Will the Daily Deals Market Survive?
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few weeks ago I addressed the question whether or not Groupon (NASDAQ: GRPN) really provides any value to the consumer market? In short, my answer was no, it does not. Not everyone agreed with my answer.
Many investors only look at the numbers on a spreadsheet to determine the worth and value of a company. But this is a mistake; investors must look at what added value a company brings to the marketplace. Does the world need another widget-maker? Or will this widget be cheaper, better, faster, sleeker? Does this widget-maker bring something we didn’t have before? If the answers are no, the company rarely succeeds.
A business cannot just offer a service; it has to offer a value-added service. It is a simple concept, but one that got lost somewhere in the dot com boom, and lost again in the age of social media. There has been a resurgence of companies that provide a service without necessarily adding additional value to the marketplace. Groupon is high up on the list of companies that offers an enjoyable service, but doesn't necessarily offer more value.
Now Groupon’s main competitor, LivingSocial Inc. (owned in part by Amazon (NASDAQ: AMZN)) is about to reduce its staff by 9%, or 400 employees, as the market for daily deals and other flash discounts continues to dry up. LivingSocial employs roughly 4,500 people.
The “daily discounts” product market has not grown since the IPO of Groupon one year ago. The IPO was the largest tech debut at the time. But since then, shares have declined rapidly. Google offered $6 billion for Groupon in 2010. At the time of the IPO the company was valued at $13 billion. However, today Groupon is valued around a much lower $3 billion.
LivingSocial said earlier this year that it had no intentions of going public, having learned its lesson by watching the Facebook (NASDAQ: FB) and Groupon IPO troubles. LivingSocial reported a $565 million loss for the third quarter, on revenue of $124 million, according to Amazon (who owns a 30% stake in the company). Amazon, a normally healthy and strong company, took a $169 million third quarter loss related to LivingSocial, a major hit in the behemoth’s quarterly earnings. It was Amazon's first major loss in more than nine years. Amazon invested $175 million in LivingSocial in 2010.
More signs that the “daily deals” market is doomed are rumors that Groupon CEO, Andrew Mason, may be on his way out. Mason, 32, founded Groupon in his 20s and led it to become the fastest ever web company to record $1 billion in sales, according to Forbes magazine.
Mason has no delusions about his stability as CEO. Mason said, "Here's a news flash: our stock is down about 80%, it would be weird if the board wasn't discussing whether I'm the right guy to do the job. It's their chief responsibility to ask that question."
Groupon posted a loss of $2.98 million in the third quarter.
Tech companies that are more “entertainment” than “need” based, such as Facebook, Groupon, and LivingSocial are faced with the two great business conundrums: serve the buying public, or the merchants whose services are sold? Keeping the public happy (giving them what they want at a price they can afford) does not always equate to helping merchants meet their goals (make money).
Since its November 2011 IPO, Groupon has lost over 81% of its value, as the reality failed to live up to the hype (not unlike Facebook). When looking at a company, investors must consider more than what the company is worth on paper and in assets, but also what the company offers the market. What value does it add? Can the market survive without this company? Or would its demise leave a notable hole? What is the goodwill?
Investors in eBay (NASDAQ: EBAY) should also take careful note of the proceedings at LivingSocial and Groupon. The auction site has rolled out “Lifestyle Deals,” an offering that looks an awful lot like Groupon. eBay now offers daily deals on services (not products - that's a different offering within in the site) to members that are similar in nature to LivingSocial and Groupon.
More competition may be a good thing in the “daily deals” market, if there is a market at all for daily deals. Groupon currently has 53% of the market share. However, given eBay's current membership, business partners, and deep pockets may make it just the company to give Groupon a run for their money. But before worrying too much about the damage the competition may do to Groupon and LivingSocial, ask whether or not the new eBay program will even survive.
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, eBay, and Facebook. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!