Groupon’s (NASDAQ:GRPN) stock has surged by almost 50% since the company ousted its CEO Andrew Mason. While this suggests that the market may be expecting the company to turnaround its business under a new leadership, it is unlikely that Groupon will find a permanent replacement until next year. So what else could be driving the stock?
It seems that several analysts have taken a neutral stance, but an upgrade from Deutsche Bank sent the stock soaring by 15% last month. It appears that Groupon is now shifting its focus from new subscriber acquisition for its daily deals to customer retention through better service and useful features. The company will open up its service to all users and not just the subscribers and will allow for direct deal marketing as well. In addition to this, Groupon will place more emphasis on its business development on mobile platform, which seems to be the right thing to do.
However, the bitter truth is that the business model still faces significant issues and it is unlikely that Groupon will be able to turnaround its business in the near term without dramatic changes. The number of Groupons sold per subscriber are declining, its international business is under pressure, competition is growing, and the business model is deteriorating in mature markets.
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We believe that Groupon may need to invest in more robust aspects of e-commerce and diversify its revenue streams. It could potentially look at developing a payments platform or a marketplace to sell products directly similar to what online retailers such as Amazon (NASDAQ:AMZN) do. Even when eBay (NASDAQ:EBAY) was reviving its marketplaces business, it had a thriving payments business segment in the form of PayPal.
Growing Competition & Availability Of Shopping Alternatives
The fact that there are over 500 social buying sites across the world proves that Groupon’s business model can be easily copied. Low barriers to entry have encouraged several players to join the bandwagon. China alone has over 100 sites offering similar services. Groupon has tackled this situation by trying to acquire other competitors in smaller markets in a bid to expand.
Furthermore, group buying is not the only social shopping mechanism currently. Other alternatives include real time online shopping, reviews and recommendations, charity-based shopping and location-based shopping.
- Real time online shopping – Users can connect with each other and exchange ideas at the same time to get opinions about the products.
- Reviews and recommendations – Sites offering discounts for reviewing products or recommending them to others.
- Charity-based shopping – Websites such as iGive provide discounts to users for shopping through their network of affiliates.
- Location-based shopping – Users are given points when they enter and check in places; Four Square is a prime example.
Legal Troubles & International Business Under Pressure
Many critics allege that Groupon is ultimately selling gift certificates (in the name of Groupons). In most of the U.S., gift certificates, which are essentially shopping vouchers that are not supposed to expire. In extreme cases, the minimum expiration date stands at over five years. Many consumers have complained that some of their Groupons expire before they have a chance to use them. Groupon is already facing legal scrutiny in many U.S. states for a supposed gift card violation and any strict action on the part of regulators can significantly threaten Groupon’s revenue growth.
To add to its troubles, Groupon’s international business isn’t doing too well. Revenues from this segment declined 18.4% in the recent quarter reflecting the tough economic environment in Europe. The company is currently in the process of rolling out a deal personalization technology, a mobile app and a search feature in these markets which could result in performance similar to that in North America. We believe that the push towards mobile and the “One Playbook” strategy to consolidate systems can help the company achieve international growth.
Negative Consequences For Local Businesses
While Groupon claims that more than 90% of businesses that are featured ask to be featured again, many businesses often find Groupon to be a loss making proposition for them. They don’t tend to break even in terms of costs, and the lack of repeat customers and additional sales makes it difficult for businesses to operate. According to a study conducted by Rice University, Groupon promotions were not profitable for 32% of the businesses with 40% of the respondents, indicating that they would not run a similar promotion. As long as Groupon keeps its gross margins (the commission it earns over every Groupon) around current levels, there will be a sizable number of merchants who will continue to remain unprofitable, especially those in the product based businesses.
Our price estimate for Groupon stands at $5, implying a discount of about 40% to the market price.