What Deals Can Groupon Get if it Sells Itself?
Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It may be harsh-sounding but is certainly worth noting that Groupon (NASDAQ: GRPN) might have been dead on arrival at its IPO, despite that its faithful investors would likely insist otherwise. Unless companies of Groupon’s clients are all in a position to operate consistently as discounters, handing out coupons to customers can only be periodic promotional propositions. Thus for Groupon coupon sales are at best an unstable revenue source and likely lead to inconsistent business performance. Selling coupons is really a niche business, and Groupon may become self-sustainable at some point, but likely with little growth prospects.
Groupon’s coupon business model seems to have inherently built in some systematic business unknowns in both coupon offerings by companies and coupon demand from consumers. While Groupon may solicit only limited coupon offers from its clients at times, it has also seen unreliable customer demand on its marketed coupons. Coupon uses have never been associated with broad-based consumer demographics, even back in the days of clipping paper coupons. Not too many people would check around on Groupon just to secure, say, a $6 burger deal before heading out.
On the side of coupon offerings, not too many companies can afford to sell at discounts on a continual basis, not to mention that they have to split any coupon sales with Groupon, further reducing their revenue. The fewer businesses there are offing coupons and the less frequently they do so, the more constrained Groupon’s business becomes. Besides, not all businesses need to compete through aggressive pricing if they can win over customers on other grounds with effective marketing. This will make it even more challenging for Groupon's coupon business model to work.
If Amazon (NASDAQ: AMZN), with all its e-commerce operating skills, hasn’t seemed to make too much of a dent in LivingSocial, a competitor of Groupon and about one-third owned by the online retail giant, there may be little chance that Groupon can eventually pull it off in the same online coupon retailing business. In fact, due to losses at the privately held LivingSocial, which is second-ranked behind Groupon in the sector, Amazon has just written off $169 million of its total $175 million investment in the company.
One way to transform Groupon’s struggling coupon selling business is try to expand into providing broader marketing services to its business clients. This is where Google (NASDAQ: GOOG) can readily come into play. We all know that the core strength of Google has much to do with its ads distribution services. Thus, Google may well combine its own advertising know-how with Groupon’s current marketing platform to create new ways for clients to promote their products and services beyond what coupon deals can do for them. A potential fee-for-service business model might be able to deliver a more consistent business result for Groupon under Google. It could also be something more welcoming to client companies when they don't have to cut off a piece of each of their sales using a new, fixed-cost scheme based on marketing fees. Furthermore, providing broad-based marketing services, Groupon could avoid relying directly on unpredictable consumer behaviors for revenues.
A potential Google takeover of Groupon would at least end the frustration of Groupon investors who have seen the stock lose about 80% of its market value within a year of the IPO. However, any purchase interest from potential acquirers would hardly be a vote of confidence on Groupon’s ongoing business. Instead, a potential sale would be the company’s own admission to its unprofitability and over-valuation. Currently trading at almost four times its equity book value, the stock still looks a bit expensive to potential buyers. In a proposed acquisition, Groupon shareholders, especially those early IPO investors, would be much better off with a stock-for-stock transaction whereby they might be able to recoup prior Groupon share losses from future gains in the acquiring company’s shares. In a cash deal, any amount of premium paid by an acquirer would be most definitely short of what is needed to recover those early investors’ losses.
Faced with receding customers’ interests in online coupons, it may be time that Groupon tries to restructure its business and broaden its services. While deals and discounts are all valuable, they may still fail to attract customers if priced on the wrong products and services. A potential alliance with Google can help Groupon expand into marketing a broader range of products and services with or without coupon offers. In the end, it’s the right products and services that build consumer followings; it’s never the price alone.
JJtheArdent 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!