Why North America Is The Biggest Segment For Groupon?

Groupon (NASDAQ:GRPN) is revamping its business in an attempt to implement the right strategy that will help it create a long-term sustainable business. The year 2013 saw a revival of its North American operations whereas the international markets continued to remain a cause of concern. We recently changed the structure of our pricing model for Groupon and now break down its valuation into three different markets – North America, EMEA (Europe, the Middle East and Africa) and Rest of World. According to our estimates, North America is by far the most valuable segment constituting roughly 50% of Groupon’s value. This can be primarily attributed to higher number of active customers, slightly higher gross billing per customer and higher take rate. Additionally, Groupon’s strategic initiatives will bear fruits in North America first and international markets later.

Our current price estimate for Groupon stands at $8.45, implying a premium of about 5%-10% over the market price.

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North America Is Leading In Almost All Metrics

Compared to 14.3 million average active customers in EMEA and 9.8 million in Rest of World, Groupon had 19 million average active customers in North America in 2013. In addition to this, its take rate for the region stood at 53.4% during the same year compared to 37.5% in EMEA and 33.4% in Rest of World. The company has strong brand recognition and merchant relationships in the U.S. and is looking to invest further in expanding its merchant network. As far as gross billing per customer is concerned, North America again comes out on top with a figure of $150 as compared to $139 for EMEA and $95 for Rest of World.

New Strategic Initiatives Will Again Favor North America

Groupon has made it clear that it intends to expand its physical goods business. Last year the company 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. It 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 much better recognized in the U.S. The company can leverage its large user base to successfully expand its physical goods retailing business domestically. Most of physical goods sales is likely to come through direct sales channel wherein Groupon is the owner merchant, and is responsible for storage and delivery of goods and merchandise. This implies that gross billings and net revenue are same and take rate is 100%. As the proportion of direct sales increases, Groupon’s overall take rate in North America will go up.

Groupon also introduced discount coupons in the U.S. 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. We expect online coupons sales to increase at a much faster rate as the overall e-commerce market continues to grow. This effect will be more prominent in North America.

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