Less than a month into the New Year and the e-retailer and marketplace announces plans for three additional U.S. fulfillment centers.
It’s hard to believe Google offered $6 billion, or that Groupon would turn it down.
Groupon has been a fabulous success by any measure. In just two years it’s created a new marketing niche, built a $500 million a year revenue stream and expanded into more than 300 markets, with more coming every week. But is it really worth $6 billion?
I doubt it, and I have doubts that Google offered that much. That was the highest number thrown around in the media over the last week or so, the story being that Google offered something like $5.25 billion plus another $700 million in executive bonuses if certain goals were met. But neither Google nor Groupon ever confirmed that there was an offer, much less how much it was. And at least some analysts are privately skeptical Google would offer that much.
It’s not that Groupon isn’t a great company, or that the concept it pioneered will soon disappear. It’s created a marvelous way for businesses to acquire new customers through the web, as an article by our Zak Stambor will explain in more detail in the January issue of Internet Retailer magazine. And it’s especially great for small local businesses that don’t have the money or the expertise to invest in sophisticated Internet marketing. Groupon is building that kind of expertise, for instance, recently hiring a key executive from Netflix, Mark Johnson, who was vice president of software engineering at Netflix, as its chief data officer to beef up its marketing chops. With that kind of talent, Groupon can do the hard technical work of web marketing; all the merchant has to do is serve the customers that stream in as a result.
The problem for Groupon is that its success has spurred imitators, and that major online companies are getting into the act. EBay recently acquired Milo.com, making clear it will be a player in local product search and marketing. And, in the clearest sign of how tough the competition will be, Amazon.com Inc. invested $175 million in Groupon’s nearest rival, LivingSocial. Amazon hasn’t said how big a stake it got for that sum, which would have given us a sense of the value of these social coupon sites. If Amazon took a 10% stake that would value LivingSocial at $1.75 billion, which seems plausible. But Amazon could just as easily have bought 5% or 20% of LivingSocial, which would change the valuation significantly. We’ll have to wait and see what comes out. In any case, the world’s largest online retailer by revenue is now competing directly with Groupon. So that’s one cloud on the horizon for Chicago-based Groupon.
Another is that competition will inevitably drive down its profit margins. Groupon has been taking 50% of the value of the coupon offered. So if a local shop offers $100 in merchandise for $50, Groupon takes $25 and the retailer $25. That means the retailer is selling $100 in goods or services for $25. That may make sense to the merchant as a one-time marketing expense that can draw in new customers, but it’s not the kind of offer many businesses can make on a regular basis.
There are already signs that Groupon competitors are asking merchants for less than 50% of the coupon offer. Sooner or later, competition will drive down Groupon’s percentage, and hence the profitability of its business model.
And then there’s the question of consumer fatigue. Are they going to be as excited about Groupon-type offers in two years as they are today? Five years ago, comparison shopping engines were all the rage, and big companies like eBay, Experian and Scripps paid hundreds of millions of dollars for leading comparison shopping sites that make money by charging a click fee for the traffic they send e-retail sites. Those deals don’t look as good today, particularly since Google undercut those sites by offering its own shopping portal and charging merchants nothing for the traffic they receive from Google Product Search.
And that brings me to the final problem for Groupon: If it really did turn down Google, Google will go elsewhere. And ultimately it’s likely Groupon will be competing against companies backed by Google, Amazon, eBay and perhaps other major players. At some point, Groupon’s owners may wish they had accepted Google’s offer, whatever it really was.