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Groupon Continues With Business Model Experiments

Posted on Monday, Nov 12th 2012

In recent research, BIA/Kelsey increased its market projections for the daily deals market. The segment is expected to double in size this year to $3.6 billion. A year ago, the researcher had estimated the market to be worth $4 billion in 2015. Today, it projects that the market will grow to $5.5 billion by the year 2016. But as we saw with LivingSocial, U.S. daily deals market leader Groupon is also finding it difficult to maintain a strong business model despite this growth.

Groupon’s Financials

Groupon’s (Nasdaq:GRPN) Q3 revenues grew 32% over the year to $568.6 million, but they were significantly short of both their projections of $580-$620 million and market estimates of $605 million for the quarter. Gross billings for the period grew 5% to $1.22 billion. The customer base has also reported strong growth. While the total consumer base has increased to more than 200 million, Groupon’s active customer base increased 37% to over 39.5 million. However, revenue per customer fell to $149 for the quarter.

Groupon has seen significant growth in North America revenues, which increased 81% to $291.6 million. Mobile efforts have helped Groupon to register this growth as more than 30% of its transactions in North America were conducted on mobile devices. International revenues grew 3% to $277 million.

EPS of a break-even quarter was better than the loss of $0.01 projected by the market. A year ago, Groupon had reported a loss of $0.18 in the same period. This must be a huge sign of relief for the market.

For the current quarter, Groupon projects revenues to grow 27%-37% over the year to $625 million-$675 million. It is projecting an operating break-even quarter to an operating income of $20 million in the period. The Street was targeting revenues of $643.5 million for the quarter.

Groupon’s Diversifying Offerings

Groupon continues to be challenged by daily deals fatigue among consumers. Consumer’s in boxes are flooded with mails from several vendors offering similar deals multiple times during the day. To continue to grow in such conditions, Groupon is looking at diversifying their offerings in the market.

They have increased their focus on Groupon Goods, a service that lets consumers buy products through Groupon at a discounted price. Within a year of its launch, the service reported a global billing run rate of $1.5 billion annually and a revenue run rate of $500 million annually. Groupon Goods offers world famous brands, including the likes of Dyson and Garmin. Earlier this quarter, they offered a Garmin GPS device on sale which translated to sales of 30,000 units within the first 24 hours of the offer. Groupon expects Goods to become a destination of choice for the holiday gifting season. But, analysts aren’t too pleased about this move as Groupon Goods is a comparatively lower margin business.

Last quarter, it also entered into the mobile payments field with the launch of a credit cards payment service. This is its “lowest cost option” for merchants. The latest app charges merchants a fee of 1.8% plus $0.15 per swiped transaction for MasterCard, Visa and Discover cards. American Express card transactions are charged 3% and $0.15 per transaction. These costs are significantly lower than the normal rates of 2-4% transaction fee. Initially the offering is available to merchants who run daily deals on Groupon. However, Groupon is also running a pilot program for non-Groupon merchants, charging them a fee of 2.2% for most cards and 3% for American Express cards in addition to the fee of $0.15 per swipe.

As part of its increased merchant offerings, it recently released Breadcrumb, an iPad app that is a point of sale system for restaurants. Groupon got Breadcrumb when it acquired developer Postility earlier this year for an estimated $10 million-$15 million. Breadcrumb will complement its Payments system and will give restaurants and hospitality merchants a solution to update point of sale systems, take orders, search and manage menu items, process payments, split checks, and view real-time sales data. Breadcrumb’s service is available at $99 a month for a single iPad system to $399 a month for 10 iPads. Groupon offers free installation and 24/7 customer support for the service along with Payment’s reduced mobile payment fee.

Groupon is trying hard to become a local e-commerce option for both merchants and consumers. However, the stock market isn’t impressed. The stock is trading at $2.76 with a market capitalization of $1.80 billion. The stock price is less than a tenth of the peak of $31.14 it touched soon after listing in November 2011. The market is nervous about their continuous experiments.

As I have said many times before, the public market is not the best place to run business model experiments. It is much better to figure out what business model works, before taking a company public.

Groupon, of course, is a quintessential bubble company that got ahead of itself, and is now, biting its fingernails.

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