April 4, 2012, 3:44 PM
Blogger

Asking the wrong questions about Groupon

Don Davis

Editor in Chief

Groupon is worth a couple of billions dollars less to its shareholders today than it was Friday after a 19% stock drop that followed the downward revision  of its fourth quarter financial results. But the leading provider of daily deals is still valued at nearly $10 billion. To justify that valuation it will have to keep retailers and restaurants interested in offering deals, and that may be hard to sustain.

That’s largely because Groupon was always an expensive way for merchants to advertise. Groupon made its name by passing along discounts of at least 50%, and it increased its revenue rapidly by taking 50% of the price the consumer paid for the product or service. If a retailer, restaurant, spa or other merchant offered a $100 voucher, the consumer paid $50 and the merchant wound up with $25—with the other $25 going to Groupon. As an occasional customer acquisition expense that may be fine, but it’s not something many merchants will keep doing. From a merchant’s perspective, Groupon may well have been a great way to reach new customers when the daily deals it offered were novel to so many shoppers. But deals from Groupon, LivingSocial, Amazon, Google and hundreds of smaller competitors now bombard inboxes, and  = I have to believe consumers are increasingly hitting the Delete button when they see that flood of offers.

Those daily deal competitors want to imitate Groupon’s considerable success—the company’s revenue increased more than 100 times from 2009 to $1.62 billion last year. But the fact that so many competitors have joined the fray in just the past two years shows there’s little barrier to entry. Anyone can buy an e-mail list of consumers in a local area, call up merchants to craft discount offers and go into the daily deal business.

Groupon realized that, and has sought to differentiate itself by racing into new markets. It now operates in more than 40 countries, and has 10,000 employees, many of them pounding the phones in major cities around the globe trying to convince merchants to offer its deals.

But that kind of global scale doesn’t provide as much of an advantage for Groupon as it would for big brands like Nike or Apple. If I live in St. Louis, I’m just interested in deals in St. Louis. Anyone can set up a daily deal service in that city and compete with Groupon. And if that new service offers merchants a better deal, I’ll wager they’ll give the newcomer a chance to show what it can do.

That’s the real problem Groupon faces: It doesn’t have a sustainable advantage. Plus, I believe both consumers and merchants will tire of daily deals. What spooked investors this week is that Groupon admitted it hadn’t adequately allowed for how much more it would have to reimburse consumers as it moved last year into offering more expensive deals. That’s the kind of mistake a start-up can make, and Groupon admitted it relatively quickly. Groupon will recover from this misstep. But I’m not convinced its business model will hold up in the long run.

 

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