Daily Deals Still on the Radar at ReachLocal Inc.

Gordon ReachLocal Inc. may have shuttered its Groupon competitor in December, but that doesn’t mean the $375 million Woodland Hills online advertising company is giving up on daily deals and local Internet commerce. Just months after announcing plans to shut down DealOn.com, the Groupon competitor it purchased a year ago, ReachLocal said it’s as eager as ever to get into that space — it’s just rethinking the approach. Rather than focus on impulse purchases such as offers for restaurants and day spas, the company is crafting a strategy to facilitate local commerce between what it calls “need-based businesses,” such as local plumbers and dentists, and consumers, said CEO Zorik Gordon. “I am as excited about the potential for moving local commerce online today as I was about moving small business advertising dollars online seven years ago,” Gordon said. The company is using technology from its $10 million purchase of DealOn and leveraging it to transact commerce between consumers and plumbers, electricians and dentists, who have always been the mainstay of ReachLocal’s business. Gordon is mum about how exactly he will move these transactions online, but identifying the business model for doing this profitably is one of his key goals for 2012, he said. The task won’t be easy. Consumers typically are not interested in hiring a plumber until they desperately need one and after that need is met, they go back to being disinterested. The process does not easily lend itself to the Groupon model, which entices consumers to try a new restaurant or salon through a daily deal, said Kerry Rice, senior Internet and digital media analyst for Needham & Co. “You have to develop a product with a longer shelf life than today,” he said. One way is to offer a deal for a discount on the first service, regardless of when that service will take place, Rice said. Rice said it’s likely that ReachLocal will work with its clients to identify the right discount and time-frame, and then would disseminate that deal through partners such as Google or Yelp. Target consumers could be reached either through an email blast or directed to a website. ReachLocal could charge for the service on a fee basis, as it does for most of its existing services, or it could take a percentage of the transaction volume as Groupon does, Rice said. “It’s a good strategy,” he said. “Not too many companies in the daily deal space focus on that niche…They can be successful and drive revenue.” Slower growth The extra business would be helpful, given that domestic growth has largely leveled off. Reach Local revenues grew 29 percent to $375.2 million in 2011 driven largely by international growth of 72 percent. Domestic sales, however, have grown much more slowly due to the weak economy. “Small- and medium-sized businesses are like the canaries in the gold mine, Rice said. “They are the first to feel the pinch and cut ad spending and the last to start spending again.” Rice estimates that the average ReachLocal customer’s monthly advertising spend with the company grew 10 percent in 2010, but just 7 percent in 2011. It’s a solid showing in a tough economic climate, Rice said. But for a relatively new Internet company, Wall Street wants to see better. “Investors want to see that 10 percent growth continue,” he said. “When they saw that it slowed to 6 to 7 percent in 2011, people got concerned.” The market’s concern is reflected in its stock price. ReachLocal shares have fallen steadily since their 52-week high of $25.51 on April 28. The stock dropped to its 52-week low of $6.18 on Dec. 30 and has yet to recover in any significant way. Gordon said that while he keeps tabs on Wall Street, the ups and downs are not his main concern. “The market movements are not that important to me,” he said. “Over time, if we have a great strategy and we are able to execute, those things will work themselves out. We’re in a big space and it’s still very early. There are still hundreds of billions in transactions that will move online. This is a multi-decade potential and we’re focused on that.” Looking forward Toward that end, Gordon is also pursuing other opportunities in 2012. International growth will figure big again this year, as it did last year, he said. Moving local advertising online is still a new game in Europe, Australia and Asia, he said, and ReachLocal still has a first-mover advantage in those markets. The company opened new offices in the United Kingdom, Germany and Netherlands, and with the opening of its Tokyo office as of this month, it now has a presence in Asia. International revenues grew 72 percent in 2011 to $86 million. ReachLocal also will add mobile advertising to its service mix this year, Gordon said. Among other possibilities, ReachLocal will have the capacity to push notifications to consumers, perhaps even allowing consumers to act on those notifications immediately with their smartphones. And as it pursues smaller businesses for growth, Gordon said the company also will run some pilots with telesales this year. Until now, ReachLocal has done all its selling and outreach to prospective clients in person, face-to-face. Almost unheard of these days, Gordon said, the approach worked with small business owners. ReachLocal actually sells a complicated set of services that is difficult to explain over the phone, he said. “For an average monthly spend that’s thousands of dollars, we go to them,” he said. “We bring an outsourced digital marketing department to our clients.” That approach has allowed ReachLocal to build a global sales force of 796 individuals. But the door-to-door method could prove too costly as ReachLocal looks for growth in what Gordon calls “second tier” companies, smaller small businesses scattered across the globe. With technologies such as GoToMeeting, Gordon said it should be possible for the ReachLocal sales force to connect with small businesses owners digitally and walk them through online presentations rather than visiting them in person. “We would prefer to do it face-to-face, but as we get into smaller-tier companies, it may be more effective to do it this way.” Those concerns loom large at ReachLocal these days as the company works to reduce losses, which were $10.2 million in 2011, narrower than the net loss of $11.1 million in 2010. Rice believes the company is on the right track and he expects losses to narrow further to $2.7 million in 2012. “I think (telesales) is a good strategy,” he said. “It seeds the market as these businesses grow and eventually could be spending more advertising dollars online.”