Groupon (NASDAQ:GRPN) recently announced the acquisition of travel app Blink, which primarily deals in curated same day hotel bookings in Europe. With Blink’s 2,000 hotel partners in eight European countries, the company intends to bolster its Groupon Getaways business.  Broadly speaking, Groupon is trying to diversify as its faces pressure on its core daily deals business. The Asia Pacific and Latin American markets are still weighing on its growth, and the company needs to optimize its product mix, take rate and merchant reach in order to improve its performance in these regions. Diversification is necessary for stability and predictability of its business in the long run.
However, the acquisition may not make a material difference in the near term as Groupon Getaways accounts for just 1% of the company’s value according to our estimates. Moreover, Blink was launched just two years ago and still has a lot of ground to cover. The company is still new in this segment and will need to compete with well-established brands including Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN). However, there is a growth opportunity here and Groupon can leverage its brand and existing user base to boost Blink’s operations.
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The Significance Of Blink Acquisition
Blink specializes in last minute booking and is exclusively available on the mobile platform. Priceline mentions that close to 70% of the bookings on its mobile app have less than 24 hours notice.  A report by Google states that the number of mobile searches related to last minute booking jumped 411% between June 2011 and June 2012, whereas the number of desktop searches fell by 79%.
The gross online travel bookings in Europe accounted for 37.7% of the global online travel market in 2012. Though the percentage contribution might decline in the future as higher demand from Asia-Pacific and Latin America outpace demand growth from Europe, the European online travel market offers higher growth opportunities compared to the U.S. The European online travel sales are expected to grow at a CAGR of 5.7% till 2016 as compared to 4.8% CAGR for the US online travel market. The global online travel market is expected to hit $520 billion by 2016 (Read Priceline Has Huge Growth Potential In The European Online Travel Market). If Groupon can take even 1% share of this growing market, it will result in upside of about 20% to our price estimate. That’s not going to come easy, and certainly not soon. Blink’s acquisition will help, but Groupon has a long way to go to prove itself as a formidable competitor in this arena.
Physical Goods Sales Is Another Way To Diversify
Groupon is planning to invest in building a warehouse network that will allow it to ship physical goods to its customers directly instead of relying on its merchants.  Besides improving the delivery time, this move will aid the company’s margins. However, capital expenditures could be high and there will be pressure on Groupon’s cash flow in the near term. Groupon has mentioned that it intends to sell some specific items at best possible prices, and isn’t interested in selling everything just yet.
Although Groupon’s deals business has crumbled in international markets, the silver lining is that the brand is recognized globally. The company can leverage its large user base to successfully expand its physical goods retailing business. There is plenty of opportunity to grow given the explosive growth in global e-commerce volume and increased usage of Internet-enabled mobile devices.
Market research firm Forrester expects U.S. online retail sales to grow rapidly and take market share away from physical stores. This is clearly evident from the comparison of Amazon’s growth with that of traditional brick-and-mortar retailers such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Target (NYSE:TGT) and Best Buy (NYSE:BBY). Forrester further predicts that the U.S. online retail market will reach $262 billion in 2013, registering 13% growth over 2012.  Although the online channel still accounts for just 8% of total retail sales in the U.S., the future growth potential is huge and Groupon cannot afford to miss this wave. Another market research firm eMarketer forecasts U.S. retail sales to grow at a CAGR of 14% over the next few years, increasing from an estimated $225 billion in 2012 to close to $434 billion in 2017.  While the U.S. growth outlook certainly looks promising, international markets can offer even higher potential in the long term.
Our price estimate for Groupon stands at $6, implying a discount of about 45% to the market price.Notes:
- Groupon’s Press Release [↩]
- No Reservations: Now’s the Time for Last-Minute Hotel App, Bloomberg Businessweek, Sept 10 2013 [↩]
- Groupon Eyes Warehouse Network For Goods, The Wall Street Journal Blog, Aug 27 2013 [↩]
- US Online Retail Forecast, 2012 To 2017, Forrester Research, March 13 2013 [↩]
- US Retail Ecommerce Outlook—What’s Driving Growth?, eMarketer, Apr 18 2013 [↩]