Groupon: Evaluating Rich Williams’ First Year At The Helm

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November 3 marked the one year anniversary of Rich Williams taking over as Groupon (NASDAQ:GRPN) CEO. He was promoted to CEO, from COO, at a time when Groupon’s gross margins were spiraling down and the company’s share price had plummeted over 65% in the previous ten months. In a bid to turn around the company’s fortunes, Mr. Williams announced a slew 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 and active customers in North America but took a toll on profits.

In the first nine months of 2016, Groupon’s revenues were largely flat year-over-year (y-o-y) at $2.2 billion but its net loss increased to $142 million, compared to a profit of $67 million in the first nine months of 2015, owing to significantly higher marketing expenses. Notwithstanding the increase in losses, the company’s share price is up over 30% year-to-date. In this note, we evaluate Mr. Williams’s first year performance in terms of how Groupon’s increased marketing expenses have impacted the company’s top line and active customer growth.

Marketing Costs As A % Of Operating Expenses, Revenuegrpn-33Considering that Groupon 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 six months of 2016. In Q3 2016, Groupon’s marketing expenses were $88 million or about 13% of its revenues in the quarter.

Impact On Gross Billings

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Marketing expenses contributed 4.1% of Groupon’s gross billings in the first half of 2015. This increased to 5.4% in Q4 2015 and to 6.8% in Q3 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 seven quarters. The same trend can be seen in the company’s revenues and gross profit. grpn-31Impact On Customer Base

Groupon’s growing marketing spend helped increase its active users from 40.6 million at the end of September 2015 to 44.5 million at the end of September 2016. The effectiveness of Groupon’s marketing expenses can be gauged from the fact that the marketing spend per new user declined from about $119 in Q4 2015 to $68 in Q3 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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