OpenTable’s Acquisition Sparks Investor Interest In Groupon, But The Company Needs To Address Some Deficiencies

Groupon’s (NASDAQ:GRPN) shares saw a mild rise of 4% following the announcement of OpenTable’s acquisition by Priceline. The increased demand for the stock can be attributed to the perception that the acquisition is an acknowledgement of value in structured location based businesses. Groupon certainly falls into this category. The company has pioneered local deals business and continues to grow its merchant base. In fact, it has outlined focusing on ‘local’ as one of the three key strategies it will employ to revive faltering sales. That means significant investment in the sales team that will reach out to more local businesses, including retailers, restaurants, spas and travel agencies. Although there may be suitable buyers who will benefit from Groupon’s vast database of local merchants, the company needs to fix fundamental deficiencies in its business before it can market itself as an attractive acquisition target. Having said that, we believe that Groupon will not seek a buyer if it is able to turn around its business. Instead, it will leverage its dominant market position to expand both in the U.S. and overseas.

Our price estimate for Groupon stands at $6.38 implying a slight premium to the market price.

Check out our complete analysis of Groupon

Groupon Needs To Fix Its Email System

The blast e-mail of numerous offers to its customer base 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 with a 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 the 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.

Groupon Needs To Encourage Users To Browse

Groupon needs to ramp up its efforts to encourage 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 a subscriber shift will smooth out its topline growth and help reign in expenses. In March 2014, around 9% of Groupon’s traffic in North America comprised 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 can accelerate a customer shift from emails to its marketplace.

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