Groupon last week reported another quarter of disappointing earnings as its core business stagnated, sending its stock down 30% to an all-time low of $2.76. Photo: Reuters
Chicago/ San Francisco: Groupon and its
compatriots in the much-hyped daily deals business were supposed to
change the very nature of small-business advertising.
Instead, it is the daily deal vendors that are racing to
change as evidence mounts that their business model is fundamentally
flawed.
Groupon last week reported another quarter of
disappointing earnings as its core business stagnated, sending its stock
down 30% to an all-time low of $2.76.
Its biggest rival, Living Social, is piling up losses, and part-owner Amazon.com earlier this month recorded a quarterly loss after writing down its Living Social investment.
Both companies are racing to diversify, venturing into
more generic ecommerce areas such as off-price sales through ventures
such as Groupon Goods and LivingSocial’s Shop. Meanwhile, upstarts are
developing new variations on the discount coupon theme.
“It’s clear that they need to have other models besides the email daily deals business,” said Aaron Kessler, an analyst at Raymond James. “The problem is that a lot of these newer businesses have lower margins.”
Critics say the torrid growth that enabled Groupon to go
public at $20 a share just a year ago was fueled by merchants buying
into a new type of marketing that they didn’t fully understand.
The discounts offered through the Groupon coupons have turned out to be costly, and the repeat business they generate uncertain.
“A lot of people made the mistake of overlooking the price-promotion part of this model,” said Utpal Dholakia, professor of management in Rice University’s Jones Graduate School of Business.
“Normal advertising, yellow pages advertising, it really
doesn’t have a price promotion, it doesn’t have discounting component.
That’s what makes this difficult to do again and again.”
A Raymond James survey of roughly 115 merchants that used
daily deals services during the fall found that 39% of merchants said
they were not likely to run another Groupon promotion over the next
couple of years.
The top reasons cited were high commission rate and low rate of repeat customers gained through offering a promotion.
The survey also found that 32% of the merchants reported
losing money on the promotions, and nearly 40% said the Groupon offer
was less effective than other types of marketing.
“I’ve always maintained that this is a hype driven
business built on an unsustainable business model both for the merchants
and for Groupon,” said Rakesh Agrawal, principal analyst at reDesign mobile, a San Francisco consulting firm.
Existing customers interested in signing up for daily
deals have waned—Groupon reported last week that the average revenue per
active customer (defined as an account that has purchased a deal from
the site in the previous 12 months) fell to $63.96 in the 12 months to
30 September from $76.49 a year earlier.
The company has also suffered a string of high-level
executive departures as its market value has shriveled to just $1.8
billion, down from nearly $13 billion when it went public.
Groupon has also been dogged by controversy over its
accounting methods, though it said last week that it had $1.2 billion in
cash and cash-equivalents with no long-term debt.
Beyond the daily deal
Groupon cites an array of new services and features that
it hopes will make the company a crucial partner for many types of
merchants over the long run.
Groupon Goods, a more traditional discount online retail operation, already account for much of the company’s revenue growth.
“We’re investing in the development of products and
technology that help our merchants run their businesses more
effectively, from payments and point of sale (POS) services to our
evolving suite of marketing services including the daily deal,” said Kal Raman, Groupon’s senior vice-president of international operations, in an email.
“By this combination we become a true merchant partner,
serving the yin and the yang, both the operational and marketing pieces
of each business.”
A key part of that is the massive sales force that Groupon has built to market its daily deals to small businesses.
The relationships it has built with merchants and a
retail subscriber base that recently hit 200 million could help it beat
back competition in daily deals and broaden its offerings, some analysts
say.
Groupon controls about 50% of the daily deals market
share in North America, according to Yipit, a New York City-based daily
deal industry tracking firm. “I don’t think the industry it is
completely going away, though it will settle,” said Arvind Bhatia, analyst with Sterne, Agee & Leach.
“There may be some market share shift to the benefit of Groupon.”
The margin pressure, though, could be here to stay.
Groupon laid off 80 employees last week, mostly in sales, as it seeks to
bring more automation to the sale process and control costs. But a big
sales force is central to the company’s strategy.
“It’s a business that scales with bodies, with humans,” said Karim Faris of Google Ventures,
which invests in online coupon company WhaleShark Media. “I’m a
technology investor, and I like businesses that scale with technology.”
WhaleShark and other competitors such as Coupons.com have
focused on bringing traditional coupons into the digital era. Such
companies typically get a small percentage of revenue for each sale
generated by their coupons.
“Groupon is working with small retailers to give big discounts, irregularly,” said WhaleShark chief executive Cotter Cunningham. “We work with big retailers, to give small discounts, every day.”
Dholakia of Rice University said executives at new
startups have told him they plan to make daily deals more attractive to
merchants by offering them a bigger cut.
He also cites interest in new models around “perishable
inventory,” such as restaurants and spa services, for which big
discounts might make more sense for the merchants.
As such competition builds even as the original deals business flattens, there are no easy answers for Groupon.
“The heyday for the daily deals are behind us,” said Bhatia. Reuters
(Nivedita Bhattacharjee in Chicago and Alexei Oreskovic in San Francisco; Sarah McBride contributed to this report)
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