Travel deals publisher Travelzoo (NASDAQ: TZOO) may be in an anxious situation about its recent local deals offerings after Susquehanna Financial Group and daily-deal aggregator Yipit released a survey stating that businesses that have offered an online deal-of-the-day in the past aren’t planning to do so again in the next six months due to concerns on low rates of repeat business from new customers. The survey queried almost 400 merchants recently about their experiences running daily deals with Groupon (NASDAQ:GRPN), LivingSocial and other providers.  The discounted deals space is characterized with low barriers of entry, a lack of customer loyalty and has become highly competitive of late. We discuss these threats to Travelzoo’s Local Deals business in detail below.
We have a Trefis price estimate of $30.38 for Travelzoo, which represents over 10% premium to the market price.
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More Competitors Can Reduce User Stickiness for Travelzoo
A major threat to Travelzoo Local Deals is that its business model is very easy to replicate. This has spawned a large number of deal-based clone sites that provide similar discounts to subscribers.
Travelzoo competes with companies like Groupon and LivingSocial that also sell vouchers for deals from local businesses such as spas, restaurants and activity companies. Travelzoo, however, contend that their approach will be very difficult to replicate owing to its rigorous deal quality standards. Still, there is lot of room for overlap in the nature of deals offered across companies, and this tends to reduce user stickiness as consumers will finally use a platform that offers the best value.
High Competition to Result in Softening of Take Rates on Daily Deals
The social buying space has become highly competitive and it’s estimated that there are over 200 social buying site clones in the U.S. alone and over 500 worldwide. Low barriers of entry and minimal start-up costs have led to the rise of a number of competitors in the group-buying space. Competition threats to erode take rates (percentage of gross revenue kept by group-buying platforms). Certain competitors like Kgbdeals charge 15% from merchants compared to about 40% charged by Travelzoo. Competitive pressures will likely lead to a decline in take rates charged by the company over time.Notes: