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Is the sun setting on daily deals?
First the good news. Groupon Inc. was profitable in the second quarter. In large part, that’s thanks to the daily deal operator reigning in its marketing spending.
But there’s plenty of bad news. Most notably, the daily deal operator’s meteoric growth rate is a thing of the past. Even though the Groupon’s revenue was up 44.8% year over year, it was only up 1.6% compared to the previous quarter. That’s a sharp decline from the double-digit growth rates that Groupon had posted the previous five quarters.
Moreover, Groupon’s gross billings, which reflects the total amount collected from Groupon customers for Groupon vouchers sold, excluding applicable taxes and refunds, fell 4.5% compared to the first quarter—the first time that’s happened.
The problems are even worse if you look at its international business. Groupon’s international revenue fell 3.9% compared to the first quarter. Andrew Mason, the company’s CEO, yesterday sought to explain the dip during a conference call with analysts by blaming weaknesses in the European economy. “While deals such as laser hair removal and luxury hotel stays in Monaco give Groupon an element of serendipitous discovery that is key to our brand, we have also found that these more discretionary offers are more susceptible to negative demand elasticity over the past few quarters as macroeconomic conditions have deteriorated,” he said.
In other words, when consumers are worried about their finances they’re less likely to spend on things they don’t need. And those discretionary items—spa visits, restaurant meals, sky jumping lessons and the like—have been an important part of Groupon’s business.
Groupon’s saving grace has been that it cut back on its marketing spending. Its marketing outlay, as a percentage of total revenue, has fallen from 54% in the second quarter of 2011 to 15% this past quarter. But that cut in spending has come at the expense of its ability to attract new customers. The daily deal operator only added 1.1 million new customers in the second quarter.
Groupon wasn’t profitable when it was spending a large chunk of cash to add new customers. Now that it is profitable, its relevant metrics like gross billings, paint a troubling picture. And that doesn’t bode well for the daily deal operator’s future.