Can a ‘Daily Deals’ Provider Rise From the Ashes?

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This is a challenging moment for Groupon as it continues to struggle to remain afloat. Groupon (NASDAQ: GRPN) is a leader among businesses that provides daily deals, but the company has been unable to generate positive margins that is crucial for gaining investors’ confidence. Groupon offers discounts to subscribers in over 550 cities globally on things – either products or services – that you can eat, see, buy or do.

Groupon has been under fire from investors since the time its earnings became known after its astonishing IPO at the NASDAQ stock exchange in 2011. A practical way to learn how dissatisfied investors have been with Groupon since the company began trading publiclly on November 4, 2011, is to review the graph of its stock price history. Groupon’s stock price has fallen sharply and consistently from the $20 IPO price per share to as low as $3.83 recorded three days prior to its 2012 IPO anniversary.

Groupon’s Third Quarter Results 2012

Two things have made Groupon, the company that pioneered daily deals, popular among investors: The company has recorded an astonishing quarterly growth in revenues in the past two years but it  has also reported huge losses in its operating margins during the same period. The recent third quarter financial result Groupon declared on Thursday, Nov. 8 isn’t an exception as the company again booked an operating loss, though narrower this quarter, despite the higher revenues recorded during the quarter.

The Chicago-based daily deals pioneer reported $568.6 million third quarter revenue which was an increase of 32 percent, yet it fell short of the 45 percent it reported during the same period in 2011. The company reported a $3 million operating loss, signaling break even earnings on per share basis. Compared with $54.2 million third quarter operating loss reported in 2011, it seems losses are being gradually contained. But it remains to be seen if Groupon can scale up its operations and avoid losing money in subsequent quarters. Losses in the midst of huge revenues have become a part of Groupon and investors’ perceptions about its stock have always been with caution. Indeed, it is the safest thing for investors to know when Groupon will break the jinx of its financial losses.

Effects of Rising Competition on Groupon

In online daily deals business, Groupon is nearly a monopoly but competition is gradually building against it. The impact of the entry of Google (NASDAQ: GOOG), through Google Offers, and Amazon (NASDAQ: AMZN) through LivingSocial, its subsidiary, into Groupon’s core area of business needs to be taken very seriously.

Google made an unsuccessful offer to buy Groupon in December 2010. When the plan failed, Google launched Google Offers website early 2011 to feature online daily deals and keep its ambition of running daily deals alive. The only clear difference between Groupon’s daily deals services and Google’s deals is that Google’s deals remain valid irrespective of how many people accept the offer.

Amazon’s LivingSocial is the biggest challenger regarding Groupon’s core identity. With the help of Amazon, LivingSocial has got the huge resources and the benefit of better scales it can use to upset Groupon in the near future.

A Look at Groupon’s Expansion Drive and Its New Business Model

Groupon has since launched its business in Europe where it has a large market that is next in size to its market share in the U.S.  In China, Groupon is getting a foothold in Chinese daily deals business through Gaopeng. While Groupon’s third quarter results showed solid earnings from North America, the financial troubles in Europe reduced its good showing in North America.

Groupon acquired Savored, a competing daily deal business, in September 2012 to provide deals that meet the needs of merchants better. Savored’s discounts are smaller at 30% to 40% compared to Groupon’s typical deals of almost 80%.  Groupon also acquired BreadCrumb last May. Groupon hopes to improve its scale with BreadCrumb, a restaurant system built to run on iPad.

In addition to the new acquisitions, Groupon has added new business lines like Groupon Now, Groupon Rewards, Groupon Payments, and Groupon Goods and Gateways to improve its outlook and capacity to earn more income.

It is not yet clear if Groupon’s new acquisitions and business model will pull its finances out of the ashes. It doesn’t hurt to wait and see if this new approach will signal a new era of growth and profitability for Groupon before making an investment.




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