If analysts were expecting the daily deals market leader, Groupon (Nasdaq:GRPN), to show impressive results during the holiday quarter last year, they were surely disappointed. According to market research conducted by Manta prior to the holiday quarter, 82% of small businesses surveyed claimed that they had no desire of running deals during the holiday season last year. And it is not just the holiday season that is affected. According to a Raymond James survey of merchants who have used daily deals services earlier, 39% claimed that they did not want to run another daily promotion due to the high costs and low repeat customer rate. Thirty-two percent of the merchants surveyed reported the deals to be loss-making ones.
Groupon’s Q4 revenues grew 26% over the year to $638.3 million, marginally shy of the Street’s estimates of $638.4 million. They ended the quarter with a loss of $0.01 per share, compared with the market’s projected earnings of $0.03 per share. Margins have been hurt by the high cost of international expansion and Groupon’s willingness to reduce their commission rates to attract more merchants. During the last quarter, Groupon’s billings grew to $1.52 billion, compared with $1.33 billion expected by the market. But higher billings did not translate to improved revenues, as Groupon reduced their fee structure to 31.9% from 39.5% a quarter ago. My take is, they need to reduce it a LOT more before merchants will find this an attractive deal.
Revenues from international markets fell 16% over the year to $263 million, while billings in these markets grew 6.2% to $801.5 million. Recently, Groupon promoted a new COO to steer their struggling international business.
Despite their weak performance, it was their outlook that scared the market away. For the current quarter, Groupon projected revenues of $560 million-$610 million, significantly short of the Street’s projections of $650 million.
Groupon remains convinced that their future lies in the successful implementation of their product selling service, Groupon Goods. Groupon Goods offers retail products at a highly discounted price. Groupon does not separate out their financials to show the performance of Groupon Goods, but in another announcement, they had reported that Groupon Goods was operating at billings of more than $1.5 billion annually.
The service has been available for more than a year, but analysts believe that Groupon is still struggling to find its footing. According to Sameet Sinha, an analyst at B. Riley & Co., “They are testing what goods work and what don’t – they are getting the right mix.” But the slow growth of Groupon Goods is coming at a cost. Groupon Goods makes them compete with e-tail giants like Amazon and eBay, which have more experience in logistics and shipping in what is also a comparatively low-margin business. As part of improving their offering, last quarter Groupon acquired a web-based channel management firm, CommerceInterface. CommerceInterface’s platform is used by merchants to select the optimal location to list their products online. Terms of the deal were not disclosed. Frankly, I am not convinced about this strategy.
Meanwhile, Groupon has also been busy acquiring small technology-focused firms. Earlier this quarter, they announced the acquisition of Glassmap, a location-based app that helps users find deals. Glassmap was a freely downloadable app created to help users find interesting and relevant things near their locations. Groupon will be able to leverage the acquisition to offer more location specific deals to their user base to increase the usage of Groupon Now.
As part of the emerging trend of acquihiring, Groupon added the talent from MashLogic to their team. California-based MashLogic has developed a tool called Britely that collates information from web pages. Users can save pieces of information they would like to refer for future use using the tool.
Groupon’s Management Change
With Groupon failing to improve their financial performance, the Board finally fired its founder and CEO, Andrew Mason. Until Groupon finds another CEO, the company will be led by executive chairman Eric Lefkofsky and vice chairman and co-founder Ted Leonsis. Mason has been responsible for taking Groupon to its high profile position in the industry. But he is also blamed for Groupon’s controversial accounting metrics and continued failure to find a stable and sustainable business model.
Last week’s disappointing quarterly results finally led to his exit. But whoever steps in to fill Mason’s shoes will have a tough road ahead. The daily deals market is no longer seeing an explosive growth, and the cost of international expansion has eaten into Groupon’s margins. Most importantly, customers are dissatisfied, a fact Mason points out in his touching farewell letter. The successor will have to take bold steps to ensure Groupon has a chance of survival.
Groupon’s stock managed to recover marginally after the announcement of Mason’s departure. Despite the improvement, it is trading at $4.52 with a market capitalization of $2.97 billion. It touched a peak of $19.89 in March 2012.