Groupon’s (NASDAQ:GRPN) stock recovered significantly in 2013, gaining roughly 135% as the company saw a turnaround in its North American operations. Daily deals still remains the biggest part of its business but the company is now planning to diversify into other streams. As we look back on 2013, we find Groupon rebuilding itself by focusing on mobile commerce, local merchants, and allowing subscribers to search deals rather than pushing email marketing. In this analysis, we’ll discuss Groupon’s key developments for 2013 that will set the tone for the next year.
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Turnaround In North American Business As Groupon Shifted Its Strategy
Groupon’s business in North America saw a turnaround in 2013 as the company focused on its strategies for ‘mobile’, ‘local’ and ‘push’. Even though revenues declined in international markets, the North American region saw growth of over 35% in the first nine months of 2013 over the same period a year ago.
The company is reducing reliance on its ‘push’ strategy to bring more sustainability to its business. The push strategy essentially refers to marketing of deals through direct emails. The company is shifting its focus to ‘pull’ which refers to users finding deals by searching themselves instead of relying on Groupon’s emails. That’s a good sign, and points towards repeat customers and demand for the company’s services. Direct email accounted for less than 40% of North American transactions in both the second and third quarters of 2013.  In addition to this, over three-fourths of merchant contracts that Groupon signed in June 2013 in North America opted to feature in the company’s ‘pull’ marketplace with monthly recurring deals. 
Groupon is heavily banking on growth in mobile and Internet usage. The company stated that it expects the number of smartphone users to grow fivefold over the next 5 years, and this could double the global Internet user base.  This trend plays right into the hands of Groupon and other e-commerce companies such as Amazon (NASDAQ:AMZN). If the company can get its take rate, merchant base and products right, it can leverage the growth in mobile commerce to connect users with local businesses. The company saw over 9 million downloads of its mobile apps globally in Q3 2013, with total cumulative downloads (at Q3 ending) of 59 million.  This is still a fraction of the company’s total subscriber base and there is a significant opportunity to grow. The trend is encouraging as the mobile platform’s share of North American transactions stood at more than 50% in Q3 2013. 
Acquisitions And Expansion Beyond Daily Deals
Groupon has been making acquisitions and investing in diversifying its business to reduce its reliance on cash flows from daily deals. In September, the company 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. The weakness in daily deals business in the Asia Pacific and Latin American markets has weighed on the company’s growth. Diversification is necessary for stability and predictability of its business in the long run.
In August, Groupon also announced plans 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 delivery time, this move will aid the company’s margins. However, capital expenditures could rise and this might put pressure on Groupon’s cash flow in the near term. Groupon has mentioned that it intends to sell some specific items at the 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.
New Products Hitting The Market
Groupon introduced discount coupons in late 2013. 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.  Nevertheless, we expect online coupons sales 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 can tap this opportunity and potentially add 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.Notes: