January 13, 2011, 3:55 PM

Groupon and LivingSocial expand

The daily deals leaders both announced significant international expansions this week.

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It’s been a busy week for Groupon and LivingSocial, two leaders in the daily deal space. Both sites announced international investments this week and LivingSocial also tossed nine more U.S. markets into the mix. Groupon grabbed headlines on Monday when it announced it had closed $950 million in its seventh round of financing.

Suffice to say, it looks like the two operators will continue to go head to head in 2011 as they race to lay claim to daily deal dominance.

Groupon on Tuesday announced it had bought daily deal operations in India, Israel and South Africa that it intends to rebrand under the Groupon name. In India, Groupon acquired three-month-old SoSasta, which Groupon says runs deals in 11 Indian cities. In Israel, Groupon acquired Grouper, which is less than a year old and operates in and around Tel Aviv. In South Africa, Groupon acquired Twangoo, which Groupon says serves the most cities of any daily deal site in that country.

“Groupon is making a big bet that it can evolve rapidly and maintain its leadership position in many markets it is entering, and they’ve amassed a big war chest to help them do that,” says Lou Kerner, vice president of equity research at Wedbush Securities, referring to the $950 million Groupon recently raised. He likens the expansion activities of daily deal players to a land rush.

Meanwhile, LivingSocial, the No. 2 daily deal site in the U.S. by traffic, today announced it had acquired a majority stake in LetsBonus, a daily deal site launched in 2009 and based in Barcelona, Spain, that operates in Spain, Italy, Portugal, Argentina and Mexico. It also has a travel deal operation that the company says will complement LivingSocial Escapes, which LivingSocial launched in November, a month after acquiring travel deal operator Urban Escapes. LivingSocial also announced today that it had expanded its domestic presence—the company already operates in more than 100 markets—by nine more markets. The new markets are Scottsdale, AZ; Ann Arbor, MI, Jackson, MS; San Diego-North County; Boston-North Shore; Gainesville, FL; Madison, WI; Plano, TX; and Snohomish County, WA.    

Forrester analyst Sucharita Mulpuru says it’s tough to assess just how these companies’ rapid expansion will pan out in the long term. “I don’t think we have a lot of history with hyper-growth. We know that Facebook, Zynga and Groupon have grown their user bases very rapidly. Their revenues haven’t matched that, and that’s the unknown. Will getting a lot of non-paying accounts early on ultimately help you develop a viable business model over time?” she says.

Groupon admits its newest daily deal markets aren’t yet mature. “Collective buying is in its infancy in India, Israel and South Africa and we see strong potential,” says Rob Solomon, president and chief operating officer. Kerner of Wedbush Securities says that although relatively few Indian consumers shop online, the size of the country makes it important. “Even a small percentage is large in absolute numbers,” he says.

A Groupon spokeswoman says social commerce is just beginning to catch on India and that SoSasta, the young Indian firm Groupon acquired, is already taking off. "SoSasta has partnered with some of the best merchants in India and attracted thousands of subscribers in a very short amount of time,” she says.

Kerner says Groupon’s ability to attract funding shows investors are hopeful about the company’s future and potential to remain the market leader for daily deals, although he says the battle is nowhere near over. He thinks if LivingSocial grows enough as a business, Amazon may follow up its $175 million investment in LivingSocial by acquiring the company entirely. Other players, such as Facebook and its Deals program, also will compete as online marketing services for local businesses. “We’re really in the very early days of a brand new market that’s likely to evolve rapidly for the foreseeable future in ways we can’t fully anticipate now,” he says.

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