The popularity of daily deals websites has soared since they hit the UK just a few years ago, but multiples are still shy of the benefits. Charlotte Hardie finds out if they are missing a trick.

Fancy getting your teeth whitened? Save 83% and pay only £69. Book a haircut and blowdry at a top salon for only £39. Buy 10 yoga sessions for £35. Daily deal sites such as Groupon, LivingSocial, Kgbdeals and Crowdity are awash with offers on products and services from independent businesses, but few from the major multiple retailers. The question is, are retailers missing a trick?

A few of the multiples are testing these uncharted territories. Tesco is among the most recent. Two weeks ago, the grocer teamed up with LivingSocial to offer Sheffield shoppers the chance to exchange Clubcard vouchers and buy the equivalent of £15 of LivingSocial deals for £7.50. Tesco freetime director Ian Simkins says the focus was on helping local communities. “By partnering with LivingSocial we are inviting our Clubcard members to rediscover the very best of where they live,” he says.

On daily deals giant Groupon, meanwhile, Ocado – as part of what the etailer called in February an “aggressive” marketing push – targeted shoppers with a deal in which it offered £40 worth of groceries and a one-year delivery pass for £39, a package that would normally cost £110. It also offered a 12-month midweek delivery pass from Tuesday to Thursday when customers spent £39, instead of £69.99.

But to date, retailers’ use of such sites has, by and large, been sporadic. What’s more, those approached for comment in this feature appeared reluctant or unable to talk about it in any depth. A Marks & Spencer spokeswoman says: “It’s too early for us to comment in any substantial way. We’ve merely dipped our toe in the water on this one as part of our wider business to business marketing strategy.” Specsavers says it can’t comment on a local Groupon deal in Derby because the use of Groupon is at each store’s discretion. No one responded to enquiries about Glasses Direct’s one-off Groupon deal, and Ocado declined to comment.

There is no denying these sites’ high profile. Groupon has amassed 33 millions customers worldwide. LivingSocial, which launched in the US in 2009 and the UK in 2010, has more than 60 million members worldwide. Research from DD Europe – a European-wide event for the industry – suggests that £300m was spent on these sites in the UK in the six months to the end of 2011. So in the era of the price-savvy shopper, why do the multiple retailers appear reluctant to embrace these business models with open arms? And should they?

Unwelcome publicity

These deal sites are not without critics. Groupon in particular has attracted its fair share of negative press. Two weeks ago, its knuckles were well and truly rapped by the Office of Fair Trading, which found it guilty of “widespread” breaches of consumer protection rules. But, in fairness, these are young businesses that are having to learn and adapt quickly to the rapidly growing marketplace.

Is their infancy one reason why the multiple retailers are yet to throw their weight behind this model? Those heading up such sites say the focus to date has been largely on local businesses and it’s only now that they are turning their attention to the bigger players. Groupon joint managing director Roy Blanga says: “Our bread and butter has been local businesses. It has helped them to engage with customers in an efficient and risk-free way. But now as we build we’re looking to attract larger businesses.”

So Groupon wants larger businesses, but do these larger businesses want them? Blanga insists that it’s perfectly suited across a variety of industries. “The beauty about this model is it’s so flexible.” But its efficacy, he says, is down to how the promotion is structured and implemented.

Margin-obsessed retailers are often deterred by the deep discounting that is a characteristic of these services and the commission that the deals sites then take. But Blanga says there are two main benefits. One is selling out inventory, which many people think is the primary benefit. The second – and main – driver is customer acquisition. Ultimately, these sites have the potential to be an enormously effective marketing tool. LivingSocial managing director Peter Briffett refers to a national Whole Foods deal that LivingSocial ran in the US, in which shoppers could buy $20 of products for $10. At one point it was selling around 115,000 deals an hour – 30 per second. Briffett says: “It’s a huge megaphone on the web, and a way of creating a buzz about a brand.”

Hal Stokes, social media director at digital agency Essence, backs this up: “In terms of initial awareness and direct referrals, daily deals sites are huge. There’s no doubt if you want to get your product or brand out there and seen by people, it works.” But as he points out: “Retailers need to be very clever and strategic about how they use it.”

Maintaining price structure

There is concern that the type of customer attracted to deal sites in the first place will not be loyal or high-spending. Michael Ross, co-founder and director of ecommerce services provider eCommera, is a vocal critic: “They generally acquire low-quality customers who have responded to a very deep discount,” he says. “There’s no question that those who purchase at full price the first time they are introduced to a brand will spend more in the future.”

Groupon and LivingSocial are quick to quash this argument. In terms of being lucrative in the immediate term, Briffet says the “vast majority” of its customers overspend on the voucher price by 60% once they have experienced the brand.

Groupon joint managing director Tobi Tschoetsch adds that Groupon’s promotional structure means that it does not cannibalise sales.

“If I’m a retailer and put a banner across my shop saying I’m trying to attract new customers by selling big discounts, the problem is I’m potentially attracting those who would have paid full price and therefore I’m damaging the price structure.” Because Groupon runs “unannounced” promotions for a short period, he insists that this isn’t the case with the site. Blanga adds that half of the deals it has on a daily basis are from existing merchants: “It clearly is working if done properly.”

Learning curve

So what does “properly” mean? The loyalty issue is a valid one, but these sites can only do so much. And if they can provide a surge in footfall or online traffic, shouldn’t the rest is up to the retailer? Tschoetsch says: “The merchant needs to be prepared to take the customer and make the most out of them if they’re looking for customer retention. You need to make sure in-store staff are informed and welcoming. A lot needs to be done in terms of preparation.”

Briffett points out that retailers need to be absolutely clear on their objectives before they begin. Do they want to acquire new customers? Do they simply want to create a buzz about the brand? Do they want to target a specific section of their demographic?

Expectation is crucial, particularly in terms of response rate. The press has been quick to jump on stories in which daily deals have culminated in problems – if not disaster. One was a Reading cake-maker who accused Groupon of almost ruining her business after she was overwhelmed with orders and had to make 102,000 cupcakes at a loss. And, there have been instances of angry Twitter users taking to the social network site to complain they have struggled to redeem deals .

Both Groupon and LivingSocial concede that there have been problems. Blanga says: “There definitely have been issues in terms of numbers, but this is a two-year-old business that has grown exponentially.

“At the very beginning we were relying more on merchants to tell us what number we were comfortable with. They know their businesses very well but this was a new avenue for them.” To address the problem, Groupon has introduced a capacity planning process. It runs the merchant through a capacity calculator to determine the right limit for their business and confirms with the merchant before the offer is promoted that they can fulfil it. It has also started a due diligence programme that involves continual checks throughout the deal.

While an unexpectedly large uptake could kill a small independent business, it is unlikely to bring a multiple retailer to its knees. Nevertheless, retailers have to be absolutely sure they can fulfil their orders or risk severe damage to their reputation. There also needs to be an understanding that once the deal has taken place, the responsibility of the daily deals site ends there.

There have been teething problems, it’s not cheap, and these sites have their sceptics. But with millions having registered in only a couple of years, there is no denying the potential to brand awareness that could be unlocked.

How do daily deals sites work?

There are more than 70 active daily deals sites in the UK, with more than 200 new sites having launched in the past six months across Europe. Most began life as group buying sites, whereby a certain number of people were needed to activate the deal agreed with their merchants. Customers were encouraged to share offers with friends to ensure enough people bought them, thus enhancing brand awareness. The outcome is that participating businesses extend their reach and boost footfall, while the daily deals site pockets a commission.

But the number of users of these sites has grown to the extent that most have evolved into daily deals sites – the sheer number of people visiting the site and signing up invariably guarantees that the deal will be activated.

Multiples’ group offers

Ocado Offered £40 worth of groceries and a one-year delivery pass for £39, a package that would normally cost £110, as well as a 12-month midweek delivery pass from Tuesday to Thursday when customers spend £39, instead of £69.99

Oasis Ran a deal on LivingSocial in April 2011 in which people could buy a £25 voucher to spend online, with free UK delivery, for £12. It was purchased by more than 5,000 people

Marks & Spencer Offered a LivingSocial deal in February – bought by 30,000 people – in which you could buy a £15 voucher for £7 to spend online or in-store

Tesco Clubcard members in Sheffield could buy the equivalent of £15 worth of LivingSocial deals for £7.50

Moss Bros Offers regular deals on Groupon. Currently advertising a bespoke tailored suit worth up to £400 for £198

Specsavers Ran a one-off deal in Derby in November 2011 in which shoppers could buy a £25 voucher towards glasses for £10

Glasses Direct Offered £39 voucher towards one pair of glasses for £9 or £59 towards two pairs for £24 in August 2011

Playing fair - Groupon and the oft

Groupon was this month given three months to improve the way it operates by The Office of Fair Trading, after the regulator outlined concerns about “pricing, advertising, refunds, unfair terms and the diligence of its interactions with merchants”. It has agreed to make a raft of changes, including ensuring the advertised discount is accurate and transparent as well as outlining limitations on deals.

Groupon is not dismissing the criticism. It admits basic mistakes have been made – outlining why they occurred on its blog and saying what it is doing to correct them.

UK joint managing director Roy Blanga says: “Groupon is a young and innovative company and some of our processes and procedures have not kept pace with our rapid growth. We have worked closely with the OFT to see what other changes we can make. Our objective is to lead our young industry by defining best practice.”