Yelp Follows Facebook in Scaling Back Daily-Deal Service

Yelp Inc., a website that collects local business reviews, is scaling back its year-old deal service, following Facebook Inc.’s retreat from a market where consumers and merchants say they’re becoming inundated.

Yelp will cut its sales staff dedicated to Yelp Deals by half, the company said yesterday. Facebook, the world’s largest social network, said on Aug. 26 it would shut down its Deals local-discount feature, decamping from a business it entered in April. Both services were started to compete with Groupon Inc.

As hundreds of companies jump into the online-coupon market, consumers and merchants may have begun to grow weary of offers. At the same time, increasing competition among websites threatens to squeeze margins, making it harder for them to earn a profit from the deals.

“The big players are exiting because the business is not making a dent in their revenue numbers,” said Sucharita Mulpuru, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. “The space is not as large as everyone thought it was.”

In July, 38 daily-deal sites closed -- more than the 36 that opened -- while the industry experienced a 7 percent drop in revenue from the prior month in top North American markets, according to research firm Yipit Inc. Groupon and LivingSocial are the top two deal sites, which offer discounts on restaurants, hotels, events, and other goods and services.

‘Declining Quality’

At San Francisco-based Yelp, about 15 salespeople will be reassigned to other areas of the business, and the number of deals e-mailed to users is unlikely to grow, Vince Sollitto, vice president of corporate communications, said in an interview yesterday.

“Rather than offer more and more deals of inherently declining quality to more and more folks over time, we want to make sure we’re only providing good, quality opportunities,” Sollitto said. “While we think the deals business is a good one, it has never been a core focus of our offering.”

In August, Yelp has offered fewer than 30 deals, down from more than 60 per month in June and July, according to Yipit. Yelp has recently made about $10,000 per deal, compared with more than $30,000 at the beginning of the year.

‘Paring Down’

“Yelp has been paring down its deal frequency steadily over July and August,” Jim Moran, co-founder of Yipit, said in an e-mail.

More than half, or 52 percent, of U.S. consumers who use daily-deal services say they feel “overwhelmed” by the number of e-mails they receive about deals on a daily basis, according to a survey conducted earlier this year by PriceGrabber, a division of Experian Plc. About 60 percent of people surveyed said they feel the daily-deal industry is too crowded.

“While Groupon had first-mover advantage, many competitors followed suit, driving down prices and commoditizing the market,” said Jeremiah Owyang, an analyst at Altimeter Group in San Mateo, California.

Groupon Chief Executive Officer Andrew Mason said last week that Yelp hadn’t made major inroads into its business.

“Yelp is small and not growing,” he said in a memo to employees that was obtained by Bloomberg News. “In the 15 markets where we compete, our daily deals are 500 percent of their size.”

Full Inboxes

Facebook may have withdrawn from the market because the competition was too intense, said Greg Sterling, an analyst at Opus Research Inc. in San Francisco.

“There’s just too much competition out there,” Sterling said. “That manifests in too many e-mails in the inbox and too many salespeople calling merchants. There’s so much noise in the market that it’s hard for merchants and consumers to make sense of it all.”

Yelp began offering discounts from local merchants in San Diego in August 2010 and expanded to 20 cities this year. In June, it incorporated the service into its mobile applications for Apple Inc. (AAPL)’s iPhone and Google Inc. (GOOG)’s Android software.

The startup plans to double its sales staff to 700 in the next 18 months, including a new office in New York and the expansion of a Scottsdale, Arizona, site it opened in 2010. All salespeople are able to sell Yelp Deals, and vendors can sign up for the service on Yelp’s website, Sollitto said.

Merchants say that participating in the deals often leads to unsolicited calls from other coupon sites. After Kiebpoli Calnek ran a Yelp Deal advertising 50 percent off an aerial performance class in July, she began receiving calls from representatives of Groupon, LivingSocial and other deal sites every day.

“They send me e-mails, they call me, they call me again,” said Calnek, who is based in Brooklyn, New York. “I told them, ‘I’m burnt out from this deal. I have 500 new clients. Why would I want to do another one?’”

Founded in 2004, Yelp has raised more than $130 million in funding from Elevation Partners LP and other backers. Last month, the company hired a new chief financial officer, Rob Krolik, citing his experience at publicly held companies.

To contact the reporter on this story: Douglas MacMillan in New York at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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