The coming crash of Group Buying…smells like 1999

If you were working for a living at the end of the last century (pre 2000) you may have a sense of deja vu.

All those dot.con businesses stealing money from investors with hopelessly inflated business models that were never going to pay for themselves. Well the same whiff is in the air – it smells like 1999, just before the massive tech-stock meltdown.

That’s because we have the explosive growth in easily replicated commodity businesses – the so-called group buying businesses. And their business model is flawed, their customers (the small businesses) are unhappy and increasingly the final customer (the consumer) is also unhappy.

But don’t take my word for it – check out these articles sent to me by a couple of colleagues from the UK and Australia – Michael Rhodes and John Hancock. Once again commonsense is warning the world, but is anyone listening…just like 1999?

Why you shouldn’t believe the theory behind Groupon’s business model:

Why Groupon is poised for collapse:

Like most things on the internet, group buying is not new. It’s just an old habit executed with new technology. For decades we have been able to buy discount coupons in bulk via the Entertainment books and their various competitors.

These are group buying services that supply all sorts of discounts at various retailers in a book. The books are usually sold by fundrasiers as a way of raising funds and many of us have owned one at some stage in our life, heading out to a local restaurant with friends, coupons in purses and plonk in hand.

For my sins, I was once the owner of a family supermarket in suburban Sydney. Unlike most packaged goods marketers, I’ve packed shelves, operated a cash register, packed customer’s bags and carried them to their car, as well as dealt with the ruthless wholesalers who supplied the groceries in our branded retail group. So I have some knowledge about human behaviour.

Every Wednesday and Thursday our metropolitan newspapers were filled with supermarket advertisements promoting loss leaders. These were high turnover items, usually staple foods such as butter, margarine, jams, tinned food, etc. The principle was simple: offer these high-demand products at cost or below cost, to attract customers to your store in the hope that those customers would then buy other products with better profit margins, while they shopped.

These loss-leaders were often only available in limited supply eg “limit 4 tubs of margarine per customer”. While the technique certainly shifted lots of loss leader products amongst regular customers, it also attracted another group of buyers.

These were the people who only bought the loss leaders and drove from shop to shop to stock up each week on the items that were on sale. Not the best way to manage one’s diet, but it saved money. These were not loyal customers and they never spent money on items that weren’t for sale.

Many of these are the same people taking up the group buying offers. These are people who are buying a sale item. They are not looking to become regular customers. And many of them are taking up the cheap milk or petrol discounts now being offered as the loss leader by the two major supermarkets.

We’ve recently mystery shopped over 20 different group buying deals and in most cases have successfully redeemed the offers. Though a couple the stores had signs stating they no longer honoured group buying coupons. In one restaurant, despite advising when we booked that we were using a group buying coupon, we were ostracized for having the temerity to use the coupon.

There are a few interesting characteristics about the stores that offered the group buying deals. Most were small businesses who were not necessarily savvy marketers. They had been sold  a scam that would allegedly get them loads of valuable new customers through the magic of “the internet”.

Only one in over twenty stores asked for our contact details – and that was because she was a hairdresser and it was her habit to get your details so she could record your next booking before you left the salon.

None of the stores collect payment for providing the service until they redeem the coupons returned by the group buying customers. So they have to fund the sale until the group buying company redeems their funds. Any coupons that are not redeemed stay with the group buying company, they don’t go to the retalier.

The retailers cannot get from the group buying company, the database of people who buy the coupons for the deals. That’s because if they did get the list of customers, then they could contact them directly and not need to use the group buying company again. Although they could just ask the customer for their details when they redeem their coupon.

Many small businesses have been unprepared for the type of buyers who take up these offers. And this has caused significant backlash amongst the customers. Interestingly most of the small businesses we spoke to will not be using the service again. As one retailer said “I had people driving 40 kilometers across town just to get a two-for-one meal. I’ll never see them again and I never want to. They were not the sort of customer we want in our business.”

Of course, the business owners could easily have done some maths to determine whether or not a group buying deal would pay for itself. All they had to do was 101 marketing maths – how much do I invest to gain a customer and how much do I invest to keep a customer? Then work out the cost to convert a group buying “customer” into a profitable customer.

But hey, it was a new idea and it’s on the internet and investors are pouring gazillions of dollars into it, so it must be good.

Like I said “smells like 1999”.


  1. The only thing you’ve left out is the hurdles the customer has to go through to get a credit, if they happen to get a dud discount voucher; e.g., if they go to redeem the voucher and the company is no longer in business. Endless emails with the group buying company and lots of reasons why their systems aren’t equipped to credit your credit card. ADMA has a Group Buying Code of Ethics and they’ve even set-up a department to handle consumer complaints. It eventually all goes into the “too hard basket” and even the bargain shopper decides it’s simply not worth the hassle. Once the negative press really gets going on these ‘deal of the day’ con artists, I agree, their days will be numbered.

  2. Great piece Malcolm; it’s surprising that the general media pay little attention to these issues. Of course, one of the ways many consumers get caught out is with conditions and expiry dates that make it difficult to use the coupons they purchase. This inevitably leads to an irreparably damaged relationship with the retailer.

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