Local group buying sector tipped to reach $1 billion by 2015, but pioneer says “gloss has come off”

The former chief executive of Australian group buying pioneer Cudo says the “gloss has come off” the Australian sector, with international players hurting margins and profitability as they strive to acquire new customers.

The comments, from former Cudo chief executive Billy Tucker, come as a new report from Telsyte claims revenue in the group buying sector will hit $1 billion by 2015, with revenue jumping from $498 million in 2011 to $600 million in 2012.

Tucker told SmartCompany this morning that the float of US group buying site Groupon in late 2011 “opened the hood” on how the industry really operates.

“We’re seeing a lot of crazy in the market. We’re seeing the international guys spending a ton of money, and there’s been this willingness to acquire customers or to sell stuff with a bit of a disregard for the brand.”

Tucker points to LivingSocial local head Colin Fabig, who confirmed to the Australian Financial Review the company spent $10 million on marketing in the second half of last year.

But more importantly, Tucker believes sites are selling products across a huge variety of categories, which can dilute the brand.

“In that sense, I feel like the gloss has come off. I think before the Groupon IPO people saw the industry as very grand. But it’s a tough industry, like retail, and you have to start from scratch every day.”

“The explosion of group buying sites caused many to believe it was a very profitable business. But now, people are much more aware and less willing to invest such significant marketing dollars.”

Tucker suggests major sites may be under more pressure than they let on.

“If what I understand about staff numbers is anything to go by, these sites may be losing significant money.”

The research from Telsyte shows the group buying market was worth $498 million in 2011 – up from the earlier forecast of $400 million – while the industry is expected to reach $1 billion by 2015. Next year, it will turn over $600 million.

According to the report the best performing category was physical products, which now account for 30% of the market. According to Telsyte senior research manager Sam Yip, this represents a fundamental shift.

“This means group buying industries are now competing against other parts of the commerce world, and general online shopping environments.”

“As the industry grows, it’s going to be much harder to compete and gain customers. Especially in 2012, as we believe the group buying sites will maintain a lot of the customers gained through 2011 due to loyalty.”

Scoopon chief executive Gabby Leibovich says this shift to physical product will be difficult for other sites to maintain – especially as it will put more pressure on margins.

“Everyone is selling products and fewer services. But at the end of the day, we’ve already been sourcing great deals through Catch of the Day and that’s how we supply through the Scoopon site.”

“The other side of the industry is really struggling with that. They rely on third party suppliers, many of which are based overseas, and shipping takes quite a long time.”

Leibovich has also slammed the money being spent by the American giants, suggesting these sites are “just stupid kids with a rich parent running the business”.