After Groupon’s Jump Has Anything Really Changed With Its Business?

by Trefis Team
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Groupon’s (NASDAQ:GRPN) stock has surged by almost 50% since the company ousted its CEO Andrew Mason. While this suggests that the market may be expecting the company to turnaround its business under a new leadership, it is unlikely that Groupon will find a permanent replacement until next year. So what else could be driving the stock?

It seems that several analysts have taken a neutral stance, but an upgrade from Deutsche Bank sent the stock soaring by 15% last month. It appears that Groupon is now shifting its focus from new subscriber acquisition for its daily deals to customer retention through better service and useful features. The company will open up its service to all users and not just the subscribers and will allow for direct deal marketing as well. In addition to this, Groupon will place more emphasis on its business development on mobile platform, which seems to be the right thing to do.

However, the bitter truth is that the business model still faces significant issues and it is unlikely that Groupon will be able to turnaround its business in the near term without dramatic changes. The number of Groupons sold per subscriber are declining, its international business is under pressure, competition is growing, and the business model is deteriorating in mature markets.

We believe that Groupon may need to invest in more robust aspects of e-commerce and diversify its revenue streams. It could potentially look at developing a payments platform or a marketplace to sell products directly similar to what online retailers such as Amazon (NASDAQ:AMZN) do. Even when eBay (NASDAQ:EBAY) was reviving its marketplaces business, it had a thriving payments business segment in the form of PayPal.

Check out our complete analysis of Groupon

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 that are not supposed to expire. In extreme cases, the minimum expiration date stands at over five 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 the 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.

Negative Consequences For Local Businesses

While Groupon claims that more than 90% of businesses that are featured ask to be featured again, many businesses often find Groupon to be a loss making proposition for them. They don’t tend to break even in terms of costs, and the lack of repeat customers and additional sales makes it difficult for businesses to operate. According to a study conducted by Rice University, Groupon promotions were not profitable for 32% of the businesses with 40% of the respondents, indicating that they would not run a similar promotion. As long as Groupon keeps its gross margins (the commission it earns over every Groupon) around current levels, there will be a sizable number of merchants who will continue to remain unprofitable, especially those in the product based businesses.

Our price estimate for Groupon stands at $5, implying a discount of about 40% to the market price.

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  • commented 1 years ago
  • tags: AMZN EBAY GRPN
  • I'm CEO and Co-founder of Peekadso. Our company was founded by three friends with a crazy idea...lets take on Groupon and Living Social by creating a company that would benefit everyone, both, businesses and consumers alike.

    From a consumer point of view Groupon, Living Social, and other deal sites just means one thing, great deals on things to do around your city. Who doesn't like to get a good deal every now and then?
    From a business owner's standpoint it means having to discount their services by half, and then share half the profit they make with those deal websites.

    So, a $20.00 meal offer on Groupon sold at $10.00 by a restaurant would only bring in a $5.00 profit to that company. Many local businesses running deals on other deal sites actually operate at a loss just to get new clients in the door! This is horrible for not only our local businesses that provide tangeble goods but almost every businesses worldwide who decide to run deals on these types of sites.
    The Peekadso difference...
    • We allow businesses to have full control of creating deals. They choose how many coupons to release...from one coupon upwards to 50,000 coupons.
    • We've lowered the industy's minimum standard of 50% discounts to 35% discounts. It's up to the company's discretion whether they'd like to give away higher discounts.
    • Consumers do not pay upfront for a deal on our site. They just click on a deal they like, claim the coupon, and print it out at a later time whenever they're ready to redeem the coupon. Consumers will never miss out on a deal they don't have the money at the moment to aquire.
    • Merchants running deals on our site get the full profit from any deal redeemed. There's no commission paid per deal, there's no split of profits whatsoever.

    So with that being said, you may be wondering how we make any money ourselves.
    We make our money by charging companies a subscription fee to use our services. Our service fee is currently $45.00 per month during our website's beta phase. After a few months that fee will go up to $90.00 per month. However, any company who signs up with us during our beta phase will be grandfathered in to the $45.00 rate forever. This is our way of thanking companies who believed in us and helped us grow during our initial phases.

    Even at $90.00 a month we're still a great bargain for companies who want to run deals on our site. For example, we're in talks with a local skydiving company who ran a Groupon. They sold $140,000 worth of skydives through Groupon...Groupon took about 35% of their sales. With us they would have just paid $45.00 for that month.

    Now onto the issue we're facing...We have this amazing product that would benefit everyone but no one knows about us. Consumers wouldn't want to join a site that has no businesses advertising deals and businesses don't want to join a site that has no consumers. It's a catch 22, but one that we're slowly growing out of. We now have a few restaurants and a couple of other companies on board. Our success relies on local businesses signing up and sharing deals...consumers will go whereever the deals are.

    We're writting up a press release and will soon be letting the world know we're here to set things right.

    Alberto Borjas
    Peekadso CEO & Co-Founder
    Cell: (786) 269-3388
    albertborjas@gmail.com