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A Daily-Deals Primer: What You Need to Know

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Online daily deals have been undeniably positive for bargain-hunters, but achieving profitability has been a tricky proposition for its major players. Can they succeed? Rather than presenting a narrow positive or negative outlook, I’d like to take you through a few compelling positives, balanced by some worrisome trends, and let you decide. I'd offer you this special package of information for half-price, but half off free still costs nothing. It's your lucky day!

Get the half-off roundup … they're growing like weeds
Groupon is the fastest-growing company in history, outpacing Internet darlings Google (Nasdaq: GOOG  ) and AOL (NYSE: AOL  ) , which are both experimenting with daily deals. Groupon's growth is partly why the industry, with more than 500 daily-deal providers around the world, is projected to more than double its revenues this year. A good chunk of the remaining growth will probably come from well-financed players like Google and LivingSocial, which has a close partnership with (Nasdaq: AMZN  ) .

Some newer daily-deal providers have been online sales portals for a while and have only recently caught on to the idea of the daily deal. OpenTable (Nasdaq: OPEN  ) was a restaurant reservation and recommendation engine for some time before it started promoting daily dining deals. Travelzoo (Nasdaq: TZOO  ) offers group-discounted travel deals. Other deal providers are extensions of media companies, such as AOL's Patch and Gannett's (NYSE: GCI  ) DealChicken. Expedia (Nasdaq: EXPE  ) and others are partnering with Groupon to create deal platforms.

Keeping it local
Tracking success in specific locales isn't easy, but Groupon offered some valuable information deep in its prospectus. Customer growth rates, sales per customer, and sales per merchant have all dropped markedly in its two oldest markets over the past year. Most local businesses have no loyalty to any one deal provider, which makes it hard for any one daily-deal company to maintain the high revenue splits and appealing merchant offers that made the industry so appealing in the first place. However, daily deals make up a big chunk of participating small businesses' marketing budgets, accounting for more spending than any other type of marketing.

Too much too soon?
Visits to daily-deal sites were up 163% in August over the prior year. LivingSocial's hits increased by 358% in that period, while Groupon's were up by 179%. But visits began to decline this summer, with both Groupon and LivingSocial suffering big traffic drops from June through August. Are these drops indicative of daily-deals fatigue, or are the sites just not giving buyers what they want? LivingSocial recently sold a million vouchers to Whole Foods Market in hours, so there's still a ton of engagement when the deals are attractive.

I'm big in Japan, but my bank account isn't
Groupon and LivingSocial are trying to combat early market declines by going big overseas. LivingSocial is in 21 countries, but that's still far behind Groupon, which has a presence in 43 nations. Groupon earns more than half its revenue from overseas markets, and this rapid expansion forced the company to add 2,000 employees in just three months. However, Groupon's international subsidiaries in Europe and Japan are so deep in the red that they might as well market themselves by throwing money out of blimps. Come to think of it, a half-priced blimp ride might be a sweet deal.

The hottest IPO of the year?
It's not all bad in Chicago. Groupon is cash flow-positive based on the terms of its deals with local businesses, which allow it to hold payments owed for 60 days. The company's much-maligned massive marketing expenditures are finally dropping, and Groupon's revenue is still growing. The majority of its revenue comes from existing customers, and marketing costs as a percent of revenue have dropped significantly this year. Groupon's losses bottomed out in the fourth quarter of 2010, narrowing with each successive quarter afterwards.

It's not bad, but it's far from great. Potential investors should want to know what Groupon's leadership has been up to, and the answers are troubling. Groupon raised $946 million last winter, but $810 million of that total was paid out in stock purchases to CEO Andrew Mason and other executives and investors. An April 2010 funding round raised $130 million, of which all but $10 million went to pay many of the same people. That's a shocking trend when you consider that Groupon owed merchants $392 million on June 30 but had only $225 million in cash at the time.

Can Groupon become profitable? Is it worth investing your hard-earned money on a full-price stock rather than half-price hang gliding? Can any company in this arena emerge as the champion of a vibrant industry? Let me know with a comment.

If you want to keep informed on what these companies are doing to dominate daily deals, add them to your Watchlist so you can keep track of any moves they make to shake up the industry. If Groupon's IPO doesn't sound like the hottest IPO of 2011 to you, find out what company the Fool thinks has been the best new opportunity this year in our free report!

Fool contributor Alex Planes enjoys a daily bargain as much as anyone else, but he draws the line at discount dentistry. He holds no financial stake in any company mentioned here. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, OpenTable,, and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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