Groupon Inc (GRPN): I’ve Got The Goods On This Company

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GrouponI know that many people in the financial world like to make fun of Groupon Inc (NASDAQ:GRPN). I’ve heard Jim Cramer on his Twitter page saying he doesn’t know if Groupon sells anything other than massages. Analysts have worried that gross billings growth is slowing down. However, there is a drastic change going on at Groupon, and for patient investors this company holds real opportunity.

Sell Someone Else’s Stuff At A Discount, What A Business!
Groupon’s original business model was pretty simple and predictably brought out competition. The company’s business is essentially to suggest that retailers of all stripes heavily discount their products and services and let Groupon market these deals. While many have questioned the lack of a “moat” in this business, the simple fact is, this business is still growing.

However, Groupon Goods has the potential to change the retail landscape. The holy grail of retail is being able to offer an exclusive product or service. Since every Groupon Goods offer is exclusive, the company doesn’t have to worry about competitors undercutting their pricing. This is part of why companies like Target Corporation (NYSE:TGT) are working with their suppliers to get products that are “Target exclusives.” This helps insulate the retailer from online competitors like Amazon.com, Inc. (NASDAQ:AMZN).

Exclusivity Is Key
Physical retailers have to pay salespeople and customer service reps, and maintain expensive facilities. Target has been able to maintain a superior margin by carrying exclusive items, and focusing on clothing and higher margin sales. This accounts for the company’s over 31% gross margin in the current quarter. In theory, Amazon has an advantage over Target, in that they don’t have the over 1,700 stores that Target maintains. However, as Amazon has expanded, they do have warehouse expenses that didn’t used to exist. The company recently reported a gross margin of over 24%, but investors may not know what gross margins to expect from Amazon until their distribution buildout subsides.

Groupon Goods offers customers products and services that can’t be bought elsewhere at the Groupon price. Groupon doesn’t have to maintain as many warehouses because of their size. Think of Groupon Goods like a whole bunch of exclusive deals located all in one place.

Groupon seems to have an advantage over both Amazon and Target because of their two very different businesses. The company’s traditional Groupon service is very high margin because of the lack of inventory. In the current quarter, the company’s traditional business gross margin was 87.21%. Groupon Goods on the other hand is a fast growing, but lower gross margin (11.98%) business. Groupon’s advantage is, they can leverage the high margin traditional business against the much faster growing Goods business. That is exactly what they did in the current quarter, with a combined gross margin of 31.97%.

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