Groupon’s Secret Weapon – the local advertising GDS

Many have argued that local deal juggernaut, Groupon, is not a defensible business.  How many blog posts have we seen that exhort how Groupon was insane to pass on the reported $6 billion dollar take-out bid from Google.  Heck, reports are that they are worth $25 billion.  I think the casual observer will start to have some semblance to where they are going with there “easy to replicate” busines model.  Take a look at the latest addition to Groupon’s business model called, Groupon Now.  Call it version 2.0 of their existing small merchant couponing business model.  They are going to allow merchants to more effectively yield manager their businesses by allowing the merchant to decide when to provide incentives for new and existing customers.  Groupon has such wide customer scale that they can offer small merchants immediate access to inventory that is not being currently maximized.  For example, a bar can provide incredible real-time deals as offers during the middle of the weekend versus the prime trafficked period likes Friday and Saturday.

I believe what Groupon is doing is nothing short of creating an incredibly powerful merchant platform.  It reminds of some of the business parallels in the travel industry.  Historically, the businesses that had lots of critical demand (enough scale to move meaningful amounts of consumer volume) ended up being the market makers.  They made a lot of money in the middle – between the supplier and the consumer.  In the golden age of travel, every travel agent used what was called a global distribution system (or GDS).  The GDS’es were originally owned by the airlines and they effectively slotted their own air inventory at the top of the sort order for travel agents.  This continued until the government got involved and de-regulated the GDS’es in order to provide more competition and consumer benefit.  The new cadre of GDS’es started to flourish largely driven by the predominance of e-commerce popularity and the shifting tides of consumers armed with the tools to make their own booking decisions without a middleman.  Expedia led the charge by building their own set of hotel inventory that didn’t use a GDS – Expedia in essence built a high margin database for hotels to more effectively manage their perishable inventory.  I was at Expedia right as the phenomenal early founders of the company rolled out their merchant hotel programs which led to many years of high margin, value-adding inventory to millions of consumers.

Groupon is doing something similar but I think the implications of this is much, much bigger.  The local advertising market is extremely fragmented.  Much more than the $3 trillion travel and hospitality industry.  Many companies have tried to break-thru to reach small businesses and Groupon’s ability to offer e-commerce to businesses that were not sophisticated enough to do so was and is simply brilliant.  I think Groupon sees the bigger picture.  Look at this interesting chart found that shows the distribution of Groupon’s deals by price and volume.  Now this is the proverbial long-tail of merchants.  Groupon has the cash, the leadership, and the scale.  Hello to the new local advertising GDS.