Is the Daily Deals Model Toast?

After a string of setbacks, daily deals sites face challenges in the coming year.

Groupon employee Alicia Bowen works at the online coupon company's Chicago offices Thursday, Sept. 22, 2011.

Groupon employee Alicia Bowen works at the online coupon company's Chicago offices in 2011.

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Just a few months ago, it seemed a new daily deals site popped up every day to clog the inboxes of unsuspecting consumers, each new venture trying to imitate successful companies in the lucrative new marketplace and capitalize on young urbanites with money to spend.

"The reason why this space took off as quickly as it did is because "local" had been this nut that no one in the online world was able to crack," says Michael Tavani, co-founder of Scoutmob, a mobile phone-based local deal company operating in 13 major cities across the country.

When Groupon managed to finally break into the space, there was a lot of interest and a lot of investors eager to ride the upswing of the fledgling industry, Tavani says.

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But these days, the only people that seem to be flocking to the industry are those who are predicting its demise. And they might have good reason. Shares of E-mail coupon company Groupon have tanked nearly 80 percent since they went public last year. Rival LivingSocial confirmed last week it will lay off 400 workers, about 10 percent of its workforce.

"The industry is no longer benefiting from the explosive growth it was experiencing even a year ago," says Sean Spielberg, data product analyst at daily deals aggregator Yipit.

So is the daily deals model dying? Can giants such as Groupon and LivingSocial survive long term in a space that's been so fragmented?

Despite the string of bad financial news for big players in the space, Spielberg isn't convinced it's lights out for the troubled industry. It's just going through growing pains, he says. After a massive proliferation that brought the tally of firms in the arena to almost 500, smaller competitors are now falling off, Spielberg says, getting scooped up by larger fish in the sea, consolidating the space and reshaping it into something new.

[Money: 5 New Ways to Save if Groupon Closes Up Shop]

But while larger companies might celebrate toppling less competitive rivals and "streamlining" the industry as some have put it, it's exactly that mega-company mindset that some think put the industry on the rocks in the first place. Companies such as Groupon and LivingSocial raised millions of dollars to expand their businesses, which ushered in explosive growth but also saddled them with a tall order to bring in just as many millions for their investors.

"Groupon and LivingSocial grew too quickly for their own good and now they're coming back down to earth," Tavani says. "I don't think local should have gotten that big and I don't know if local can support a business that big."

Long-term survival of these niche firms will require reevaluating the approach in the market beyond simply consolidating the number of daily deal sites experts say. That's already happening somewhat as more of these sites specialize into verticals such as restaurants, travel, and goods, and expand offers outside the boundaries of the United States.

[Earlier This Year: Daily Deal Sites Push Premium Memberships]

"There is still a business in what they're doing, the core local deals," Spielberg says. "If they want to return to growth, they'll definitely have to be looking at other options."

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Meg Handley is a reporter for U.S. News & World Report. You can follow her on Twitter or reach her at mhandley@usnews.com.