Key Trends Impacting Groupon’s Outlook

Groupon (NASDAQ:GRPN), launched in November 2008 as part of The Point (an online community), is the largest collective buying platform in the world. The company features daily deals for various restaurants, spas and other stores in over 175 North American markets and 45 countries worldwide. Groupon serves as an alternate advertising medium for business owners. For each ‘Groupon’ sold, the company gives a share (typically 40-50%) of the coupon value to the business owner with the rest of the amount recognized as revenue. The company’s stock has fallen substantially since its IPO but has seen some mild support in recent months. In this article, we’ll look at important trends impacting Groupon which should give us some insights into its future.

Check out our complete analysis of Groupon

Positive Trends

Growth In Social Purchases

Research indicates that some of the primary factors that motivate individuals to act on an opportunity include its social aspect, scarcity and liking. All of these factors present a good opportunity for the online deals sector as a whole. Although the concept of social buying has existed for a while, it has gained a lot of traction in the last couple of years. Due to the presence of social platforms such as Facebook (NASDAQ:FB) and Twitter, the social nature of discounts has found its place among users who can interact with one another easily and discover opportunities quicker. Traditional coupons and sales do not offer discounts as deep as those offered by social buying sites. The collective nature of the deals enables customers to obtain deep discounts only if a certain number of individuals subscribe to it.

Mobile Presence Supporting Growth In North America

Growth in mobile commerce is driving the transformation of Groupon’s business in North America. In March 2013, around 45% of its North American transactions were completed on mobile devices in comparison to nearly 30% in March 2012. In the recent quarter, the share of Groupon’s North American customers in the total active customer base grew to 44%. We believe that this is a direct result of the popularity of the company’s mobile applications which aren’t available in most countries overseas currently. We expect the international business to ultimately see a transformation similar to that in North America as the app is launched in other countries.

Negative Trends

Growing Competition & Availability Of Shopping Alternatives

The fact that there are over 500 social buying sites across the world proves that Groupon’s business model can be easily copied. Low barriers to entry have encouraged several players to join the bandwagon. China alone has over 100 sites offering similar services. Groupon has tackled this situation by trying to acquire other competitors in smaller markets in a bid to expand.

Furthermore, group buying is not the only social shopping mechanism currently. Other alternatives include real time online shopping, reviews and recommendations, charity-based shopping and location-based shopping.

• Real time online shopping – Users can connect with each other and exchange ideas at the same time to get opinions about the products.
• Reviews and recommendations – Sites offering discounts for reviewing products or recommending them to others.
• Charity-based shopping – Websites such as iGive provide discounts to users for shopping through their network of affiliates.
• Location-based shopping – Users are given points when they enter and check in places; Four Square is a prime example.

Legal Troubles & International Business Under Pressure

Many critics allege that Groupon is ultimately selling gift certificates (in the name of Groupons). In most of the U.S., gift certificates, which are essentially shopping vouchers, are not supposed to expire. In extreme cases, the minimum expiration date stands at over 5 years. Many consumers have complained that some of their Groupons expire before they have a chance to use them. Groupon is already facing legal scrutiny in many U.S. states for a supposed gift card violation and any strict action on part of regulators can significantly threaten Groupon’s revenue growth.

To add to its troubles, Groupon’s international business isn’t doing too well. Revenues from this segment declined 18.4% in the recent quarter reflecting the tough economic environment in Europe. The company is currently in the process of rolling out a deal personalization technology, a mobile app and a search feature in these markets which could result in performance similar to that in North America. We believe that the push towards mobile and the “One Playbook” strategy to consolidate systems can help the company achieve international growth.

Our price estimate for Groupon stands at $5, implying a discount of 30% to the market price.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis