Could Yelp Kill Groupon? Could Google Take All? Local Services Gets Interesting…

Over the past year, I have become increasingly interested in the local services flash sale (often referred to as group buying) space. What was effectively the “internet-izing” of the long established coupon industry has rapidly become the hottest area of the internet now, driven by its tangible revenue streams and extraordinary margins.

I started building Gilt’s play in the space, Gilt City, with Kevin in September last year, and have been blown away by the growth it has shown since launch. I have also observed a massive crowding of a space that a year ago was almost empty – the launch of 22 competitors in New York alone, countless vertically-focused plays and a $1.35B valuation. Just last week, SecondMarket reported that in Q2, options and shares in Groupon were generating the most buy-side interest among investors in illiquid assets.

And then this past week, something really interesting happened. Yelp started to offer daily deals, through the businesses it already manages listings for. I have no idea why it took them so long to get into the space, but I am glad that they now have. In many ways, Yelp has the ultimate offering, coupling deals with quality content and reviews, enabling would be deal-purchasers to learn more about the business before committing to the purchase. Their recent opentable integration pushes the utility even further – at Yelp, you can find a restaurant, secure a deal and book a table all on the same page. Couple this with their already-established local sales team and its existing network of users (33M at the last count) and Yelp has the potential to be a category killer.

But yet there are some serious challenges to the Yelp model. Yelp needs a high volume of deals to keep users returning, which means deals that can live on the site over time. This will push their vendors towards more evergreen deals – “2 for 1 drinks between 5 and 7pm” – rather than the true one-time-only value that Groupon and Gilt City offer. These types of deals will rarely represent the same value as something available for a short time in the flash format, and Yelp will need to be careful that offers don’t quickly become second-rate and stale.

I have always felt that offering contextual relevance was the key to long term success in this business – the ability to put offers in front of users that have the ultimate relevance to their demographic profile, their location or the interests and needs. Yelp has this in droves – a user searching for “Restaurants in Murray Hill” is absolutely going to want to see special offers at restaurants in that neighborhood.

There is one other player that specializes in this highly tuned form of contextual relevance too, and that’s Google. Google has been tinkering around with its local offering for some time now, and local deals could be the answer. Google could (should) be aggregating deals from the multitude of players across the US and feeding them into relevant search results – it could even project them on to maps. Pushing the thinking down the Adsense route, Google could even develop a self-service platform to enable any small business to upload their best offers, to be displayed where most relevant right across the Google network. I think that Google poses a considerable threat to not just Yelp but the market in general.

So what does all this mean for Gilt City? I do think there are truly defensible positions in this market, and Gilt City is rapidly cornering one. Gilt City offers high end products and services from vendors who care about their reputation. It offers unique experiences that are crafted just for Gilt, and pushes them to an audience that has been tuned to expect this type of quality by the core Gilt business. It’s our own form of ‘contextual relevance’.

For everyone else? Find your own form of unique ‘contextual relevance’ and command your niche as quickly as possible.

It is going to be fascinating to see how the market shakes out, but I predict an unsophisticated, middle-of-the-road, giant and a select few focused players staunchly defending their corner.

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