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No deal for Zappon

Bonnie Tubbs
By Bonnie Tubbs, ITWeb telecoms editor.
Johannesburg, 18 Nov 2011

Fledgling group buying site Zappon, launched by local media company Avusa just over seven months ago, has closed up shop.

Zappon jumped on the group buying bandwagon amid the hype created by market leader, Groupon.

Zappon launched in March under the Avusa Media Live banner, in the hope of capitalising on the loyalty of audiences of established Avusa brands such as The Times, Sunday Times and the Sowetan.

At the time, Avusa said it had a competitive advantage from an advertising perspective due to its collective two million per day readership through its various media channels.

Still a fledgling industry, with Groupon turning just three this month, the phenomenon of group or social buying spread like wildfire in SA following its success, and there are currently around 40 such sites in existence.

Group buying first appeared locally at the beginning of last year with the launch of WiCount. This was shortly followed by the likes of Twangoo (now Groupon SA) and Ubuntudeal. A number of other players then sprung up their own group-buying initiatives - including Daddy's Deals from low-cost airline, Kulula.

Avusa Digital MD Elan Lohmann says the implementation of Zappon was a “low-cost experiment” for the company, which simply did not yield sufficient financial results to justify the continuation of the project.

Lohmann says there were a number of contributing factors to the early breakdown of what initially seemed to be a feasible money-spinning investment. He says, in his opinion, the current group buying business model is flawed. As a result, speculates Lohmann, the footfall and repeat buying expected to be generated by the phenomenon is not necessarily happening.

Quantity not quality

According to Lohmann, quality is superseded by the drive to pump out regular, catchy deals that will instantly attract the mass market.

“If you look at the quality of deals in SA, it is generally quite low. While there may be one or two exceptions, I don't think that anyone has really broken into the corporate market. Rather, the audience consists mainly of people who are hunting for specials and deals and who won't necessarily generate further capital for the businesses that offer discounted deals, for example restaurants.

“Also, if you consider the pressure involved in having to produce daily deals, in every region, it is often not practical. It entails face-to-face convincing of potential suppliers and a decent incentive for them. To meet the target, you need to have at least three to four deals a week in the pipeline. When this doesn't happen, strange deals creep in and devalue the overall experience.”

Model valuation

World Wide Worx MD Arthur Goldstuck says, despite its short existence, the business concept of group buying is now well proven, but “it is the business strategy that is beginning to fall down”.

He says that most group buying sites go for “low-hanging fruit” in terms of targeting businesses or services that are already staples of other group buying sites. “This is what causes the sense of sameness across group buying and the stereotype that it's a dumping ground for unused capacity at deep tissue massage and Brazilian blow-wave services.”

Goldstuck adds the concept in itself works, but the manner in which a particular group buying facilitator selects, markets and sells will be the differentiator. “An industry of this kind does not have a solid foundation in itself, but depends on the solidity of each individual company. Just because group buying works for one company does not mean it is a guaranteed success for any other.”

Lack of loyalty

Lohmann adds part of the concept of Groupon is encouraging people to get out and explore their city. “[The slant is along the lines of] we'll help you find places and things in your city that you never knew existed.” But, he says, consumers tend to go with known brands, rather than risk venturing into some unknown coffee shop.

“Customer acquisition is expensive and there is no loyalty factor there. People go where the best deal is.”

A consequence of this mentality, Lohmann adds, is that suppliers may find a particular deal only works for them once and they may not be prepared to offer it, or to use the group buying platform at all, again.

“While we never had a problem with suppliers as such, this was due to the fact that we offered them free online and newspaper advertising, so they weren't disappointed.”

In addition, he says, Zappon was hamstrung by the technology it used. “We tried a 'quick-fix' tactic and ended up paying for that.”

Zappon's technology remains with Avusa, however, and with some refinement, may be employed in the future, although for now Lohmann says the company is “parking it”.

Hindsight

Lohmann says he is “not sure” he buys into the hype of online mass deals anymore and admits, looking back, that the company made mistakes. “In retrospect, there are a number of things that could have been done differently. If I had to do it again I probably wouldn't follow Groupon's business model.”

In a nutshell, he says he would advocate less frequency and a higher calibre of deals, offer better incentive to suppliers and focus on big brands.

One of the lessons learnt, says Lohmann, was that 20% to 30% of vouchers paid for by consumers are not redeemed. This translates directly into a loss for suppliers, who are reimbursed according to the redemptions that they can prove for a given offer.

On the other hand, Lohmann suggests the notion of having “deep deals” will forever be a part of the retail landscape. “Deals won't go away, but in my opinion if you want to make it in this space you need a new group buying model.”

Lohmann says players in the increasingly competitive group buying field have to be aggressive and Avusa was “just not willing to be that aggressive.

“I have no regrets and we may even do something in the space in the future. At some point in business you just have to cut your losses and make difficult decisions. It all boils down to the fact that we could not see an upside in the medium-term right now.”

Flailing figures

Avusa's latest trading statement, issued a week ago, indicates the company expects to see earnings per share for the six months to September drop by between 55% and 65%. Headline earnings per share, which strips out a profit on the sale of properties by its books business, will slump by between 85% and 95%.

A year ago, Avusa reported revenue 5% higher at R2.3 billion, while profit after tax gained 13% to R72 million. Earnings per share were 61c a share, up from 2009's 52c a share, and headline earnings per share were 61c, up from 47c in the first half of the previous year.

The media company explains that its entertainment and books businesses had a poor trading period, and it also incurred costs after Capitau offered to buy it out. In addition, the “separation agreement” between it and its former CEO Prakash Desai, who left last month, affected the company's results.

Its results are expected to be issued next Thursday.

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