Groupon Might Bounce Back

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

The stock price of Daily Deals pioneer, Groupon (NASDAQ: GRPN) has gone down substantially ever since its IPO back in late 2011. The company made a lot of improvements in its business and made changes in terms of strategy, but unfortunately its bottom line hasn't seen significant improvement. Groupon doesn't expect to churn out a net profit in Q4, even though it racked up record sales in the holiday season already. Highly reputed tech hedge fund, Tiger Global spearheaded by Chase Coleman took a sizable stake of 9.9% in Groupon. A deeper look at Groupon's business is necessary to see if it can bounce back in 2013. 

Growth in Users

Groupon's management has built a local platform that operates on a huge scale by using technology and a very strong salesforce to rope in merchants. The result, is an eCommerce company that operates in 48 different countries, and at the end of Q3, has more than 200 million subscribers amongst which ~40 million are active users, and it added more than 10 million users Y/Y from Q3 2011. 

'Sticky' Relationship with Merchants

Groupon works with more than 250,000 merchants that signed up with Groupon, often on a regular basis, to sell off excess inventory or capitalize on unused service capacity and/or to generate new clients and get more exposure. Also, Groupon built value added services for merchants in order to position themselves as a partner for them in the long run. It built a very low cost payments platform for merchants, to serve the more administrative needs of these merchants. And secondly, it built an iPad app that operates as a Point of Sales (POS) system for restaurants called BreadCrumbs.

These two value-added services will make merchants very sticky with Groupon and not go to other rival deal companies such as Amazon (NASDAQ: AMZN), LivingSocial and Google's (NASDAQ: GOOG) very own deals services, Google Offers and the Germany based, DailyDeals. While the impact of this investment cannot be seen immediately, in the long run, it will be able to overcome these deep pocketed rivals, by having a stronger bond with these merchants. Groupon already boasts of very high customer and merchant satisfaction rates. 

Mobile Standing

Currently, 1/3rd of all Groupon transactions are coming from mobile devices alone in North America, and Groupon is now one of the largest mobile-based companies. Groupon provides a great experience on mobile and is doing very well on this platform because it shows location specific deals around the user. In addition, mobile users spend 50% more than other customers. 

Adoption of SmartDeals

SmartDeals is Groupon’s deal personalization system sending out very customized deals to users based on previous buys and searches, which stimulates users into making more purchases and it has resulted in a 25% increase in North America’s email purchase rate. And Groupon is in the process of rolling out SmartDeals in Brazil and Europe. 

Groupon Goods 

Groupon Goods is at a Gross Billings Run Rate of ~$1.5 billion, which shows remarkable growth for a new product category. It is a great way to supplement the Email Deals Business and to drive customer engagement and growth. However, Groupon is walking into the turf of eCommerce giants, eBay and Amazon, which might not be a good thing, as both eBay and Amazon operate on an extremely large scale. And also, the goods business gives Groupon a much lower operating margin of 12%, compared to its third party revenue business, where it acts as an agent and doesn't take the title of the inventory.

Local eCommerce Platform

Groupon is out to building up a Local e-Commerce Marketplace for deals on demand. In the last year, the number of active deals in North America has increased to more than 27,000 deals. Building a local e-Commerce Marketplace makes intuitive sense, and Groupon has managed to build this platform by the power of its salesforce who went door-to-door and built relationships with Merchants, this is something that is not easily replicable. Groupon has built the scale, the infrastructure and the merchant relationships to fast-track this Local e-Commerce Marketplace. This could be a solid driver for its business in 2013. 

The Takeaway

Success in its business requires both technology skills to optimize the deal mix a customer is receiving as well as sales people to sign up newer merchants. Groupon has been criticized in the past for having a very high rate of marketing spend as a % of  total revenue. However, marketing spend is becoming more efficient and has dropped down to 12%, which is definitely a step in the right direction. It has a pretty strong balance sheet, generates Free Cash Flow, and trades at a substantial discount. If it can further streamline its operations, gain more momentum on Goods and a better footing in Europe, Groupon's fortunes might go through a major inflection point from its current standing in the next year.

ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of and Google. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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