Amazon is Taking Over the World… of Daily Deals
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon.com (NASDAQ: AMZN) is well known for emerging as a dominant seller of books and consumer electronics. To continue a blog series that has detailed Amazon.com's efforts to expand revenues through the sale of everything from pet supplies to streaming video, this article takes a look at Amazon.com's role in the rapid expansion of daily deals. This industry, which has risen in popularity thanks to companies like Groupon (NASDAQ: GRPN), is expected to grow to $3.6 billion in online sales in 2012 and reach $5.5 billion in sales by 2016. The potential of this growing sector of e-commerce is evident by Groupon's recent revenue growth from practically zero in 2009 to over $2 billion over the past 12 months:
Groupon Takes the Lead... And Circles the Drain?
Groupon is the current industry leader and largest pure-play purveyor of online daily deals. A first-mover, leadership position with enormous revenue growth over the past couple of years sounds like a great business, right? Well, a quick look at Groupon's share price since it went public shows there is more to this industry than just revenue growth:
So while customers may love Groupon's daily deals, there is a little bit more to the story than just revenue growth. It turns out that Groupon's business model is extremely easy to replicate both by large competitors such as Amazon.com's LivingSocial and Google's (NASDAQ: GOOG) Google Offers, but also a growing number of smaller websites. My local newspaper has its own daily deal website with the same types of deals as Groupon. So, long term success in this industry requires the ability to differentiate with unique features, the financial stability to invest in the business and the ability to stay off the SEC's radar.
Daily Deals Have Been Profitable
While Groupon still struggles to consistently generate earnings, there have been success stories in the world of daily deals. One example is Travelzoo (NASDAQ: TZOO), which has created a niche that fits somewhere in between Priceline.com and Groupon for travel deals. Travelzoo offers discounts both on travel deals to exotic locations that compete with Groupon Getaways as well as discounts on entertainment activities in specific cities that compete directly with Groupon's core local deals.
Despite being consistently profitable and generating annualized growth of 40% over the past 5 years, Travelzoo's stock price has been treated much like Groupon's in recent months. With a TTM P/E of just 14 and a TTM Free Cash Flow yield of 10%, this stock not only shows that this industry can generate solid profits but is also worth a look as an investment.
There is Plenty of Competition
Aside from smaller companies like Groupon and Travelzoo, some of the major players in the internet economy are potential competitive threats. As noted above, Google has its own daily deals site, Google Offers, which sells a combination of discounted goods nationally and local deals that have now reached over 40 cities in the U.S. This is a tiny portion of Google's operations and thus far does not seem to be an area of focus, but Google realized quickly after its failed bit to buy Groupon in 2010 that it'd be much less expensive to simply replicate Groupon's model than purchase the company. Google's massive scale and dominant positions in search, mobile and email provide it with a unique advantage that would serve it well if it decided to aggressively pursue Groupon's market share.
Amazon.com Has a Significant Presence
Recurring themes throughout this blog series are Amazon.com's strategic investments, diverse product offerings (frequently under multiple brand names) and the ability to invest its significant resources to become a formidable competitor. Here's how Amazon.com has already made its mark on the daily deal business with a combination of these moves.
Amazon.com's primary website has featured "Gold Box" daily deals for years. The company began offering these one-at-a-time deeply discounted deals well before Groupon came into existence, and the Gold Box is credited as being one of the primary reasons that "Cyber Monday" caught on and became an international phenomenon. Like many of Amazon.com's initiatives, these deals are designed to draw customers to the website with the hope of generating revenue from the sale of additional items.
Woot.com is a daily deal site that sells one item at a time with a touch of humor and personality mixed in to the transaction. Since its humble beginning in 2004, Woot! expanded to include daily deal sites for technology, home, sports, kids, wine and shirts. In 2010, Amazon.com purchased Woot! and its almost 3 million registered users. Since then, the site has continued to run with the same personality that has helped infuse a social element into the daily deal business.
LivingSocial is currently the #2 daily deals site behind Groupon. In late 2010, Amazon.com invested $175 million in LivingSocial and made an additional investment in 2011 to bring its ownership in the company to 29%. Aside from the obvious investment in an upstart competitor to Groupon, Amazon.com gained a lot more through this investment. For example, Amazon.com has often offered wildly popular deals such as a $10 Amazon.com gift code for $5. The ability to use LivingSocial's list of millions of customers to encourage visitors to Amazon.com is a savvy marketing move.
Perhaps more importantly, Amazon.com's strategic investment in LivingSocial provided the ability to roll out its own daily deals site, AmazonLocal, powered by LivingSocial. AmazonLocal has already expanded into 31 states and offers a comparable array of deals to both Groupon and LivingSocial. In addition to adding to the company's extensive customer list and data, this website provides yet another way to cross market products or even offer discounts on goods that are overstocked in Amazon.com's warehouses.
Amazon.com is a Big Player in Daily Deals
I bet a lot of people didn't realize that Amazon.com has a four-pronged, diverse set of daily deal offerings. These deals range from DVDs for $3 in the Gold Box to tennis lessons down the street from your house for 50% off the regular price. Amazon.com has recognized the potential of the deal market and has leveraged its investment in LivingSocial to provide a diverse array of deals that add to its customer list and potential sales channels. Expect more growth in this area in the future, whether it be through continued expansion of AmazonLocal or perhaps acquisition of the remainder of LivingSocial (if the price is right).
As with many aspects of Amazon.com's business, successful revenue growth doesn't always translate into income. In Amazon.com's most recently quarterly earnings, the company reported a $169 million impairment of its LivingSocial investment as a result of LivingSocial's ongoing losses. So, it will be important to determine if Amazon.com can carve out a piece of the daily deals market that generates income (like Travelzoo) or suffers continuous losses (like LivingSocial thus far).
Know What You Own
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BrewCrewFool owns shares of Amazon.com and Google. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com, Google, and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.