Are Increased Marketing Efforts Really Helping Groupon?

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Since taking over as Groupon (NASDAQ:GRPN) CEO last November, Rich Williams has undertaken a series of bold measures such as significantly raising marketing investments, restructuring the international portfolio and moving away from certain low-margin goods businesses. These initiatives helped in improving sales in North America but took a toll on profits. In the first half of the year, Groupon’s revenues grew 1% year-over-year (y-o-y) to $1.5 billion but its net loss increased to $104 million owing to significantly higher marketing expenses. In this note, we focus on Groupon’s marketing expenses and how they are impacting the company’s top line and active customer growth.grpn-24

Considering the company is moving away from lower-margin businesses in international markets, we assume that most of its marketing expenses are spent in the North America and EMEA regions. Incorporating this in our calculations, the company’s marketing expenses increased from $110 million (8% of (North America+EMEA) revenues) in the first half of 2015 to $145 million (9.5% of revenues) in the second half of 2015, and to $182 million (13% of revenues) in the first half of 2016.

Impact On Gross Billings

Marketing expenses contributed 4.1% of Groupon’s gross billings in the first half of 2015. This increased to 5.1% in the second half of 2015 and to 6.8% in the first half of 2016. This consistent increase suggests that rising marketing expenses were not able to drastically increase Groupon’s gross billings, and the company consistently spent more on marketing per dollar of gross billings in the last six quarters. The same trend can be seen in the company’s revenues and gross profit.
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Impact On Customer Base

Groupon’s growing marketing spend helped increase its active users from 40.2 million at the end of June 2015 to 42.7 million at the end of June 2016. The effectiveness of Groupon’s marketing expenses can be gauged from the fact that the marketing spend per new user declined from over $44 in the second half of 2015 to $21 in the first half of 2016. This data suggests that Groupon’s current focus seems to be on increasing its active customer base rather than improving individual customer sales.

We expect the company to continue with its marketing efforts going forward to expand its active customer base, and it will likely reap benefits in the form of higher gross billings, gross profit and revenue in the seasonally strong fourth quarter. However, it will be interesting to see whether this expanding customer base sticks around when discounts gradually fade away, as operational profitability is likely to become a primary investor concern sooner rather than later.

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