Groupon Continues To Diversify Its Business

Groupon’s (NASDAQ:GRPN) stock has recovered significantly in the last few months, thanks to the change in leadership and the company’s investment in key growth areas of mobile, ‘local’ and ‘pull’. While these efforts are focused on reviving its bread and butter ‘daily deals’ business, the company has been making some more strategic investments to diversify into other areas. These include physical goods, travel, and now discount coupons. Groupon recentlya  launched digital coupon business with 25,000 coupons from 5,500 different brands and retailers in North America. ^[1]

These discount coupons differ from the company’s daily deals in the sense that Groupon will earn revenue only when users redeem these coupons and make purchases. In case of daily deals, the company collects the money upfront regardless of whether a customer actually makes use of the deals or not. This suggests that the incremental revenue opportunities may be relatively low. However, given the market opportunity, Groupon can add meaningful value to its stock if it can take even 10% share of the U.S. online discount coupons market.

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The Market Opportunity For Groupon

Groupon will get a commission fee from merchants based on the sales made through the discount coupons. The company’s advantage lies in its wide reach, which makes it easy and quick to market new products and services. At the end of 2012, Groupon had close to 80 million subscribers in North America which suggests that discount coupon business can be an instant hit as it gets promoted across this vast subscriber base. The online coupon market in North America stands at $4 billion annually, and the total coupon market is somewhere around $28 billion indicating that in-store coupons still account for the majority of the industry’s revenues. ^[1] Nevertheless, we expect the sales of online coupons to increase at a much faster rate as the overall e-commerce market continues to grow. The increased usage of Internet-enabled mobile devices has facilitated the customer shift to online shopping. Groupon, along with Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), is going to benefit from this trend.

The company’s net revenues stood at less than $2.5 billion in 2012, and will show only mild growth in 2013. ^[2] Keeping that in perspective, $28 billion discount coupons market seems like an attractive investment. In fact, Groupon can add almost 15% to its value if it is able to grab even 10% share of the online coupons market. This will imply incremental revenues of close to $400-$500 million over the next few years. The long term opportunity can be much bigger, especially as the share of online coupons in the overall discount coupon sales increases.

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1. Groupon gets into coupons, challenging RetailMeNot, USA Today, Nov 20 2012 [↩] [↩]
2. Groupon’s SEC filings [↩]