October 1, 2012, 12:00 AM

Quick fix

Groupon Goods and LivingSocial Shop offer brands new ways to quickly move excess inventory.

Lead Photo

Good news has been in short supply at Groupon Inc. since the company that popularized online sales of discount vouchers went public in June 2011. Restated financials and executive departures have helped drive down its stock price 75% since its IPO.

But amid the struggles, there's been one bright spot for Groupon—Groupon Goods, the flash-sale site it launched last fall that sells tangible goods, and not vouchers for spa visits, skydiving lessons and other activities that make up a big part of its core business. In its first week Goods sold an estimated $2 million worth of merchandise, and by the second quarter of this year reported sales of $200 million since its launch.

The marketplace will sell between $600 million and $800 million worth of products this year, predicts Scot Wingo, CEO of e-commerce services provider ChannelAdvisor Corp. For the sake of comparison, the leading flash-sale web retailer, Gilt Groupe Inc., generated an Internet Retailer-estimated $500 million in revenue in 2011.

That success has spawned competition from Groupon's biggest rival, LivingSocial, which in July launched its own flash-sale site, LivingSocial Shop. The site, which features 16 to 20 items tied around a particular theme like "ballgames & brewskies," also quickly resonated with consumers. Daily-deal aggregator Yipit estimates LivingSocial Shop sales could approach $200 million in less than six months this year.

An opportunity to sell to the millions of consumers who have signed up to receive Groupon and LivingSocial offers—Groupon claimed 38.0 million active customers at the end of the second quarter and LivingSocial says it has 70.0 million members worldwide—is attractive to businesses like home fitness and weight loss retailer Beachbody LLC looking to move a lot of inventory quickly. "Their e-mail database is bigger than just almost anyone's," says Jennifer Weiderman, senior vice president of business leadership at Beachbody, which has run six offers on Goods this year. "Beyond that, we like their customer composition—they're web-savvy, high-income people who are likely to be interested in fitness."

And the business of selling excess inventory appears to be attractive to Groupon as well, as the struggling deal operator is moving to make it easier for retailers and brands to offer even more overstock merchandise via Groupon Goods.

An evolution

Groupon Goods has already gone through a considerable evolution in its first year of operation. Groupon launched it as a bargain site where consumers could buy a small number of products from a mix of local and national merchants for a set period of time, with Groupon taking a 10% to 15% commission, according to daily deal industry tracker Yipit. (Groupon typically takes 40% of the purchase price of vouchers, Yipit says.)

But Groupon transitioned quickly from making money from commissions to buying the excess merchandise and selling it on its own behalf. By the first quarter of 2012, Groupon owned 75% of the goods on sale via Goods and in the second quarter that moved up to 95%, according to Yipit.

For the manufacturers and retailers Groupon buys from, the benefit of this model is that they get paid upfront for the merchandise—albeit generally at a lower price than they would receive selling the products directly to consumers, says Faisal Masud, vice president of Groupon Goods. And by taking stock of the inventory and using a logistics company, which it declined to name, to fulfill orders, Groupon earns more than it did when taking a commission while also having better control of the overall customer experience. "It enables us to own the transaction from end to end, which we feel is the right approach," Masud says.

LivingSocial takes a slightly different tack. It also works with a logistics provider to house goods, but it sells on consignment and doesn't own the inventory. Retailers and manufacturers are only paid for the items that sell.

But both approaches work out about the same for household appliance manufacturer and online retailer Kalorik, which has sold six products on Shop and four on Goods. That's because each time it has run an offer it has moved most of its available inventory, says Dori Topaz, vice president of sales at Kalorik. The buyers at Groupon and LivingSocial, Topaz says, "have similar strategies in deciding what products will move. We've seen the same types of results from both."

When Kalorik has used the sites to clear out excess inventory of higher-priced items, like an indoor/outdoor grill with an iPhone connectivity dock and speakers that retails for $249 and sold for $149 on Shop, its sales numbers are typically in the hundreds. But for lower-priced items, like a $50 steam iron it sold on Groupon for $29, it can move thousands of units.

Whether it turns a modest profit or sells below cost, Kalorik benefits because it gets a higher return on its excess inventory through these deal sites than through most liquidation channels, Topaz says. And, at the same time, it also helps it build brand awareness. "It enables us to showcase our products in front of a large audience," he says.

That's why the sites are so useful, Topaz says. Unlike other flash-sale sites where a retailer often has to sell several items at once, he says, Groupon and LivingSocial enable a manufacturer or retailer to sell just one item at a time.

How to get featured

But getting an item listed can prove difficult because there are only so many products that Groupon and LivingSocial can feature in their e-mails to subscribers. Groupon has 15 to 25 offers available at a time that run for one, three or seven days, depending on the availability of the inventory. It also runs some other Goods offers on affiliates like Slickdeals Inc. that don't appear in e-mails. LivingSocial presents 16 to 20 products a week.

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