Social buying is collective bargaining in the Internet age. The advantage that group formation brought workers in the industrial age was greater power to represent and achieve their demands vis-à-vis employers in terms of wages, working hours, and benefits. The advantage that individual e-commerce participants have in joining a group — i.e. using a social-buying website — is that they can benefit from the site’s purchasing power to induce sellers of products and services to give them price discounts, free extras, and, theoretically, better customer service.
Sitting on the other end of the bargaining seesaw, merchants can use social buying sites as online marketing tools to expand their customer base into an online community, gain advantages in fast and precise analysis of marketing campaigns, and, also in theory, increase their repeat business.
The social-buying model is represented in the Middle East by scores of startups and locally-grown companies — ScoopCity, a one-year-old site owned by entrepreneurs Abdallah and Sara Yafi is a Lebanese example — or by the affiliates of companies in the United States where the model was pioneered by the likes of Groupon and LivingSocial.
Four-year-old Groupon has been present in the United Arab Emirates since 2010. LivingSocial entered the regional markets in 2011 by acquiring a company called GoNabIt, which claimed to be the first social-buying venture to launch in the UAE when it opened its online portal in mid-2010. The operators of the sites will usually take their cut from the merchants; for example ScoopCity will offer a typical deal, or “scoop” in its lingo, at 50 percent of the item’s or service’s nominal value to its members. The merchant will provide the deal at 25 percent of the standard price to the site operator; every online buy will leave the operator with gross earnings equivalent to half the discount obtained by the customer.
Enter the iPhone
The original iPhone – i.e. iPhone 1 – sold less than 1 million units on its launch weekend. Apple’s iPhone 4 launched last year with sales of 4 million units in the first weekend. Last month, the iPhone 5 sold 5 million according to an Apple media announcement on September 24. But whether you wonder if there is a pattern or if the world’s most valuable company should perhaps have skipped a few numbers and launched iPhone 7 or 8 this year, the fact is that the most demanded gadget of them all right now is the iPhone 5.
Nice, but what does that have to do with social buying? Quite a lot actually. For one general observation, social buying as a business model relies on high attention rates and short attention spans working in tandem, and the craze of standing in line for a day to get an iPhone in week one instead of week three of market presence is a show of “need-to-have” immediacy and run-with-the-pack behavior.
On the ground, the iPhone 5 tied intimate knots with social buying in the United Arab Emirates last month; the larger operators in the market put up iPhone 5 offers immediately after the device’s launch weekend.
At over $1,000, the deals were not really of the high-discount variety usually associated with social buying, and attracted less buyers than expected, according to Frank Scheunert, board chairman of Mox Deals, the social-buying unit of German-telecoms firm Mox Telecom. Mox Deals operates in the UAE market and seeks to compete with the two companies that are considered the biggest fish in the Emirates’ social-buying pond, American-owned Groupon Middle East and locally grown Cobone.
“I did a comparison [after two days], Groupon had sold approximately 140, Cobone about 100, and we around 50. I was a bit disappointed to be honest; I would have expected that every provider would have seen several hundred orders come in,” Scheunert said.
Bigger rival Groupon Middle East’s Chief Executive Alexander Kappes took it differently. “We have sold 150 iPhones and have taken the deal off the site [after three days]. It was a great demand,” he told Executive, adding that in pricing the smartphone at AED 3,800 ($1,035), the social-buying offer on the iPhone 5 was competitive against the high markups charged by the traditional phone vendors in the first few days of the gadget’s availability in the UAE. “This was not a markup but it was about showing that Groupon can put such a product on the site and be the first to have it available for people to pick up the same day.”
Tough to master
Social buying is an online concept that is easier to set up than to succeed with, and one of the globally leading adopters, LivingSocial, has just experienced a meltdown of its presence in the Middle East. The operator, which had moved into the regional market only a year ago by buying local player GoNabIt, declared in the middle of August that it was urgently seeking a buyer for its regional customer data base encompassing operations in the UAE, Egypt, and Lebanon, and then promptly closed shop before the end of the month, comforting customers that valid deals would still be honored and pointing them to their global head office unit for all other concerns.
In another example, global social-buying market leader Groupon launched a high-flying $20-a-share initial public offering on Nasdaq in November 2011, only to see its share-value crash to $4.15 at close of August 31 this year and trade between $4.15 and $5.27 throughout September, barely recovering from the historic low. Over the course of only 10 months, the stock thus morphed from an investor craze into something of an investor scare and the company’s chairman, Eric Lefkofsky, Chief Executive Andrew Mason and director Brad Keywell all fell off the pages of Forbes magazine’s list of the 400 richest Americans. Mason (31 years old) and Keywell (42) were each worth less than a paltry $500 million, Forbes wrote sympathetically in August.
The fact that stock markets have already reflected overexcitement and subsequent under-appreciation of the biggest player in the social-buying sphere does not say anything about the operational soundness and fundamental validity of the business concept. Nonetheless, with a swell of downside observations in global markets raising concerns over core issues such as customer satisfaction and loyalty, or bad vendor experiences of un-met expectations or user fraud, plus LivingSocial having folded in Dubai, it is natural to ask if the social-buying business model in the Middle East is an already a dying fad or still filled with future.
To answer that question, it must be understood that LivingSocial did not exit from the region because of local considerations, said remaining operators. According to Scheunert, LivingSocial had a very sophisticated website and high-class interface but may have been spending too much in the local market. “LivingSocial has given up on this very early on, as they have been only under a year in the market and invested a lot. Obviously their strategy was too expansive,” he said.
Abdallah Yafi, managing partner of Beirut-based ScoopCity said the LivingSocial decision to pull out was “purely a US-based decision”, citing discussions with concerned parties. “Surprisingly, the company was doing well here in generating traffic and good revenue figures. The decision came from the US where the global cost structure did not allow them to sustain the Middle Eastern operation,” he said. “They were trying to run the company in the region with a similar model to that they used in more mature markets. This didn’t work and they decided to pull the plug because they decided they would rather concentrate on the mature markets where they were making profits, rather than trying to grow a market that still has investment [needed] in order for them to reach the level of profitability that is acceptable to them.”
As for measuring the impact of LivingSocial’s exit on the UAE market, Kappes said that it was still too early to tell the effect on Groupon, while citing that the 2-million plus registered user base of Groupon and the 1.5 million user base of LivingSocial are likely to have significant overlap. “It is a shame to see a big name like LivingSocial exit the market,” Kappes said, because the international brands represent strong skills, and the regional market and operators have still some ways to go before reaching maturity. “There is still a lot to learn,” he exclaimed.
Expanding in the future
While the markets in the UAE and region over-abound with social buying sites, the consensus of the three operators interviewed by Executive was that the potential for social buying was far from exhausted but the next stage of development would certainly involve consolidation.
Groupon is looking at expansion into other regional markets while using the Dubai operation as a hub, and hopes to leverage the strength of the UAE team to grow into markets with high Internet penetration and high incomes.
Some countries in the Gulf “are obviously very interesting if you look at markets with big potentials like Qatar, like Saudi Arabia, like Kuwait. They have very high GDP per capita and very high internet penetration,” said Kappes, but emphasized that recent media reports were incorrectly citing him as saying that the company was planning to launch offices in six Gulf Cooperation Council countries in the near term.
Mox Deals is close starting operations in Saudi Arabia, Scheunert told Executive. “We are in the establishment phase in Saudi Arabia,” he said. “We have a good partner there, an advertising group, and we will announce more in a few weeks.”
Scheunert, whose Mox Deals had announced in August that it was interested in buying the LivingSocial UAE customer database, said the company was still at the table for this acquisition but the process by which the deal on the database was offered had been lacking information; he added that such a data base loses value every week.
For world leader Groupon and smaller international Mox Deals, expansion prospects in the region do not extend to countries such as Lebanon, at least not before they develop their footholds in larger and safer countries in the region as well as master looming challenges, such as the Arabization of platforms that are required to reach audiences in Saudi Arabia. The desire to expand in the other direction, from Lebanon into the Gulf Cooperation Council countries, however, is strong.
According to Yafi, ScoopCity wants to diversify its business into a wider e-commerce range and then quickly go regional. “We will look at the GCC as of first quarter of next year,” he said. “That is our objective.”