Blue Skies for Groupon?

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

A great investment requires a good look at a company from various angles. In my previous post on Groupon (NASDAQ: GRPN), I highlighted why Groupon might bounce back, primarily based on its transitioning business model. To get a better idea of its strategic playbook, a SWOT Analysis would be very insightful and provide a deeper glimpse of its possibilities in the near and distant future. 

Strengths 

Industry Pioneer: Groupon has reaped the first mover advantage by building a huge network of more than 250,000 merchants, who depend upon Groupon on an often regular basis, to sell off excess inventory or capitalize on unused service capacity and to generate new clients. While the barriers to entry in the field are relatively low, signing up such a huge number of small merchants using a big sales force is not easily replicable. 

Subscribers and Users: Groupon managed to sign up an astonishing number of subscribers, and it now boasts of more than 200m subscribers and 40m active users and in the process built up a strong brand name in 48 countries.

Value Added Services for Merchants: Groupon has done a very good job of roping in the merchants, and being a real partner for them. It built a very low cost Payments Processing Platform for merchants, to serve the more administrative needs of merchants. And secondly, it built an iPad app for restaurants, BreadCrumbs. These two value-added services will make merchants very sticky with Groupon and also differentiates the company from the large number of Daily Deals operators.  

Groupon Goods diversifies away Groupon's excessive dependence on Daily Email Deals alone. And has grown at a phenomenal pace, it currently has a run rate of more than $1.5B. While Groupon's CEO has indicated that he doesn't envision Groupon to be the next Amazon (NASDAQ: AMZN), but the firm will be entering the ballpark of the eCommerce giant anyway. 

Mobile Platform: Roughly 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, and provides a great experience on mobile by showing location specific deals for the user. In addition, mobile users are inclined to spend a lot more than other customers. 

Merchant and Customer Satisfaction: Merchants and customers alike are satisfied with Groupon's services. Groupon is rated amongst the highest in the eCommerce category for not only customers but also for merchants, according to research firm, Foresee.  

Weaknesses

Repeated Losses: While the operating history of Groupon only dates back to October of 2008, it hasn't managed to grow its bottom line, in spite of phenomenal growth in its top line. Repeated losses made jittery investors dump the stock in large numbers. 

Lack of Recurring Deals: Merchants often don't repeat deals after getting a decent customer base and exposure to new customers. This is a problem because Groupon has to spend a decent amount of money for Merchant Acquisition, and this cost goes down the drain if the merchant is reluctant to sign up for a number of deals. 

Entry into a Low Margin Business: Newly entered goods business has a much lower operating margin, relative to its daily deals business. Amazon which is the 800 pound gorilla in the eCommerce space can be taken as a good example of very low margins in a high volume platform.

Opportunities

The Size of the 'Local Market' is roughly $3 Trillion, and a small portion of that can translate into a lot of incremental revenues for Groupon.

eCommerce Local Platform: Groupon is building a Local eCommerce Platform, which might work out very well in the long run as it would have a wide array of A La Carte deals for users. 

Rolling Out SmartDeals Overseas: Personalized emails sent to customers, has resulted in a 25% increase in the Email Purchase Rate in North America, and Groupon is in the process of rolling it out in Europe and Brazil.

Expansion of Goods: Groupon just acquired CommerceInterface, a web based channel management provider to further streamline its Groupon Goods business. This acquisition should provide additional tailwind for Groupon Goods to get bigger. 

Search Engine Traffic: A quarter of the search queries on Google (NASDAQ: GOOG) and Bing are Local, this is an untapped opportunity for Groupon because most revenues flow in from Email Deals. On mobile devices, local search queries make up almost 50% of all queries. Roughly 5% of Groupon’s traffic comes from search queries, and Groupon expects search to aid further in search queries. It can ramp up its Search Engine Optimization (SEO) to be listed higher in search listings, or take on paid marketing tools via Google Adwords to be listed higher i.e. through Search Engine Marketing (SEM). Adopting these tools will increase Groupon's total subscribers on desktop and mobile.

Threats

Competition: The local deals space is a very competitive one and there have been a number of failures in the space, due to recurring losses.

Threat of New Entrants: There is a constant threat of new entrants due to low capital outlays, but the existing players are in the red.

Deals from Yelp (NYSE: YELP): Popular consumer reviews site is very big for restaurant reviews, and it has built up an inventory of more than 40,000 deals. It hasn't gained much momentum, but going forward that might change. Yelp has the potential to snatch users from Groupon as restaurants are an important category for both the companies. 

The Bottom Line

A number of companies have entered and failed in the Daily Deals space. Arguably, Groupon's largest rival in the space, Amazon backed LivingSocial is in massive trouble, and cut workforce by one-third. AmazonLocal, Google Offers failed to get off the ground and Yelp's deals business is very small. Groupon is increasingly being left alone, in the industry with its massive scale, and managed to muscle out its competitors in a very tight space. There is a decent probability, the dominant and increasingly lone player in the daily deals space can swing back to profits.  


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

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