Can Groupon Stay Afloat with a New Business Model?

Kathleen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Groupon has been struggling to keep its head above water. Investors have not been happy with Groupon (NASDAQ: GRPN) since its quarterly earnings began to appear after its remarkable IPO in 2011. The stock price has consistently dropped from its $20 per share to as low as $2.77. While GroupOn’s exciting IPO is comparable to Google’s (NASDAQ: GOOG) IPO in 2004, investor opinion took a turn for the worse once Groupon’s quarterly earnings became known. Google is now one of Groupon’s close competitors with Google Offers, a popular website that features daily deals. Google launched this site in January 2011 after it tried to acquire Groupon in December 2010 and failed. The main difference between deals offered by Google and the deals offered on GroupOn is that irrespective of the number of people that accept the offer, Google’s deals are still valid.

In part, Groupon has been recording massive losses in its share prices because investors developed a lack of confidence in the company’s ability to show a steady and significant topline earnings growth that can consistently produce positive margins. Many investors are also concerned about the sustainability of Groupon’s business model. While Groupon has recorded rapid revenue growth in the last two years, its operating margins have shown huge losses.

Groupon started with a local business model for daily deals. It grew its revenues to an incredible $1.6 billion in 2011. This was an increase of over 415 percent from the 2010 financial year to the 2011 fiscal year. However, it sustained a 14 percent operational loss in 2011 despite an astonishing growth in revenue. 

A Change in Groupon’s Business Model

Although Daily Deals remains its core identity, Groupon has been working on diversifying its original business model. The new additions include Groupon Payments which launched in September and enables a point of sale (POS) system via iPhone or iPod. Another addition is Groupon Now!, which is a product that enables merchants to sell their unused inventory or capacity at a discount to improve earnings and profits. Groupon Rewards was launched in May, and Groupon Goods and Getaways provides customers with physical goods and vacations. The company’s goal is to make Groupon the core solution provider to local businesses and a major platform for local commerce.

New Acquisitions Contribute to the Business Model

While Groupon is nearly a monopoly in the online Daily Deals business, it recently acquired BreadCrumb and Savored in its attempt to provide deals tailored more towards merchants. BreadCrumb is a restaurant management software system built especially for the iPad. Savored, on the other hand, was a Groupon competitior. Its discount pattern is time-sensitive and slightly smaller - at 30-40 percent - compared to Groupon’s typical deals that often go up to 75-80 percent discounts. BreadCrumb was acquired in May, while Savored was acquired in September.

Rising Competition

With 38 million active users, Groupon has begun to leverage its brand identity in daily deals. Google and Groupon’s biggest competitor is Amazon (NASDAQ: AMZN) - through LivingSocial, its subsidiary. While LivingSocial has more resources and better sales than Groupon on daily deals, Groupon is still the most popular brand among its competitors. Amazon’s LivingSocial offers a deal a day with discounts as high as 90 percent on local products and services. Amazon’s LivingSocial also allows users to purchase deals to give as gifts from your smartphone.

Although Groupon has the resources to outperform smaller competitors by either forcing them out of business or acquiring them, the company has been struggling to keep its head above water for some time now. So while a new business model might be just what the company needs, it would be wise to let Groupon prove they can swim before making an investment.

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