Where The Daily Deal Business Is Headed

How many Keratin wraps, photography workshops and Hookah tokes does one person really need? After Groupon and LivingSocial, there are another 400 to 500 daily deal sites in the U.S., plus 200 more internationally — and very few people think the world needs that many. Expect plenty of consolidation in the next year or two. But that isn’t the only change coming to the daily deal business. By this time next year, you may be finding the best daily deals via search and social networks rather than email blasts — and you could be redeeming the deals with a swipe of your credit card rather than a computer print out. Here are four predictions for the industry from panelists at BIA/Kelsey’s Deals 3D conference last week.

Enter the credit card companies Foursquare and, last week, Facebook have both partnered with American Express to allow for more seamless deal redemptions. Users link their American Express accounts to, respectively, their Foursquare or Facebook “Link, Like, Love” apps. They see deals based on their friends and interests and can load the deals to their AmEx cards, so when it comes time to redeem the deal all they have to do is swipe their card. The transaction goes through at full price and users get a credit on their AmEx statement. Expect other credit card companies, like Visa and MasterCard, to jump in soon.

“You can think of daily deals as a $300 billion media market or a $5 to $8 trillion commerce market,” said Neal Polachek, President of BIA/Kelsey. As credit-card companies enter the space, “I think we’re on the leading edge of a transformation of how the marketplace exchanges money.”

Don’t forget *Amazon*, Facebook and Google. Those three companies are still new to daily deal sites and operating in just a few cities each–Amazon (NSDQ: AMZN) rolled out AmazonLocal in early June; Google Offers launched in May; and Facebook Deals kicked off in April–but the infrastructure and customers are there if the companies start thinking beyond “traditional” daily deals sent out via e-mail.

For instance, Amazon could “allow all the deal companies to consolidate their deals in one marketplace,” daily deal software site Deal Current CEO Jimmy Hendricks said, relying on a search/e-commerce format to promote deals–whereby they would recommend relevant deals to customers based on their recent purchases. And once people are able to find deals through search, “the relevancy of a daily e-mail” decreases drastically,” David Strebinger, founder of “request-a-deal” site Wantsa, said. A caveat: “The only way [search] really works is if the quality of the deal matches the quality of the search experience,” said Yelp consumer product lead Eric Singley. “Otherwise, it becomes noise.”

Ongoing challenges with brand loyalty: Brand loyalty remains basically nonexistent among the different sites–both for customers and for merchants, with the average daily deal customer subscribing to 3.5 different daily deal e-mails. That problem can be tackled by providing a better experience for merchants, a better experience for customers — or both. To appeal to merchants, deal sites may have to accept lower margins–estimated currently at around 50 percent.

To get to the point where deal sites are an “everyday tool,” Perry Evans, CEO of local marketing site Closely, said, sites’ margins should decrease to the 15 to 20 percent range for marketing to an existing customer base and 25 to 30 percent for lead generation. “The loyalty is to the merchant,” Hendricks said. Deal sites have to adopt a lower rate or “provide more,” by getting merchants to offer exclusive products and experiences that no other sites have (Daily Candy and Gilt City are doing well with this, he said) and by adding more editorial content (a major component of Yelp’s focus going forward).

“I really like what I’ve seen from LivingSocial recently, like experiences in a city, escapes and travel products,” Evans said. Multiple products might be coupled together to create “an evening out,” and create more brand value. Also, he believes being a “quality citizen” can build customer loyalty: “The business that does the right things in terms of redemption and treatment of the [merchant] can build brand affinity. There’s a risk of a backlash against the way Groupon and LivingSocial work. If you’re sustaining 50 percent margins, at the end of the day, consumers don’t like that.”

As for Groupon backlash… There was little consensus on whether Groupon (whose representatives did not appear on any panels at the conference) has a sustainable business model. For now, it’s #1, with LivingSocial close behind (and, at a distant #3, probably BuyWithMe). “Groupon will become the MySpace (NSDQ: NWS) of daily deals,” predicted Strebinger. “Groupon’s done amazing things in terms of scalability and building up sales forces to sell deals. But it doesn’t think the way LivingSocial or Google (NSDQ: GOOG) think in terms of how to make things more relevant or social.” The “constantly evolving” LivingSocial, with its expansion into the social and mobile spaces and “strategic” partnerships, has “a lot of opportunity for movement over the next 12 to 18 months.”

However, Evans expects bold moves from Groupon: “I’d buy Yelp, OpenTable and Foursquare if I were the CEO. I wouldn’t be the least surprised to see those kinds of bold moves,” he said. “It’s fun, in a sadistic way, to beat up on Groupon. But at the end of the day they’re going to get out first and have a big checkbook.”