2012 was a troubled one for Groupon Inc (NASDAQ:GRPN), with its stock price falling ~76%. The company’s shaky business model and poor management execution is mainly responsible for this massive loss for the investors. Groupon witnessed a huge fall in its daily deals globally, which was down by ~21% on a sequential basis in the third quarter. On the brighter side the company's other segment – Groupon Goods-- is growing at a faster pace. However, it operates with a gross margin of just 12%, which impacts the overall profitability. Consequently, there is a huge burden on its cash flows, with its operating cash flow decreased by ~35% y/y in its last quarter. Even though the company is currently at a zero debt position, I feel the company needs a strong and quick turnaround for improving its whole situation.
Unstable Mobile Platform
One of the major disappointments for Groupon is its failure to monetize the increasing usage of mobile in the US. Mobile, which could have been a new growth avenue, remains poorly exploited. Although Groupon’s mobile access in the United States has seen partial improvement, the overall performance is still below par. The number of unique visitors has grown at a compound monthly growth rate of just ~1.5%, which is still below the total mobile internet growth rate of ~2.2%.
Losing the International Shine
Another major reason for Groupon's failure is its inability to strategize its growth activities in the European region, which accounts for ~80% of its international billings. The company was unsuccessful in planning the right incentive model to promote its franchises in this region. Moreover, Groupon's previous team in Europe rapidly expanded its business, and its billings grew from zero to ~3 billion annually in those two years. In this expansion process the company neglected the basic infrastructure, customer satisfaction, merchant selection, and focused only on the cheapest high volume deals. The company even flooded the small merchants with too many deals, which they were not able to handle, leaving customers unsatisfied. This resulted in poor ROI for the merchants, which led to a fall in repeat purchases. The company paid a big price for this with its deteriorating performance in Europe.
The Competitive Pressure
The industry continues to see immense competitive pressures, with new entrants flocking around this retail channel - the major ones being Facebook Inc (NASDAQ:FB) with its “Gifts” and “Coupon” offerings, and Google Inc (NASDAQ:GOOG) with a “new deal everyday.” Let’s discuss them in detail.
Facebook - The company added new sources of revenue in 2012 with its coupons and gifts, giving a tough fight to Groupon in this space. It launched Coupons for discounted offers that allow businesses to promote special discounts on their page. It is a simple tool that will help Facebook increase its user engagement. Users just have to “Like” a company page on Facebook, and the recommendation might come up under a Facebook ad. The new service is already showing great performance, with many company pages running out of coupons. Another feature is Facebook Gifts, which allows users to buy and send gifts to their friends without leaving the site. Under this service, the company has partners such as Starbucks and 1800-Flowers.com for providing various options of gifts. The service is already rolled out in the US, and the other countries will follow soon.