Groupon & Daily Deals Competition
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the hottest tech IPOs of late was Groupon (NASDAQ: GRPN). The daily deal site turned down a $6 billion offer from Google and then went public, spiking to several times the Google offer. Then after the company's first quarterly earnings the stock dropped nearly 9 percent on larger than expected losses; in fact a profit had been expected. In early 2012 Groupon worried investors again when they restated their fourth quarter 2011 results to show worse than originally reported losses, and since Groupon’s IPO their stock has been cut in half. Even before Groupon went public regulators made them change how they calculated their revenue so that they used a more traditionally accepted revenue calculation.
However in the most recent quarter Groupon beat their own expectation and outside predictions. Revenue rose by 89% year over year and a drop in marketing expenses helped their bottom line, although since they hired over 1,000 new employees their expenses did rise. Groupon also predicted strong second quarter results and at least for a day they seemed to have redeemed themselves after months of rocky financial news.
This good news wasn’t long lived however because the Financial Industry Regulatory Authority (FINRA) announced an investigation into unusually heavy trading in Groupon's stock in the hours before Groupon announced its better than expected earnings. Groupon must walk a fine line going forward between marketing-based growth and reining in spending to become profitable. They need to get their house in order when it comes to financial disclosure because now they report to shareholders.
So where does Groupon stand now aside from the financial circus that they have become? They are still not profitable and they are still spending a significant amount on marketing. However they are also experiencing huge growth in revenue and some attempt looks like it is being made to watch their marketing expenses. Groupon did identify a market with their daily deals platform, with over 115 million users as of 2011 and it's expanding internationally. Groupon also benefits from prime mover advantage. But Groupon is not alone in this market -- in the United States its two largest competitors are LivingSocial and Google Offers.
LivingSocial is backed by Amazon (NASDAQ: AMZN), which invested $175 million into Living Social in 2011. In their latest round of funding LivingSocial raised $400 million, which values the company at $3 billion. Amazon, which owns 31% of LivingSocial, reported that in 2011 Living Social lost $558 million on revenue of $245 million. With 5,000 employees and over 60 million users LivingSocial is growing fast and spending faster.
Google (NASDAQ: GOOG) launched a service to compete with Groupon after their $6 billion takeover offer didn’t go through, called Google Offers. Google Offers has the same business model as Groupon and LivingSocial but at this point is available in far fewer locations and has far fewer deals.
Facebook (NASDAQ: FB) also launched a competitor to Groupon called Facebook Deals in 2011 -- it shut down after only four months. Facebook stated that “We've learned a lot from our test and we'll continue to evaluate how to best serve local businesses."
There are several high-profile competitors to Groupon in the United States, more internationally, and at this point they are not profitable. In fact LivingSocial lost so much money compared to its valuation that it makes Groupon's value, at roughly $6 billion, look somewhat cheap. Groupon is somewhat stuck -- if they decrease marketing spending by a large margin their growth could slow and their competitors could strengthen. If they increase marketing spending they will have a hard time becoming a sustainably profitable company. Additionally LivingSocial has been able to give discounts on Amazon products and gift cards in the past because of Amazon’s investment in LivingSocial. Amazon also launched a deal aggregation site called Amazon Local and the first provider of local deals on this site is LivingSocial. Going forward tying in more LivingSocial deals with Amazon products and aggregating them for all Amazon users to see on Amazon Local could give LivingSocial an edge.
The daily deals space is a competitive one and thus far not a profitable one. Google and Amazon are both backing their own offerings and the $6 billion offer by Google suggests that company is serious about daily deals. Other potential competitors, Facebook to name one, have decided that the daily deals business model doesn’t work for them and have bowed out. Going forward the daily deals space will boil down to just a few main players -- LivingSocial backed by Amazon, Google Deals made by Google and Groupon with prime mover advantage will be the big names. Slim margins and stiff competition are the name of the game in this business and overall it does not look very appealing.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com and Google. 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.
