Mercata's planned IPO highlights group buying trend

Thanks to a bundle of group buying sites that launched last year, shoppers can bid down the price of the latest must-have gadget or appliance by recruiting fellow Web consumers to buy in a group.

But while group buying has a "group hug" effect on shoppers, the practice is sparking fierce competition among companies scouting for their business.

Mercata, the most well-known and heavily financed of the rivals, plans to break from the competition and take the business to the next level by filing to raise $100 million on the public markets. The funds will make the company more attractive to partners and give it greater leverage to expand its reach. Backed by Vulcan Ventures, the investment firm of Microsoft co-founder Paul Allen, Mercata could also pave the way for widespread recognition of group buying.

Mercata, Accompany, ActBig, Zwirl.com and C-Tribe.com are all self-described group buying sites, promising consumers a better price on products if more people buy. Although not a new concept--shopping clubs such as Sam's Club, for instance, have been around since the early '80s--group buying on the Internet offers a unique way to draw consumers together.

"Group buying captures some of the more powerful dynamics of the Net--such as networking and access to information--to give consumers a better shopping experience," and lower prices, said Derek Brown, research analyst at WR Hambrecht. "They are leveraging the Net's global distribution to empower consumers on a massive scale."

For K.T. Moran, a new mom in Brandon, Fla., it meant getting a great deal on a baby car seat. She contacted ActBig, asking to pay about $150 for a $200 car seat and the company countered with an offer of $165 if 15 people did it together. Within a couple of days, she had nine buyers just from her neighborhood mom's group.

"This allows us to use our numbers as parents to get better prices," Moran said. "It's nice to have a chance to save a little money instead of getting gouged by the manufacturers."

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As group buying booms two major Net players are looking to test its waters. Last month, online giants AOL and Yahoo separately talked about plans to offer group buying services on their sites.

AOL said they plan to launch before the end of March: "The success of the group buying feature is dependent on numbers, and with 21 million members in mainstream USA, we've got the numbers," an AOL representative said.

Yahoo declined to say when it would launch its service.

Shopping engines, which include all demand-driven pricing sites such as Mercata, MySimon and Priceline, will account for 22 percent of total online shopping by 2003, or about $31.6 billion, according to a recent study from Forrester Research.

Yahoo and AOL will be a formidable threat to the current group-buying companies, said Andrew Bartels, an analyst with Cambridge, Massachusetts-based Giga Research.

"Because group buying is so new, AOL and Yahoo have a greater chance of making gains against these guys than they have against eBay (in auctions). But it's not a sure thing." Bartels said.

"Amazon, AOL and Yahoo have an advantage that they can expand the size of these buying pools by an order of magnitude," Bartels said. They can also attract more manufacturers because of their size.

But AOL and Yahoo, which aren't exclusively retailers, may need the current players to license group buying technology from one of the existing group buying companies. Accompany, which recently raised $35 million from investors that included DLJ and Netscape founder Marc Andreessen, plans to license its technology, as does Mercata.

Most group buying sites earn money through a commission that ranges from 3 percent to 10 percent. Some fees are higher for items such as cell phones because sellers will factor in the acquisition costs for that customer. The sites are also a good outlet for manufacturers looking to move products that aren't selling well, or to sell some products at a loss to get new customers.

"Sellers are so attracted to this model because they can acquire customers much more aggressively than they would traditionally through their retail channel," said Stephen Tsai, founder and chief executive of New York-based Actbig. "There's a quid pro quo."

Analysts say that while group buying can result in lower prices on particular items, the major brick-and-mortar retailers like Wal-Mart could still undercut those prices if they wanted to.

"The problem for a Mercata is that traditional retailers will always be able to get better deals from manufacturers because they turn greater volume--it's not even a comparison," said Seema Williams, analyst with Forrester Research, an Internet research firm based in Cambridge, Mass.

Mercata could also face trouble if it is perceived as just an online retailer, said David Menlow, president of IPOfinancial.com. Those companies have lagged in the stock market recently.

"The viability for Mercata as a public vehicle at this point is questionable," Menlow said. "The business-to-consumer market has seen a huge lag. Investors are not looking for retail sites on the Internet."

Meanwhile, major retailers are making the move online. In January, Wal-Mart revamped its online site with more products and services.

But Mercata says it has an advantage over mass retailers by scaling inventory for direct sale. Because it doesn't keep inventory, Mercata can act quicker on a product request through suppliers, said Tom Van Horn, company chief executive.

"That kind of responsiveness is hard for large companies to replicate," Van Horn said. For example, a supplier typically couldn't sell only 20 tennis rackets to a mass merchandiser, but it could sell that few through Mercata.

For shoppers, group buying can have its drawbacks, too. Going through the bidding process and waiting for a group to fill up can take weeks, and a shopper is not guaranteed that it will, Giga's Bartels said.

But the numbers show tremendous growth for the area, analysts say.

Roughly 60 percent of young Americans online have already used a pricing engine, whereas two-thirds of adult Internet shoppers have not used price comparison stores. Eleven percent of young online shoppers used sites such as Mercata "most or every time" they shop, according to Forrester's report.

"Group buying is popular with young consumers (16- to 22-years-old). They are more comfortable with experimenting with the price of a product because they have fewer dollars to waste," said David Cooperstein, director of online retail research at Forrester Research.

"They've also internalized the use of the Internet as a shopping vehicle," Cooperstein said. "As these younger generations age, group buying will become part of everyday shopping behavior."

Bellevue, Wash.-based Mercata, founded in September 1998, is also backed by Highland Capital Partners and Global Retail Partners, among others. Accompany is funded by former AOL chief technology officer Mark Andreessen, among other investors. ActBig is backed by executives from iXL and WebMD, and venture firm PS Capital Ventures.

New York-based Zwirl.com, which is privately funded, plans to license its technology to content sites and suppliers so that they can operate group buying sites.