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Groupon: Succesfull Turnaround or Identity Crisis?

Aug 11, 2014



Groupon's transformation is generating impressive results when it comes to sales, but profitability is still scarce. Can Groupon sustain sales growth and increase profitability while competing against challengers such as Amazon and RetailMeNot?

  • Groupon: Successful Turnaround or Identity Crisis?
  • In the midst of a transformation Groupon wants consumers to think of the platform as a full online marketplace that can be accessed anywhere, anytime, not just a daily-deals site. The company wants customers to go to the platform searching for deals and opportunities -- the "pull" business model -- versus the old "push" approach of sending daily deals via email. Groupon is expanding into e-commerce and diversifying via acquisitions, such as South Korean e-commerce marketplace Ticket Monster and U.S. fashion site Ideeli.
  • Strategic initiatives Mobile integration in order to adapt to the main industry trends and capitalize on growth opportunities. Increased focus on local deals to improve relevance and effectiveness. Expanding beyond email to increase customer engagement via multiple venues. Internationally rolling out practices and processes that have produced solid results in North America. This includes tools to enhance customer experience as well as integrating underlying technology platforms.
  • Mixed results Revenues are growing rapidly, and operational metrics are showing encouraging signs. On the other hand, profit margins are under heavy pressure. The main question for investors: Can Groupon sustain sales growth and increase profitability while competing against challengers such as Amazon and RetailMeNot?
  • NA: North America
  • Healthy sales and falling margins While sales jumped 26% during the first quarter, gross profit increased only 8%, and Groupon reported a net loss of $37.8 million during the period. Increasing sales allow the the company to leverage fixed costs on a growing revenue base, so profitability should increase over time if Groupon sustains revenue growth. However, competition from companies such as Amazon and RetailMeNot, among others, represents a considerable challenge for Groupon.
  • Amazon Amazon is the undisputed leader in online retail, and a dreaded competitor in the industry. The company is willing to operate with minuscule profit margins in order to offer its products at aggressively low prices. This means heavy margin pressure for different players in the business. Amazon reported sales of $19.74 billion in the first quarter, growing at a remarkably strong 23% versus the same quarter in the prior year. This is an extraordinary performance for a company of Amazon's size.
  • RetailMeNot RetailMeNot is generating explosive success in the digital offers business, and this represents a growing competitive threat for Groupon. Unlike Groupon, RetailMeNot has attracted many big companies with popular brands; this business model resonates extraordinarily well among consumers. RetailMeNot is firing on all cylinders. During the first quarter of 2014 the global subscriber base grew 107% to 20.4 million, while revenues increased 51% to $61.3 million in the period.
  • Foolish takeaway Groupon is going through a particularly uncertain phase. The company's transformation plans seem well intended, but execution is a considerable risk. Revenues are growing rapidly, and the company is gaining traction among consumers. However, profit margins are still depressed. The main factor to watch: Can Groupon successfully compete against companies like Amazon and RetailMeNot while sustaining sales growth and increasing profitability?
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