Struggling coupon giant Groupon Inc (NASDAQ:GRPN), recently promoted Eric Lefkofsky to the role of CEO, replacing the ousted Andrew Mason. This gave Groupon a post earnings boost, with the share price jumping 19% , as well as a $300 million share buyback. This bit of positive news can be seen as a start of Groupon’s recovery after two brutal post-IPO years, but there are still challenges ahead, and there are some questions that will follow Mr. Lefkofsky on Groupon’s future.
How do you keep local merchants coming back?
This has been one of Groupon Inc (NASDAQ:GRPN)’s recurring problems since the company went public. Local merchants that advertise on Groupon run into problems regarding customers only shopping when they have Groupon vouchers, creating a dependency on Groupon for customer traffic.
Groupon Inc (NASDAQ:GRPN) has combated this by limiting how many coupons are sold to customers as well as time limits for purchases, but the dependency problem still lingers. Groupon sells long-term deal contracts with retailers to post the same deals periodically.
The goal is to help these merchants out, but has instead been more of a short-term stimulus than creating long term customers, but businesses don’t mind discounting prices to get customers through the door. A quick browse on Yelp Inc (NYSE:YELP) mobile app shows numerous local businesses offering discounts or free items for “checking in” there, while Yelp rewards regular customers with profile badges, increasing foot traffic. The discounts are smaller (at face value) than Groupon Inc (NASDAQ:GRPN), but Yelp’s clientele also pay for premium advertising. This helped Yelp Inc (NYSE:YELP) earn $55 million in revenue last quarter, and report a 62% increase in premium business accounts year over year.
Groupon Inc (NASDAQ:GRPN) has to encourage people to be regular customers at local businesses, rather than just be a Groupon bargain hunter. Otherwise, local merchants will not sign on to Groupon and instead deal with Yelp Inc (NYSE:YELP) or other means of advertising.
How will you take advantage of the increase in mobile users?
One important bit of news from Groupon’s second quarter earnings was the increase in mobile transactions in North America by 30-50% year over year. This drove the $40 million increase in quarterly earnings year over year, as more people rely on mobile phones rather than desktop computers.
However, this has not appeared to benefit local advertisers. Local business went from being 65% of Groupon’s revenue to just 57%, not where Groupon needs to be. As people become more mobile, they will want to know about a certain local business climate. With Groupon catering to high-end local businesses that thrive when offering specialty coupons at a deep discount, a lot of local businesses are left out.
Having cheaper, smaller discounts would broaden the business base, resulting in more mobile purchases. An industry study shows that 7 out of 8 proposed deals are rejected before even going to market, limiting the selection. If Groupon were to relax that policy, more local businesses would be inclined to use Groupon. Non-Groupon foot traffic would increase and boost same-store sales, an important profit source for small businesses.
What will you do differently?
This might be the most important question facing Mr. Lefkofsky in the wake of Andrew Mason’s departure. During Mr. Mason’s tenure, Groupon fell from its $20 IPO price to $5/share, and declines in daily deal purchases and local business involvement. With a new captain, investors will be wanting to see what he does to revamp the company, like the expectations being placed on Zynga Inc (NASDAQ:ZNGA)’s new boss Don Mattrick.
Mr. Mattrick’s company is in more dire straits than Groupon, but the dynamics are the same. Zynga Inc (NASDAQ:ZNGA) started out hot selling online games on Facebook, then fell off, and is now trying to retool. Like Groupon, Zynga is now trying to use the upsurge in mobile-phone users to its advantage.