- Associated Press - Monday, May 23, 2011

Groupon is adding 150 employees a month at its U.S. headquarters and trains them in a church because the conference rooms at its headquarters aren’t big enough. Ideeli has crammed so much electronic equipment into its New York office that the power goes out every day.

And at LivingSocial, well, the living is a little too social. Its third office in Washington, open just two months, ran out of room so fast that employees have to work at narrow desks in the hallway.

Deal-a-day websites blast email offers for deep discounts, sometimes good for only a few hours. And they’re becoming so popular that their offices are starting to look as crowded as their subscribers’ inboxes.

In just three years, the business model has changed local advertising, delivering faster results than other marketing methods. Store owners get immediate revenue and can see exactly how many customers an offer brings in.

The exponential growth of the sites, along with the emergence of hundreds of clones, is reminiscent of tech companies before the dot-com stock bubble burst in 2000. But Lou Kerner, a social media analyst at Wedbush, argues this isn’t a fad: It’s a new category of commerce that has changed how companies from hair salons to sandwich shops market their products.

Groupon, the No. 1 daily-deal site, has swelled from 2 million subscribers to 85 million over the past year and a half, while second-place LivingSocial went from 120,000 subscribers to 28 million.

The sites are expected to generate $2.7 billion in revenue this year, more than doubling from last year, according to Local Offer Network, which collects and distributes deals from hundreds of sites. The daily-deal market could reach $4 billion by 2015, says Mark Fratrik, vice president at marketing research firm BIA/Kelsey. While that’s a small slice of the $142 billion in online retail sales, daily-deal revenue is growing much faster than overall e-commerce.

The discounts and limited-time offers on daily-deal sites motivate shoppers to splurge on treats such as half-priced golf lessons at Miami’s Better Golf Academy, or $75 worth of wine for $35. The sites fall into two categories:

_ Group-buying sites, such as Groupon, LivingSocial and BuyWithMe, that partner with small businesses to send subscribers a local offer each day. (Occasionally, they partner with big companies such as Gap to run a national deal.) Subscribers can opt to purchase the voucher, usually good for half off. Then Groupon takes 30 to 50 percent of the revenue. So a pizza parlor might take in only $4 on a pizza it can regularly sell for $16. The theory is that bringing in a bunch of new customers will offset the smaller profit and result in repeat business.

_ Flash-sale sites, such as RueLaLa, Gilt and Hautelook, that host limited-time sales for members only. They feature a different product or designer each day, like Dolce & Gabbana dresses that didn’t sell or Rock & Republic jeans at 60 percent off. Private sales allow designers to unload excess merchandise and market to more budget-conscious customers while maintaining an air of exclusivity. Woot, a pioneer in 24-hour sales, focuses on gadgets, such as discontinued Flip cameras. Flash sales generally involve limited quantities and can sell out in a matter of minutes.

Skeptics predicted that traffic to daily-deal sites would flatten as the economy recovered and shoppers stopped worrying so much about finding a bargain. The opposite has occurred. LivingSocial had 7 million unique visitors in March, up 27 percent from February, making it one of the 10 fastest-growing websites, according to ComScore. Traffic to Jetsetter, a luxury travel-deal site, has grown tenfold since January 2010. Hautelook’s traffic is up 15 percent since Nordstrom Inc., the high-end department store chain, announced plans to buy the site for $270 million in February.

In April, Facebook began testing a daily deals program in five U.S. cities. On May 3, Amazon launched MyHabit.com, which peddles a new luxury item at 60 percent off each day. Groupon rejected Google’s reported $6 billion buyout offer last year, but the search giant launched a pilot program called Google Offers in Portland, Ore., in April.

Paul Hurley, 46, started flash-sale site Ideeli in 2007, operating out of his kitchen. Now the company rents space in two New York office buildings. Marketers, programmers and customer-service reps sit elbow-to-elbow.

Ideeli is on track to bring in $250 million in revenue this year, Hurley says, and has 4 million members, triple the number from a year ago. The biggest challenge, he says, is managing the growth. Up to eight fashion shoots are going on at once in the company’s studio, and Ideeli has become one of the city’s top hirers of models.

Groupon’s staff has grown so quickly that the company hired a high-school yearbook publisher to produce a book of employee headshots, trying to maintain the tight-knit community atmosphere of a startup.

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