Why Groupon Could Face an Early Stage Death
HM is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
JPMorgan Chase & Co (NYSE: JPM) announced recently that it is acquiring an online coupon site for $35 million. Bloomspot is a local discounts and coupon shop that competes with coupon sites like Groupon (NASDAQ: GRPN), LivingSocial and a bunch of other smaller players.
Deal Confirms a Trend
In the past couple of years, credit card issuing banks have started working with merchants directly or indirectly to provide their cardholders discounts, promotions and rewards. This model is slightly different from a single merchant reward card (like an airline or a hotel rewards card) where customers accrue redeemable points upon purchases - here cardholders get discounts and coupons directly from multiple partnered retailers and merchants, in some cases directly at the point of sale.
JPM's deal with Bloomspot confirms an ongoing trend in this industry:
- Discover, which is a payment network scheme that also issues cards, does not work with discounts directly, but it has a direct relationship with many merchants so its cardholders can get cashback rewards and discounts if a Discover card is used for purchases, especially online purchases that are made after going through the Discover's cardholder account website. Customers who use this functionality end up substituting services like Groupon and LivingSocial.
- American Express is another card issuer/network that works off a three-party system just like Discover - it has partnered with Foursquare Labs, which is a location-based service that allows users to share their locations and earn loyalty rewards, to provide its cardholders coupons when they "check in" into the merchant's location using the Foursquare smartphone application.
- Bank of America has already ventured into the discounts world, albeit by itself - it introduced discounts at certain retail shops in the form of cashback rewards. The company had also tested its new program called "BankAmeriDeals" that would offer online retail discounts to cardholders based on their spending habits.
- Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) have introduced their own services offering local deals as well. Facebook (NASDAQ: FB) had introduced its own Facebook deals that eventually was shut down after a few months of testing. Companies like Google, Amazon and Facebook are more capable of leveraging their vast customer databases to gain valuable information about the customer, and they do not have to spend excessively like Groupon to add new subscribers.
Groupon's Service Has Become a Commodity
This trend challenges the business model offered by conventional coupon and discount websites, and there are other factors such as subscriber distributing channels, acquisition costs, knowledge of customer preferences and payment trends that could work against Groupon.
- Distribution channels
Banks, social networking sites and companies like Google and Amazon can offer local deals to their customers through a variety of channels such as email, online banking and maybe ATMs in case of banks, mobile wallets (e.g. Google wallet) and social networking pages of merchants and retailers themselves. Some of these companies have already well-established relationships with retailers because of the businesses they are in, and they can leverage these relationships to get better deals for their customers without incurring large costs.
Plus, Amazon and Google actually have their own expanding ecosystem that offers a myriad of services to customers that can serve as deal distributing channels.
- Acquisition Costs
Groupon needs to spend a considerable amount of money to add new subscriber email addresses and grow its customer database. From 2010 to 2011 alone, Groupon's acquisition costs rose more than $30 per email address, which was an increase of more than 485%.
On the contrary, other companies like Facebook, Amazon, and most banks like Chase can use existing databases of customers to offer deals, and they can easily get increased attention from retailers and merchants due to great exposure to potential customers and existing alliances.
- Does Groupon Have The Customer's Perspective?
Unless a subscriber is a heavy user of Groupon's deals, Groupon will not be able to develop business intelligence around subscriber's preferences. Its database is relatively new. If you are a Groupon subscriber, how often have you seen deals that do not appeal to your preferences or even your demographic?
The company has no intelligence to target its subscribers in a way that the service would be actually valuable to them. It has to rely on the subscriber entering his or her preferences manually, and that does not cover the entire realm of possible purchases that the subscriber would make. Card issuers, Amazon, Google or even Facebook are in a much better position to gain knowledge about customer's preferences and target deals to them accordingly.
- Mobile Wallet + Discounts: A Deadly Combination
With increased smartphone usage, the payment industry is seeing cardholders adapting to new payment technologies such as NFC-based mobile wallets like Google Wallet and Isis.
Google Wallet allows cardholders to store payment card details on a cloud server that links to their smartphones, which can then be used to make payments using contactless NFC standards. The Google Wallet gives an opportunity for cardholders to get better deals through Google's exclusive Google Offers services that provides local as well as online deals.
Isis is another virtual wallet solution. It comes as an application installable on a smartphone, and allows customers to checkout by simply saying their names, which the merchant verifies against their Isis accounts. Isis also offers local discounts that instantly show up on customers' smartphones.
If mobile payments are going to be the next big thing in payments, Groupon's single channel discount service could very well be outdated.
Groupon's service has become a commodity that faces no barriers to entry. The trend of companies in various industries entering the couponing business has already started and is growing. In this situation, will Groupon's model continue to work? For the next couple of years and beyond, Groupon faces an uphill battle as it gets attacked from all directions by various market entrants. If the company does not change its business strategy proactively, the company could very well face an early stage death.
HMJoshi has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Bank of America, Facebook, Google, and JPMorgan Chase & Co. and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, American Express Company, Facebook, 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.