time, we want to make sure we're only providing good, quality opportunities," Mr. Sollitto said. "While we think the deals business is a good one, it has never been a core focus of our offering."

More than half, or 52%, of U.S. consumers who use daily-deal services say they feel "overwhelmed" by the number of emails they receive about deals on a daily basis, according to a survey conducted earlier this year by PriceGrabber, a division of Experian. About 60% of people surveyed said they feel the daily-deal industry is too crowded.

"While Groupon had first-mover advantage, many competitors followed suit, driving down prices and commoditizing the market," said Jeremiah Owyang, an analyst at Altimeter Group in San Mateo, Calif.

Groupon CEO Andrew Mason said last week that Yelp hadn't made major inroads into its business.

"Yelp is small and not growing," he said in a memo to employees that was obtained by Bloomberg News. "In the 15 markets where we compete, our daily deals are 500% of their size."

Facebook may have withdrawn from the market because the competition was too intense, said Greg Sterling, an analyst at Opus Research. in San Francisco.

"There's just too much competition out there," Mr. Sterling said. "That manifests in too many e-mails in the inbox and too many salespeople calling merchants. There's so much noise in the market that it's hard for merchants and consumers to make sense of it all."

Yelp began offering discounts from local merchants in San Diego in August 2010 and expanded to 20 cities this year. In June, it incorporated the service into its mobile applications for Apple's iPhone and Google's Android software.

The startup plans to double its sales staff to 700 in the next 18 months, including a new office in New York and the expansion of a Scottsdale, Arizona, site it opened in 2010. All salespeople are able to sell Yelp Deals, and vendors can sign up for the service on Yelp's website, Mr. Sollitto said.

Merchants say that participating in the deals often leads to unsolicited calls from other coupon sites. After Kiebpoli Calnek ran a Yelp Deal advertising 50% off an aerial performance class in July, she began receiving calls from representatives of Groupon, LivingSocial and other deal sites every day.

"They send me emails, they call me, they call me again," said Ms. Calnek, who is based in Brooklyn, N.Y. "I told them, 'I'm burnt out from this deal. I have 500 new clients. Why would I want to do another one?'" Founded in 2004, Yelp has raised more than $130 million in funding from Elevation Partners LP and other backers. Last month, the company hired a new chief financial officer, Rob Krolik, citing his experience at publicly held companies.

-- Bloomberg News --

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