A new fever is gripping Latin American consumers, male and female, ages 25 to 45: discounts from group buying websites, in some cases involving prices 80% lower than what is available elsewhere. With companies expanding their online sales rapidly, a wave of promotions for show tickets, dinners, hairdressing, tourism and other services seems to have no limit, at least in the short run. New competitors are expected to vie for customers attracted by the comfort of buying at home or at work.

Volume lets it all happen. Web portals can offer competitive prices once they attract a certain number of buyers. Registered users qualify for discounts using printed coupons good for 3 to 12 months provided that a certain threshold is reached for each offer. The offers last only a day and are allocated city by city.

“This is about growth in the market that is taking place on a global level,” says Sebastián Pereira, country manager of Groupalia, a shopping site that has reached major markets in the region. Its sales have grown 40% a month in Argentina since launching there in October 2010, according to the company. “First, it started in the United States, and then it immediately spread to the rest of the Americas, Europe and Asia.”

The Latin American market was quick to adopt these sorts of buying systems because “there is a large and growing population with access to the Internet and enough businesses that understand the system and its benefits,” notes economist Eduardo Remolins, a professor at the National University of Rosario. Specifically, the region is home to 600 million people, a third of whom were online in 2010. That’s higher than the 29% global penetration rate, Marcos Pueyrredón, the Argentine-born president of the Latin American Institute of Electronic Commerce, said in a recent interview on the Venezuelan TV show Economic Impact.

On the other hand, according to the AmericaEconomia Intelligence study,“The Strength of E-Commerce in Latin America,” business-to-consumer e-commerce sales grew by 39.2% in 2009 to US$21.77 billion. In 2010, that figure may have reached US$28 billion thanks to higher penetration of computers and broadband technology, and greater security of transactions, AmericaEconomia says. A study by the Argentine Chamber of Electronic Commerce (CACE) shows that online B2C transactions in Argentina grew by 48% in 2010 to $1.76 billion. CACE attributes this rapid development to several factors: growth in the number of Internet users to 26.5 million; growth in the percentage of people who bought online, to 32% of all Internet users, and continued growth in numbers of companies, services and products in the sector.

“The amount [of sales activity] generated through the Internet is equivalent to 3% of total retail sales in Argentina and 1.93% of the country’s GDP,” Patricia Jebsen, president of CACE, said at a news conference.

A New Sort of System

Group buying sites have origins in the early days of Internet, but initially failed because customers were not yet accustomed to, or comfortable with, shopping online, according to Carlos Galli, director of the marketing department at UADE, an Argentine business university. But the newly reborn model is stronger than ever. "The new thing is the delivery — the ability to print the coupon — and the impact of social media such as Facebook and Twitter," Galli notes. For a business, "it has the peculiarity of generating online traffic” that takes business activity “out of the virtual world and brings it into the real world.”

The sites began to catch on with consumers “because it is a simple concept: The more we buy, the more we can lower the price," according to Pereira. "Second, a wide range of items can be offered. The number of products and services is hard to find anywhere else…. Third, [group buying sites] enable you to access local places near where you live, whereas e-commerce used to be more global.” As a result, companies have a new way to promote their businesses. “This is advertising that involves zero cost, and has the advantage that these offers reach a large number of new customers that they could not otherwise acquire,” Pereira adds.

The system provides benefits for everyone involved in the “circuit” of activity, not just consumers, Galli says. The e-commerce companies earn a commission on each transaction, often amounting to as much as 20%. “The users of the coupons get the opportunity to try out something new at a low price, which permits companies that make these offers to expand the consumption of these products in the economy.” The sites are also “an ideal way for small and midsize companies, which may not have enough funding to use traditional marketing tools, to get out the word about their businesses."

Diego Regueiro, a professor of economics at the University of Palermo in Argentina, believes that larger, more well-known companies prefer not to get involved in the promotional cycles of group buying because “they feel that it isn’t worth the trouble to get into the game, and risk their image and positioning in the market by making a series of offers. On the other hand, service-sector companies offering something ‘perishable,’ as well as high-margin firms such as spas, which appeal to human desires rather than basic needs, are natural candidates for exploring these mechanisms to fill empty spaces.”

Typical customers of discount shopping sites in Latin America are men and women ages 25 to 45 who have Internet access and belong to the middle or upper class. “These are people who have credit cards and access to broadband,” Pereira notes. His site, Groupalia, has improved market penetration in Chile because of growing use of debit cards there, “something that has not advanced on the whole in the rest of the region. As for consumer behavior, it is similar in every country.”

Nevertheless, the sector must overcome the myths and obstacles that still influence online buying decisions in the region, such as a lack of consumers with credit or debit cards and those who fear of using them for online transactions. There is also some trepidation among consumers that the product that is ultimately delivered to their homes will be very different than the one they viewed on the computer screen. Doubts also remain in Latin America about the mechanisms for returning products.

Subscribers receive tempting promotions by e-mail daily. “The disadvantage of this system could be the erosion of prices, and that users get accustomed to using services only when they are available at a discount,” notes Galli. “The discount coupon system is generally utilized so that consumers get to know the product, and after that, they continue to buy it without the initial discount. The biggest risk is that, given the rapid availability of new offers, consumers will only buy something because of its price.”

An Evolving Market

In Argentina, more than 20 networks are operating, the most popular of which are Groupon, Groupalia, Pez Urbano, LetsBonus, Agrupate and Click On. There is even a site, Dealandia, which brings together all the discounts in a single place.

Remolins expects that the competition will only increase as popularity of the sites grows. "To the extent that this competition adds too much pressure toward pushing discounts higher, aimed precisely at capturing and retaining customers, the system could wind up being no longer attractive for the companies. Of course, the customers would be pleased. This would mean a price war among the companies to win over customers.” Alternatively, he says, competition could “put downward pressure on the fees paid to the sites, thus making not only the clients happy, but the companies happy, too. There would be a price war among sites such as Groupon to capture business. Of course, there could also be a mixture of both things happening.”

Doubts exist about the point at which customers will tire of having their e-mail inboxes packed full with group buying offers. “What the sites should do to retain their customers is to work on personalization, so they don’t overwhelm users with thousands of offers that are not of interest to them," Galli notes. "The coupon companies are working on a model in which they believe that, out of 40 offers that they launch each day, people will only receive one,” that is personalized to their needs.

Groupalia also anticipates that more players will enter, “but many will also be falling by the wayside," Pereira points out. "There are lots of young companies that are going to spend a lot on gaining a position. Getting scale is going to cost a lot. For example, we develop technology for use in 10 countries, but a local company is going to have to amortize its [technology development] costs in just a single location."

In any case, Remolins believes that the “Google effect” could be produced. That is to say, for a time at least, “a single player concentrates so many advantages of scale and network that it wins the lion’s share of the market.” Regueiro, of the University of Palermo, suggests that a purging process will leave only a few winners standing. “The thing is to figure out who those winners will be, whether they will be the companies who are already successful today, or the new intruders who come in and conquer. It seems clear that it is easy to enter and compete, and that makes it easier for offers to proliferate. But whenever there is a mania on the Internet, things naturally wind up at some point being concentrated in just a few hands.”