Why So Few Daily Deals for Groceries?

There are daily deal sites for everything from restaurants and hotels to comic books and marijuana, but until recently there were no Web sites specifically offering group buying discounts on what is arguably the most essential shopping trip for consumers: groceries.

If you want to find deals on everyday products such as eggs, juice and cereal, there is certainly no shortage of coupon Web sites and newspaper circulars promoting dollar-off deals or buy-one-get-one-free offers, but shoppers would be hard pressed to find the kind of limited-time 50% to 90% off daily deals Web sites such as Groupon and LivingSocial have turned into the new normal.

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LivingSocial made headlines last month when it sold $20 vouchers to Whole Foods(WFM) nationwide for half price, a deal that was bought 1 million times. Groupon dabbled in the grocery market earlier this year as well, partnering with General Mills(GIS) to sell a sample pack of cereals and snack bars in Minneapolis and San Francisco, selling out in a matter of hours.The incredible popularity of these grocery deals is as notable for showing the huge consumer demand that exists as it is for highlighting the scarcity of similar offers. While Groupon would not say exactly how many grocery promotions there have been, the company did admit to us that there have been only a "handful." LivingSocial did not immediately respond to a request for comment."The deal pipeline in each Groupon market is determined by local consumer interest and merchant availability. Grocery deals have been successful for us and we're definitely open to doing them again," says Julie Mossler, Groupon's director of communications.Based on the success of the few grocery deals so far, consumer interest is clearly not the problem, which by Mossler's own explanation leaves only merchant availability to explain the limited number of these deals to date. The real answer, however, is a bit more complicated and boils down to a combination of inventory and timing.The problem with grocery dealsGroceries differ from other consumer products in two potentially problematic ways: Each food product has many subtle variations and virtually all can expire. We might call this issue the "orange juice paradox": When a grocery store offers a deal on orange juice, it has to specify whether it's pulp, nonpulp, concentrate, whether it's a quart or a gallon and whether it's Tropicana, Dole or another brand. "There's such a huge number of products and choices available, the likelihood of getting a huge number of people interested in any particular option is lower," says Geoff Allen, the founder and CEO of Ziplist, an online service that launched this year and lets users upload grocery shopping lists and searches for related food deals. Once the grocery store figures out which kind(s) of orange juice to offer, Allen says the big challenge is figuring out how much each merchant needs to stock to make sure it can fill all the requests.

Let's say a chain of grocery stores chooses to sell a voucher for half-off any gallon of Tropicana orange juice in store, whether it's pulp or nonpulp, in an effort to broaden the appeal. This leaves merchants with the problem of figuring out how many of those who redeem the deal will shop at each store and which kind of orange juice they will shop for. That creates a major inventory problem, as stores must struggle to stock enough to satisfy those who have prepaid for the products but not so much that the juice starts to expire on the shelves.

"The last thing you want is to send consumers to a store for a deal and have them not find the product," says Christopher Steiner, a senior technology writer at Forbes who co-founded Aisle50, one of the few Web sites trying to make daily grocery deals work, albeit on a fairly limited scale. Aisle50 launched this summer and partners with more than 100 Lowe's Food Stores on the East Coast to offer daily bargains that can be redeemed using a Lowe's loyalty card.

For this reason, Aisle50 has shied away from specialty products and focused mostly on a select few items that are well-stocked in most of the Lowe's locations, including Chobani yogurt, International Delight Coffee Creamer and the store's brand of orange juice. The deals are significant -- the current offer is for 50% off two 64-ounce containers of Lowe's orange juice -- but the offers expire almost as quickly as the food does, with the orange juice deal only redeemable for the next three weeks, far less than the typical one-year grace period sites such as Groupon allow on many products.Even with the restricted selection of available products, Steiner admits there have been other complications along the way."We have had a couple cases where a grocery store may not carry the certain size of Chobani greek yogurt we offered," he says, but the company is now working on a "dynamic mapping solution" that would eventually show which stores have the product offered in stock to cut down on that.While tools such as this might help smooth out the redemption process, it doesn't tackle the more fundamental issue: How a grocery store can determine the precise number and type of products to offer deals on."With the exception of non-perishable goods, you need to reach consumers when they need that product and in some cases before the product expires, but how do you know when they are interested in it?" Allen says. This is the problem that he and his team at ZipList are working to solve by using shoppers' grocery lists on the site to help "decipher purchasing intent for food products," effectively providing grocery stores with a formula to better target their deals to actual demand.A recipe for successful grocery dealsAs the tools for offering grocery deals improve, the number of competitors in this space may increase. To date, the field is limited to sites such as Aisle50, Zipongo (available only on the West Coast) and the handful of companies including General Mills and Big Y that have shown interest in pushing daily deals on their products.ZipList's Allen speculates that others like Amazon(AMZN) might enter the space, since it sells food in select locations already, and more retailers may choose to partner with the major daily deal sites to advertise promotions, though this too poses a challenge.Allen says it's hard enough for daily deal sites to make money on the big-ticket items they promote now, so it would be that much harder to turn a profit by selling items that fall in the $2 to $5 price range.For the time being, the General Mills deal on Groupon is instructive on how to best offer a successful and lucrative grocery deal given all the limitations retailers contend with. In this case, the company sold a sample pack of a dozen packaged items, all of which were nonperishable, meaning no risk of spoilage. There was a wide enough variety of choices (cereals, chips, chewy bars) at a big enough discount ($40 worth of food for $20) that it would appeal to a large number of shoppers, and the products were shipped directly by General Mills to customers, removing the complexity of sorting through inventory issues at each individual store selling its products. Until businesses figure out how to cater their deals to shoppers precisely, grocery stores and daily deal sites may have little choice but to adapt parts of this formula and play it safe."We certainly think the ceiling [in this market] is pretty high but I will say the grocery world is a whole different ball game because the business operates differently than any other business," Aisle50's Steiner says. "If you don't have a full grasp on how exactly the industry works, it's a very hard one to navigate."Follow TheStreet.com on Twitter and become a fan on Facebook.

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