Groupon's stock held up by optimism, not realism

The coupon site needs to get its merchant mix right, focusing more on service-based businesses that benefit from daily deals.

By Trefis Jan 17, 2012 3:32PM
Image: Couple ordering meal in restaurant © NULL/Corbis Groupon's (GRPN) journey going public has been bumpy, to say the least. After a slew of public relations mishaps, questionable accounting practices and some highly publicized merchant fallouts, the company's stock finally ended 2011 at a price slightly less than its $20 offering price.

While Groupon can become a sustainable business, we believe that its present fundamentals do not support the stock's current market price.

We recently launched coverage of Groupon with a $13 price estimate. Groupon leads the daily-deal market and shares the sector with players such as LivingSocial and Google (GOOG) Offers.

Groupon's touted valuations have fluctuated wildly in the past, and investor views continue to be polarized. Many industry experts have cited that Groupon's business model is doomed to fail, especially in the wake of intense competition and the entry of large players like Google. On the flipside, many have bought Groupon's revenue blitzkreig story, reiterating Executive Chairman Eric Lefkofsky's description of the company as "wildly profitable." Both these views have garnered lots of press, leaving the retail investor in limbo as to where exactly Groupon stands. 


While consumers are always happy to jump on the cheapest deal, Groupon's main problem arises from its merchants. Surveys conducted recently have yielded a mixed bag, with one stating that merchant demand is expected to decline in the next six months. While this debate continues, the most visible trend is that merchants with high marginal costs (for instance, food and beverage businesses) are bearing the brunt. Groupon's deals led to a hefty loss for a bakery, and another food business was liquidated in January 2012 after running heavy losses from an arrangement with the site. In contrast, there have been no reports of service-dominated businesses like spas being adversely affected by daily-deal schemes.


Food and drinks still constitute around 24% of Groupon's total deal mix in North America, and it would not be a surprise if more such incidents crop up in 2012.


Groupon urgently needs to get its merchant mix right, focusing more on service-based businesses that will tangibly benefit from daily deals. Merchants also seem to be relatively unaware of the risks involved in running a daily deal, and Groupon must highlight these risks before striking a deal. The company may also need to compromise on the sales pressure it puts on merchants as more failing small businesses simply means more bad PR for Groupon.


(Source: Groupon's S-1 Filing Dated Nov. 1, 2011)


 

Groupon's take rate was little over 40% for its daily deal business in 2010 and 2011, and we expect this to decline to around 30% by the end of Trefis forecast period. The primary factor behind this is intense competition, especially from tech giants like Google and Amazon. Such companies have a sufficient cash cushion through their primary businesses that enables them to give more payouts to merchants.


Further, Groupon cannot continue with its marketing blitz forever, with these expenses at around $613 million for the first nine months of 2011 (around 55% of its net revenues for the period). This means that to get more subscribers it needs to strike partnerships, a recent one being with Deutche Telekom. As partners command their own revenue share, Groupon's take rates are bound to decline. Take rates are a crucial driver in determining Groupon's stock. In fact, to achieve a $20 stock price, Groupon's daily deals take rate would have to increase to close to 60% by the end of the Trefis forecast period.


Groupon International Featured Deals Take Rate

See our full analysis for Groupon, and our discussion of Groupon's fluctuating valuation.

Tags: GOOGGRPN
2Comments
Jan 18, 2012 2:58PM
avatar
As a Merchant all I have to say is it is no different than advertising a sale. Why do I need to go through a third party to do that?  Now there is a hundred different others trying to compete with Groupon which devalues it even more. In my opinion - a doomed business model - no way will I invest in their stock.
Jan 18, 2012 1:54PM
avatar

Another poor stance on what Groupon is about.  Their business model is simple.  Merchants contract with Groupon during slow periods and to gain new clientel.  80% of merchants were happy with Groupon yet won't re-sign, notice what I stated above and you can put two and two together.  It's a one shot deal to get new business.  It doesn't mean down the road the merchants won't use Groupon again, cuz 80% did approve of Groupon.

 

Could they progress, sure.  They do offer vacation packages, without air fare.  Nothing wrong with that.  In most cases you can find cheaper air fare on your own.  Plus you can book your trip to when it satisfies you.

 

So what warnings does Groupon need to give to it's merchants and or customers?  You make no mention of any statistics or facts about anything in this article.  Get back to work and get real facts and proof if Groupon is really going to die  cuz in the real world this is never mentioned.

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