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Sat 14 Jan 2012 01:53 PM

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Group therapy

Group buying took off in the post-crisis Gulf - but is it really a good deal for businesses?

Group therapy
Group-buying websites like GoNabit have seen instant success in the Gulf

In a region where online shopping is largely unheard of and credit card use remains limited, no individual or company could have been prepared for the popularity of online group-buying. Launching in the Middle East just two years ago, websites such as GoNabit and Cobone were instantly successful, attracting a spate of customers looking for great deals on their holidays, beauty treatments, outdoor activities and meals out.

It all began, of course, in China, where the notion of selling products and services at reduced rates based on a minimum number of people signing up for the deal, or ‘tuangou’, was coined.

Catching on to the profit potential quickly, Europe, the US and Australia followed promptly in China’s footsteps with a flurry of their own websites, rendering group buying one of the hottest sub-sectors in the technology industry throughout 2010 and 2011. In the Middle East, the phenomenon continues to grow.

“In the last twelve months, there has been a significant amount of corporate acquisition and expansion activity from the large players and a rush of new start-ups looking to obtain a slice of the market,” says Dino Wilkinson, a Dubai-based communications and technology lawyer at Norton Rose. “In the UAE, the acquisition of a local business [GoNabit] by a major US player [LivingSocial] was one of the Middle East technology sector’s most significant transactions of recent years.”

According to industry researchers, there are around 30 websites in the region today, with the biggest players thought to be Cobone, Groupon.ae, and LivingSocial, formerly known as GoNabit. Others such as Turret Digital’s YallaBanana are also proving increasingly popular as interest rises, and many sites now operate beyond the UAE in countries such as Saudi Arabia, Lebanon and Egypt.

Dan Stuart, the founder of GoNabit in Dubai and the new managing director of LivingSocial, says the group-buying industry has sparked a whole new approach to marketing in the region. Unlike before, he says, businesses can now invite their customers to taste and sample their products or services with the guarantee of some profit.

“We’re basically a marketing company, but instead of promoting your product up front on a billboard or on a radio ad and hoping to get business, you’re able to market and get a profit. We’re essentially getting people to commit upfront financially to try out the business, in return for giving a discount. So rather than listening to a radio ad and thinking about going to a place, you’re actually in the chair, having your hair cut or eating the food or whatever.”

For companies such as the Banyan Tree in Ras Al Khaimah, a campaign with GoNabit certainly drew a large amount of customer interest, with more than AED1.3m worth of vouchers sold in just four days. An offer for a discounted day out at Ferrari World had a similar effect, with AED900,000 in vouchers being bought in the same timeframe.

Long term, the returns are different for different businesses, Stuart says, with some finding that customers come back to the company or switch their loyalty, while others benefit more from positive word-of-mouth or increased brand awareness. Either way, he argues, group buying has proven itself as an effective way of marketing a business.

Some objective industry analysts agree with Stuart that group buying does indeed offer a novel marketing strategy. For a lot of companies, it creates an additional market segment which they can target, whilst also helping to formalise the process of providing discounts and promotions.

“[For hotels and spas] it helps to channel discounts into a more formal process as opposed to informal groups and connections,” says Chiheb Ben Mahmoud, head of hotel advisory at Jones Lang LaSalle MENA. “Now when you go through group-buying schemes you know that it will not be possible to get further discounts, so it gives some discipline. It is also a marketing channel which is less subject to sale cycles such as Christmas, making it more dynamic.”

Nevertheless, other experts argue that group buying remains laden with problems. As it happens, only recently have companies and individuals begun to talk about the issues with these kinds of websites, which could pose a serious threat to the industry if unresolved or left to grow.

One of the best examples of these issues was the case of a cake shop owner in the UK, whose decision to offer a deal via Groupon turned out to be the worst she ever made. Rachel Brown, who offered subscribers a discount of 75 per cent on cupcakes in a bid to get a few extra clients, ended up having to juggle 8,500 orders and hire 25 agency staff, which nearly put her out of business.

“When I hear about things like that, one of the things that concerns me is that because we’re a young industry, the actions of a few can become generalised,” says Stuart. “We’ve had caps [on orders] since day two, and we always look at business capacity. We never really sell more than 30 to 35 percent of a business’ total capacity because ultimately if a customer buys something from us and has difficulty obtaining it then they’re not going to buy from us again. There are also lots of deals we’ve said no to, because we didn’t feel the business had the capacity.”

But many experts and companies say more needs to be done to prevent small firms encountering similar problems.

Mark Carroll, owner of Dubai-based restaurant company Kcal Healthy Fast Food — which ran a campaign with a group-buying site offering a meal deal at their JLT burger venue — says there is definitely potential for too much business.

“When we did a campaign we had to call the company and ask them to take the deal offline, as there were far more orders than we expected. It got a bit out of hand, we sold about 500-600 burgers in the space of a week — that’s a lot of burgers,” Carroll says.

If anything, staff at the group-buying firm seemed rather indifferent to the prospect of a huge order, he adds, with little structure in place to cater for high demand and no advice offered to companies in case orders became
too much.

Stuart admits that firms have become more aware of this problem as the industry has grown.

“In the early days it wasn’t such an issue, as we just weren’t doing the volume. But as we grew more popular it became something we had to look at, and not just think about, but look at all the time.”

Indeed, GoNabit’s first deal sold 35 vouchers, compared with a recent campaign, which sold 5,000.

Another point raised by companies and analysts is the high potential for a one-off spate of deal-grabbing customers, falling outside the firm’s target clientele and who are unlikely to return for repeat business.

Experts say this could be justified if deals typically brought in high revenues, but the majority do not.

“The complaint that seems to be arising among retail partners is that the customers who are buying the services are just one-offs and not coming back,” explains Matthew Reed, a technology analyst at Informa. “From a retail point of view, group buying is meant to boost customer acquisition and bring more regular customers, but it doesn’t seem to be doing that. Of course to fit in with the model the retailer is having to offer discounts which might not be economical for them to do.”

Carroll agrees, citing these exact problems during his early campaign.

“We didn’t make a profit, and it didn’t really get the clientele we wanted or targeted; every Tom, Dick and Harry was coming in with vouchers,” he says. “I think a lot of businesses do it for exposure. [The email] does go to a lot of people, our brand name was emailed to about 20,000 or 30,000 people.”

When asked if he would do it again, Carroll says it wouldn’t be worthwhile unless his business was launching a new branch or product.

Other businesses, such as Barbhaya Middle East, a small electronics firm based in Bur Dubai, have had a similar experience with group-buying sites, but continue to value the practice solely for its ability to increase brand awareness.

Manager Yusef Akbhar believes group buying is important because it represents the new trend in the region.

“It’s the latest thing; people are getting lazy in Dubai, they want to sit at home and purchase things, so we’re moving with the trend,” Akhbar says. “We don’t make much profit, but it’s not a loss either. But it sells, it’s good.”

Perhaps more serious are criticisms stemming from poor service, both on the business and consumer side. Reed says consumer problems continue to present a drawback for group-buying sites, while a recent report by Reuters mentions how the number of website closures in China hit an all-time high last September, amid a flurry of complaints from users and a subsequent drop in consumer enthusiasm.

In Dubai, web users and businesses understand these issues. One Dubai resident says he will no longer use group-buying sites after his wife was asked to pay additional funds for driving lessons, despite having already paid for the ‘deal’ on Cobone.

“My wife bought 20 driving lessons for AED595 on Cobone, only to discover they actually wanted another AED 3,000 once she gave them the initial voucher,” he says. “On that basis I won’t be going back.”

The manager of a Dubai-based beauty salon, Fafa Nail Spa, says she was also burned by more than one website after they neglected to pass on the funds for vouchers sold.

"With Cobone, they didn’t pay me for four clients. Customers came here and told me they had paid for vouchers, but they weren’t on my list. I emailed them [Cobone], but they did not send an email back. Eventually they apologised and said they would pay next time, but they didn’t pay.”

Ati says she is now using YallaBanana, and is much happier with the service.

Looking ahead, most experts and businesses would agree that group-buying sites, whilst having some issues, could be a positive development for companies if they are used and appreciated for what they really offer. Across the board, commentators suggest their value lies more in boosting brand awareness than it does in attracting new customers and bringing in high revenues, whilst many believe the sites present the perfect platform into the e-commerce industry.

Currently, the Middle East remains light years behind other regions when it comes to online shopping, despite the industry proving extremely lucrative elsewhere.

“What’s interesting about group buying sites is that they seem to be popularising the idea of e-commerce,” says Reed, “which could help to encourage more use of the internet.”

Experts from Jones Lang LaSalle MENA agree, referencing their recent report which highlighted the importance of e-commerce in the run up to 2020. According to the research, more than half of all non-food retail transactions would be digitally influenced in the next ten years.

“Techonology will be the game changer for the industry across the decade,” says the report. “In the sense that if shopping is about buying by going out to the shops, then shopping as we know it is dead.”

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Kevin 8 years ago

I too have had bad experience with these deal sites. I have tested Cobone, Groupon and Gonabit (now Living Social) .

Usually the prices are inflated to show a discount.

Also outlets offering the deal tend to drop their quality in order to accomodate the deal buyers.

Also, outlets tend to be stuck with the image of bad quality. I mean if they had a good product they would have to deep discount. But like I said prices are inflated to show discounts.