Groupon Stock Dips on Concerns Over Merchant Demand

While daily deals may be an effective marketing channel for merchants, the coming six months might see low usage as many of these merchants do not plan on running daily deals in the near future, according to a survey conducted by Susquehanna Financial Group and the daily deal research firm Yipit. ^[1] A possible downside in the daily deal market quite expectedly dragged down Groupon’s (NASDAQ:GRPN) stock which fell to below $20-levels on Tuesday, January 3. Significant price movements like the one above highlight the volatility in Groupon’s shares, which is likely to continue till the lock-in period for its key shareholders expires sometime in May. Groupon leads the daily deal market and shares this space with players such as LivingSocial and Google (NASDAQ:GOOG) Offers.

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Silver Lining for Groupon: Merchants Like Daily Deals

Previous incidents such as Groupon’s bakery fiasco did shed light on whether merchants find daily deals a risky proposition. However, the survey, covering around 400 merchants, shows that 8 out of 10 merchants enjoyed working with daily deal companies. This might put to rest some doubts over daily discount companies, as merchants indeed find them an efficient marketing tool compared to traditional advertising in print or electronic media.

The reason behind Groupon’s stock slide, however, was that 52% of the merchants are not expecting to run daily deals for the next 6 months, with around 24% planning to feature just one deal in that period.

This brings into focus the good merchant/bad merchant dilemma. Merchants have to provide heavy discounts while running a daily deal, as much as 75% at times. Merchants who benefit greatly from a daily deal might be satisfied enough to not require such deals for a long time. On the other hand, merchants who could could not attract loyal users may refrain from running another loss-making daily deal. The combined effect of the above two scenarios can lead to extended periods when merchants won’t run daily deals. And this could reflect in Groupon’s Q4 2011 results as well, as the company might need to find new merchants to sustain revenues, which means increased expenses on sales force.

We recently launched coverage of Groupon with a $13 price estimate. Refer our note on why Groupon’s valuation has fluctuated significantly over the past 2 years.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Groupon Shares Drop on Concern About Merchants, Reuters, 3rd Jan 2012 [↩]