With Warren Buffett Competing, Groupon Shareholders will Suffer
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When reading about the woes of Groupon (NASDAQ: GRPN), whether it is the business model of the company or just the difficulties in actually making it work for low price deals, the thought arises of, "Is there anything easier than just tearing out a coupon from the local community newspaper and using it?"
It's a pretty simple process.
The coupon is either torn out or clipped, taken to the business that sponsored it, then presented and honored. With Groupon, there has to be a computer and a printer. Both have to be working. Yes, smart phones are wonderful, but less than half of all Americans 18 and older own one; so that option is not really viable. The percentage of consumers and businesses operating on the same wave length to successfully implement a Groupon coupon from a smart phone is much lower.
By contrast, at present, community newspaper readership in the United States is around 150 million, according to the National Newspaper Association. That is about half the total population of the United States. Of the 150 million reading the community newspaper, more than three-quarters, over 110 million, go through 100% of the publication. According to a study by The Media Audit, the coupon section is the second most read after the front page. The study also revealed that coupon clippers are the most desirable demographic as they are "more affluent and well educated."
Enter stage right: Warren Buffett, head of Berkshire Hathaway (NYSE: BRK-A).
Buffett is a long time newspaper aficionado and reportedly reads several daily. He recently bought more than 60 newspapers from Media General. Long before that, he purchased shares of The Washington Post (NYSE: WPO), the publisher of the venerable Washington Post, for the holdings of Berkshire Hathaway. In addition to the papers just acquired from Media General, Buffett has recently bought The Waco Tribune Herald and The Omaha World Herald, his hometown paper.
It is instructive that Buffett is investing in community newspapers and not the owner of The Washington Post or The New York Times (NYSE: NYT), the publisher of "the old gray lady," The New York Times. From a financial statement perspective, the numbers are much, much better for community newspapers and those serving smaller areas than greater New York City and the Washington, DC region.
Comparing the financials of Gannet (NYSE: GCI), which publishes 82 smaller US dailies, with The Washington Post and The New York Times is revealing. Gannet has a profit margin of 9.18%. The New York Times is losing money with a negative profit margin of 1.44%. While The Washington Post has a profit margin of 2.76%, that comes from the Kaplan educational services division, not publishing The Washington Post.
While the average return on equity for a publicly traded company is around 15%, Gannet has one of 18.90%. The return on equity for The Washington Post is 4.20%. For The New York Times, the return-on-equity is a negative 5.17%. The fact that Buffett cherry picked from Media General rather than investing in Gannet, indicates that the return-on-equity for the 62 newspapers he purchased is higher than 18.90% and the profit margin is at least in double digits. (If not, just buy Gannet stock for the 18.90% and 9.18% profit margin.)
By contrast, Groupon has a negative return-on-equity of 52.68% and a negative profit margin of 10.00%.
It is not that Groupon does not face fearsome competition already, as manifested by the drop of almost 60% in its share price for 2012 and the existing negative profit margin. Amazon invested in LivingSocial, Google created Google Offers, and Microsoft has MSN Offers. But Buffett and his three scores plus of newspapers have a myriad of advantages over Microsoft, Google, Amazon and, particularly, Groupon.
The penetration rate of community newspapers tops anything that Groupon, Google, Microsoft or Amazon can even come close to reaching. Then comes the ease of use: there is no need for a computer, printer or smart phone as all that has to transpire for use is for a newspaper coupon to be torn-out or clipped. Next is the coupon culture of a newspaper as it is the second favorite section, after the front page.
Another significant edge is that newspapers have digital editions. This offers a greater presence for the coupon community. With Buffett owning so many newspapers now, the cost savings and resultant synergies will be imposing. The coupon features for Google, Amazon and Microsoft add very little, if anything, to the overall product of the company. There is no print edition for the news and coupon sections of Google, Amazon or Microsoft.
But each detracts from the client base of Groupon. As a result, earnings-per-share growth is down this year for Groupon by 44.10%. The entry of Warren Buffett into its industry does not make a rebound seem likely for Groupon.
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