Groupon Inc (GRPN): A Bad Deal For Merchants & Investors

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Groupon Inc (NASDAQ:GRPN)Shares of Groupon Inc (NASDAQ:GRPN) recently plunged again, after analysts from Piper Jaffray announced that they were expecting the group discount site’s revenue outlook for the June quarter to miss estimates. To make matters worse, Groupon announced that Faisal Masud, the VP and GM of Groupon Inc (NASDAQ:GRPN) Goods, was leaving the company to possibly join office supply giant Staples.

Masud’s departure was disappointing for investors, since Groupon Goods, its e-commerce arm for discount goods, had been considered one of the company’s only remaining bright spots. Masud’s departure comes only two months after the company fired its founder and CEO, Andrew Mason.

Is it time for investors to simply give up on Groupon Inc (NASDAQ:GRPN), which has plunged 45% over the past 12 months, or is there some flicker of hope left in this deeply troubled company?


Groupon Inc (GRPN): Going, Going, Gone...

Can Groupon Goods succeed?

Groupon Inc (NASDAQ:GRPN) Goods was started two years ago, and is the company’s first push into the realm of traditional e-commerce that Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) have long dominated. Groupon Goods sells discounted products separately from its local coupons business.

Last month, Groupon Inc (NASDAQ:GRPN) announced that Goods had an annual run rate of $2 billion in global billings, or 37% of Groupon’s total gross billings of $5.38 billion. Former CEO Mason had stressed the importance of Goods on the company’s margins during the company’s fourth quarter earnings call.

Masud was a former Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) executive who was hired by Groupon Inc (NASDAQ:GRPN) in 2012 to help expand Groupon Goods into a larger e-commerce community, which the company’s executives aspired to be a “searchable marketplace” on par with Amazon or eBay.

While the growth of its e-commerce arm might be good for Groupon’s top line, striving to become the next Amazon.com, Inc. (NASDAQ:AMZN) or eBay is a lofty and costly goal. Yet over the past year, Groupon’s expenses have been more tightly controlled, and revenue growth has outpaced expenses by a wide margin.


Groupon Inc (GRPN): Going, Going, Gone...

However, Groupon’s expansion into e-commerce shows that it knows that its primary business model of daily deals and coupons has no real competitive barriers. Since its inception in 2008, a large number of Groupon Inc (NASDAQ:GRPN) clones, which have closely replicated its business model, have appeared.

Fierce competition

Although Groupon’s initial foray into e-commerce hasn’t made much of a dent in Amazon or eBay Inc (NASDAQ:EBAY)’s market share, it has attracted some unwanted competition. Amazon’s Local Deals have recently evolved into AmazonLocal, a dedicated site for local deals that closely mirrors Groupon Inc (NASDAQ:GRPN).

In addition, Amazon.com, Inc. (NASDAQ:AMZN) has 209 million active users compared to Groupon’s 41 million, and Amazon is generally more trusted than Groupon by both shoppers and investors. Amazon also owns LivingSocial, another local deals site which will inevitably be integrated into AmazonLocal in the future.

eBay also entered the daily deals market last year when it rolled out Daily Deals, which focuses on physical products, and Lifestyle Deals, which focuses on dining and services. These services are all tied back to its main auction site, which are all integrated into its PayPal payments system.

Ancillary, not primary

What Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) have shown investors is that a local deals business is better when its an ancillary business segment, rather than a primary one. Although Amazon has been notorious for producing rather small profits off of monstrous revenue growth, the key to the company’s success is its self-sustaining revenue growth. To date, no company has been able to touch the company’s dominance in e-commerce, which means that just like Wal-Mart Stores, Inc. (NYSE:WMT), Amazon’s profit growth and margins aren’t that significant as long as the top line keeps growing.

Meanwhile, eBay has been able to achieve higher profitability than Amazon by focusing on PayPal, its most successful business segment. In addition, its dominance of the consumer-to-consumer auction market has given it a market that is somewhat separated from Amazon’s world. Therefore, it was easy for both companies to expand from their mainstream positions into the niche world of daily deals.

Groupon Inc (NASDAQ:GRPN) has to do the opposite, unfortunately, and climb out of its niche market to challenge a mainstream one that is already dominated by two major players.

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