We Reduce Our Price Estimates As Groupon’s Business Sustainability Comes Under Question Again

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Groupon’s (NASDAQ:GRPN) stock dropped following its Q1 2014 earnings announcement as the company once again failed to impress investors. Even though its gross billings, the number of active customers and the overall revenues saw a significant jump, the profits shrank considerably. Much of Groupon’s topline growth can be attributed to its recent acquisitions, increased discounts and higher marketing spend. However, the impact on the bottomline once again casts doubt over the company’s ability to sustain its business in its current form and improve its profitability. Groupon wanted to stem the decline in its revenues, especially in EMEA (Europe, the Middle East and Africa) and Rest of World (international markets excluding EMEA and North America). It seems to have done it, but has paid a heavy price for it. We have updated our price estimate for Groupon to $6.38 as we are concerned about the substantial decline in its gross margin and notable increase in marketing expenses.

Here is what we believe Groupon needs to change soon.

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Groupon Seriously Needs To Reduce Irrelevant Emails

The blast e-mail of numerous offers to its customer bases has been questioned for some time.  Even though the company is trying to address this issue, there are still far too many irrelevant emails being sent by Groupon to its subscribers everyday. This has hurt its brand image and has diluted the value proposition. It would make much more sense to send fewer emails but a more targeted list of deals that a customer is more likely to buy and redeem.

The company sends 250 million emails everyday to its subscribers and this has helped it push upfront sales of Groupons. A lot of these groupons tend to expire before a customer has a chance to redeem them. The average number of unused Groupons remained same in the first quarter of 2014 following a decline throughout last year. This suggests that a lot of customers redeemed their unused and pending groupons in 2013 which may help the demand going forward. However, this also signals undesirable customer experience which will hinder the company’s organic growth. Having relevant deals with minimal upfront sales push is what may bring customers back to Groupon’s portal over and over.

Pull Marketplace Is Still Small, Groupon Needs To Step Up Efforts

Groupon needs to ramp up its efforts of encouraging its subscribers to search for deals and explore its marketplace (‘pull’ strategy) instead of relying on emails (‘push’ strategy). It needs an image makeover, and accelerating such subscriber shift will smoothen out its topline growth and help reign in expenses. In March 2014, about 9% of Groupon’s traffic in North America is comprised of searches on its online marketplace. This implies that email related traffic still accounts for more than 90% of the company’s traffic. Given that Groupon has touted its ‘pull’ strategy for the last few quarters, its progress thus far appears to be a little disappointing. Customers who consciously search for deals tend to spend more and have shorter redemption cycles which suggests that the company’s operations can get a significant boost if it accelerates customer shift from emails to marketplace.

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