Facebook Is Not Ready to Take on Groupon

Facebook confirmed it’s working on a Groupon-inspired discount service that will help bring together merchants and its 600 million current users. The social network told Bloomberg the service will be part of its current Deals feature and will roll out initially in San Diego, San Francisco, Dallas, Atlanta and Austin, Texas.

“Local businesses will be able to sign up to use this feature soon, and people will be able to find Deals in the coming weeks,” Facebook said in a statement.

Facebook could be a huge competitor in the daily deals social shopping space. It’s the most popular website in the U.S. and could tap its fast-growing community to compete. As my colleague Mathew pointed out, (subscription required) Groupon really didn’t take off until it combined shopping with social. Unlike Groupon, which leveraged Facebook, the social network already has an established relationship with its users. Facebook recently said it was testing a new feature called “Buy with Friends,” that allowed users in social games to share their virtual purchases with friends, who could unlock the same discount. At some point, if Facebook puts it all together — location, deals and social sharing of discounts — it could be a powerful way to build relationships and loyalty between merchants and customers.

But having said that, this new effort by Facebook doesn’t appear to be a true competitor to Groupon or Living Social at this point. It’s building off the current Deals program, a free service that allows merchants to offer discounts to people who check in to locations. The program appears modest so far, and judging by the discounts offered in New York on my side of town, it doesn’t seem like many retailers and businesses are taking advantage of it just yet. With the new service, Facebook said its staff will work with businesses to highlight deals and try to get members to share discounts with each other.

That sounds like an incremental step in improving Deals but not the kind of coordinated effort necessary to build a true large-scale system. As we’ve talked about before, to create a successful local shopping service, you need scale and big sales teams. That’s one of the reasons Google (s goog) still struggles in this area, because it still doesn’t have much of a local sales force. Facebook doesn’t appear to be making that investment either, so it’s hard to see how it will really evangelize this to businesses. Merchants can come to Facebook, but it’s unclear if the current Deals system is even paying off that well for them. Maybe that’s why Facebook hasn’t charged anything for the service yet.

Facebook, for its part, recently improved the metrics for Places and Deals for businesses, allowing them better insight into how many people are checking-in at locations and claiming deals. Again, however, this seems more like a self-service system. That may work if merchants know to turn to Facebook and do so without prompting. But many are used to building relationships with sales reps. So until Facebook makes a bigger investment there, it’s unlikely it can challenge the current leaders. Merchants aren’t all happy about the big cut daily deal services take on sales, but many also are willing to come back because the system is organized and can produce big results. Facebook needs to show it can produce the same or better upside.

Facebook is also offering deals from lower-tier competitors such as ReachLocal, Gilt City, Tippr, HomeRun.com, PopSugar City, KGB Deals, Plum District and Zozi. In this way, it’s acting more like a deal aggregator. But again, it’s hard to see how this will stand out with users. There are a number of discount aggregation sites and none have built up the following Groupon or Living Social have. Microsoft (s msft) has also gotten into the daily deals aggregation game by integrating discounts from the The Dealmap into its Bing mobile and desktop sites. Microsoft’s partnership with The Dealmap may be a precursor to a purchase at some point, similar to the way Google unsuccessfully pursued Groupon.

Can any of these big Internet giants build a daily deals program from scratch or do they need to buy someone to make it happen? My sense is an acquisition is more necessary at this point and so far Facebook hasn’t shown me yet that it can break out and build a winner on its own. It’s a super-smart company, so I’m sure we’ll hear more news on this front. Mobile and location are big priorities for Facebook in 2011. And as I said earlier, it has some great assets to make this happen. But we’re seeing more and more that it’s not an easy task to create a Groupon killer overnight.