Groupons1analysis 110719203435-phpapp01

P r e p a r e d b y M a r t i n N e w

Page 1

Analysis of the key operating

metrics published in the

Groupon S-1 Filing

Report Author: Martin New

Prepared: 19/07/2011

CONTACT

mailto:[email protected]

http://www.linkedin.com/in/martinnewmtl

http://twitter.com/


Page 2

Summary of Key Numbers:

Subscribers: 83.1 million - up from 3.4 million in March 2010 (2,320%) Customers: 15.8 million up from 874,000 in March 2010 (1,708%) Subscriber acquisition cost: 30$ Customer conversion rate: 19% Featured Merchants: total 125,765 : 56,781 in Q1 2011 up from 2,903 in Q1 2010 (1856%)

Merchant pool (IE deals in pipeline): Currently 40,000 (up from 15 in March 2009) Groupons sold: 60 million total. 28.1 million in Q1 2011 up from 1.8 million in Q1 2010 (1,496%)

Revenue: $713 million in Yr end Dec 2010 up from $30.5 million in 2010 (2,241%) Average Revenue per merchant: $11,000 Average Groupon price: $23 Average revenue per Subscriber: $14.10 in 2010 vs $7.76 in Q1 2011 Groupon:Merchant Revenue split: currently at 60:40 in Merchants favor Gross Profit: $280 million in Yr end Dec 2011 up from $11 million in 2010 (2,462%)

Net Income/Loss from operations: Loss of $114 million in Q1 2011 vs income of $8.7 million in Q1 2010

Marketing Spend: Grew by +5,000% in Q1 2011 vs Q1 2010 ($208 million) Selling, Gen and Admin: Grew by 2,300% in Q1 2011 vs Q1 2010 ($179 million) Total operating expenses: accounted for 118% of revenue in Q1 2011 vs 80% in Q1 2010 ($762 million in Q1 2011 up 2,000%)

Employees: 7,107 (76% International) Revenue per sales employee: North America - $450,000 vs International - $120,000 Geographical coverage: 43 countries and 175 North American Markets International vs North America: International operations account for 58% of revenue


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CHART INDEX Chart Page

Groupon Revenue vs Gross Profit Trend

4

Subscribers, Cummulative Customers vs Groupons sold

4

Quarterly growth of Groupon Subscribers and Customers

5

Percent of Subscribers purchasing Groupons

5

Groupons Purchased by Customer and Subscriber

6

Acquisition Cost vs Revenue per subscriber

6

Average Groupon Deal Price

7

Global Sales by Category Q1 2011 (Volume based)

7

Sales Cost and Customer Acquisition vs Revenue per Featured Merchant

8

Average Revenue per Merchant

8

Gross Profit to Cost of Revenue Trend

9

Operational Costs as a Percentage of Revenue

9

Employee Head Count by function and Segment

10

Revenue per Sales Employee Q1 2011 (North America vs International)

10

Merchants per Sales Employee Q1 2011 (North America vs International)

11

North America vs International Revenue

11

Marketing Spend Share North America vs International

11

4 City Comparison: Subscriber trend

12

4 City Comparison: Cumulative Customer trend

12

4 City Comparison: Customer share of Subscribers

13

4 City Comparison: Groupons purchased per subscriber

13

4 City Comparison: Average Price per Groupon

14

4 City Comparison: Groupons Sold per Merchant

14

4 City Comparison: Average Revenue per Featured Merchant

15


Page 4

Revenue and Gross Profit Groupon has experience tremendous revenue growth within the 30 months of trading. In the first quarter of 2011, the company generated nearly $655 million in sales (up from $44 million a year earlier. Gross profit in the last quarter stood at $270 million. Groupon classify Gross Profit as Revenue (receipts from Groupon sales) less Cost of Revenue (payment made to merchants).

Subscriber and Customer Base

252

3,30

1

9,99

8

16,920

44,236

87,298

185,23

1

396,60

0

644,72

8

83

1,20

9

3,99

6

5,64

1

19,985

34,373

72,287

153,30

9 270,00

0

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

March June Sept Dec March June Sept Dec March

Groupon Revenue vs Gross Profit Trend($000's)

Revenue Gross Profit


Subscribers 152,203 627,051 1,807,278 3,434,610 10,445,521 21,369,608 50,583,805 83,100,006

Cummulative Customers 6,840 43,014 153,471 375,099 874,017 2,379,611 4,623,267 9,031,807 15,803,995

Groupons Sold 27,221 116,231 340,471 764,869 1,760,398 4,062,458 8,237,733 16,235,481 28,094,743

Groupon Key MetricsSubscribers, Cumulative Customers vs Groupons sold

Acquired 1.9 million subscribers May 2010 with CityDeal acquisition


Page 5

As at March 2011, Groupon had acquired 83.1 million subscribers, of which 15.8 million had purchased 1 or more Groupons (19% conversion). Since launch, 60 million Groupons have been sold.

When broken down by quarter, Groupon saw subscribers increase by an impressive 18.3 million in Q4 2010 (167% growth), vs a growth in additional unique subscribers of 2.2 million (96% growth). The chart below shows the gradual decline in the rate of conversion of total subscribers.

Note: The conversion rate subscriber numbers.

152

475

1,18

0

1,62

7

7,01

1 10,924

29,214

32,516

7 36

110

222

499 1,50

6

2,24

4

4,40

9

6,77

2

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


Thou

sand

s

Quarterly growth of Groupon Subscribers and Customers

Additional Subscribers Additional customers

28.3%

24.5%

20.8%

25.4%

22.8%21.6%

17.9%19.0%

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

29.0%

June Sept Dec March June Sept Dec March

Percent of Subscribers purchasing Groupons


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The average number of Groupons purchased per subscriber has held steady at around 2 over the last 18 months. Average acquisition cost per new customer is 30$ (and rising) vs revenue of 14$ per subscriber (and falling). This is particularly high for non-recurring customers. Netflix SAC (Subscriber Acquisition Cost) for example is now at 14$.

0.80.5 0.4 0.5 0.4 0.4 0.3 0.3

4.0

2.7

2.22.0 2.0

1.7 1.8 1.8 1.8

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


Groupon Key MetricsGroupons Purchased by Customer and Subscriber

Groupons per subscriber ratio Groupons per Customer ratio

$12.12

$30.40

$7.99

$30.74

$16.86$14.10 $12.88

$7.76

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

2009 2010 2010 2011

Yr end Dec 3mth End March

Acquisition Cost vs Revenueper subscriber

Acquisition cost per new Customer Revenue per Subscriber


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Groupons To-date Groupon has sold around 60 million Groupons for a total revenue of almost $1.4 Billion. The average price of a Groupon has held steady at around 23$ for the past 18 mths.

Something that was not covered in the S-1 filing was the share by deal type that Groupon has been offering. As competition heats up and deal sites start to target specific niche verticals, it is important to understand where Groupon is facing the toughest competition. The only information provided by Groupon is that they have offered over 140 different types of businesses, activities and services that they classify into 6 broad categories. An understanding of the trend, geographical share by each category may be gleaned from 3rd party aggregators like Yipit that are tracking the market at this level, with the added advantage of being able to compare the profile by daily deal provider.

$9

$28 $29

$22

$25

$21 $22$24

$23

$0

$5

$10

$15

$20

$25

$30

$35


Average Groupon Deal Price

Services, 11%

Activities, 15%

Events, 11%Food and Drink,

23%

Health and Beauty, 31%

Global Sales by CategoryQ1 2011 (Volume based)


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MERCHANTS Turning our attention to the merchant metrics, the chart below shows that the cost of acquiring merchants has increased by almost 70% between yr end Dec 2009 and 2010, and on average is now costing Groupon around $7,500 in sales and marketing activities per merchant.

The average revenue per featured merchant has fluctuated over time. Of key importance is that Groupon attract varied and high quality merchants. Another factor affecting average merchant/deal revenue is the fact Groupon now offer multiple daily deals each day for each city. While this provides for greater consumer options/targeting, it may dilute and weaken sales for each featured merchant. Groupon has recently launched Groupon Getaways that will likely have a higher average price point and may help push the average Groupon ticket price higher.

$2,767$3,529

1,688

3,971 $4,455

$7,499

$11,306$10,761

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2009 2010

Sales Cost and Customer Acquisition vs Revenue per Featured Merchant

Sales Cost Marketing Total Sales/Marketing Revenue

$3,405

$15,57

1

$13,06

9

$10,29

2

$15,23

8

$9,127

$9,894 $11,29

9

$11,35

5

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000


Average Revenue per Merchant


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fact, the S-1 filing shows that the Cost of Revenue (amount paid to merchants) since January 2009 has averaged out at 60:40 in favour of the merchant. When analysed by quarter however, it appears Groupon is managing to negotiate better revenue share over time, having moved from 67:33 to 58:42 in the last quarter. This trend may prove to be difficult to maintain given increased competition.

Operational Costs Groupon increased marketing spend during 2010, spending $263 million versus just $4.5 million in 2009. Total operational costs in Q1 2011 out stripped revenue by 18% - which was an improvement on the yr ending December 2010 when costs were running at 30% above revenue. Selling, general and administration costs have also grown as a percentage of revenue, while payment to merchants actually improved yr on yr and is currently at 58% of revenue.

33% 37% 40% 33%45% 39% 39% 39% 42% 40%

67% 63% 60% 67%55% 61% 61% 61% 58% 60%

0%

20%

40%

60%

80%

100%

March June Sept Dec March June Sept Dec March Average

Gross Profit to Cost of Revenue Trend

Gross Profit Cost of Revenue

64.1% 60.8% 54.8% 58.1%

14.9% 36.9%

9.0%32.3%

24.5%

32.8%

16.8%

27.8%

Yr 2009 Yr 2010 Q1 2010 Q1 2011

31,548 930,526 35,665 761,876

Operational Costs as a Percentage of Revenue

Cost of revenue Marketing Selling, General and Administrative

103.5%130.5%

80.6%

118.2%


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Groupon has hired aggressively since launch and now has over 7,000 staff around the world. Over 75% are based outside North America. Being a sales/marketing company it is no surprise that 50% of employees work in sales and are a critical factor in the business. As Groupon expands into new markets, the sales force will increase in proportion.

In Q1 2011, the sales team in North America were far more profitable than their International counterparts, generating nearly 4x the revenue and being responsible for nearly 3x as many merchants.

NORTH AMERICA VS INTERNATIONAL Groupon is currently operating in 43 countries. International operations commenced in May 2010 with the acquisition of CityDeal who offer deals in 80 cities across 16 European countries. In the quarter ending March 2011, International operations accounted for 58% of revenue (up from 37% in the year ending December 2010).

50%38%

54%

12%15%

11%

38% 47%36%

Total North America International

7107 1724 (24%) 5383 (76%)

Employee Head Count by function and Segment

Corporate & Operational

Customer Service

Sales

$181,307

$450,676

$119,803


Revenue per Sales EmployeeQ1 2011

16

31

12


Merchants per Sales EmployeeQ1 2011


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Groupon has invested heavily on marketing with the International segment accounting for 62% of spend, representing 37% of revenue generated from International operations (compared to 26% revenue in North America).

An assumption made by Groupon is that as the market matures, marketing spend will decrease. Unfortunately the Groupon S-1 does not provide a breakdown of marketing spend by quarter and segment to see if Groupon have started to pull back on North American marketing spend. If not, and they continue to push into new markets, marketing expense will continue to grow. Leveraging social media is considered an important aspect of the daily deal space (hence often referred to as social group buying). If Groupon cut back on marketing spend, they will need to ensure that subscribers/customers continue to share deals using the social media tools available.

265,048

346,831

448,317

297,897

Yr end Dec 2010 3 mths end March 2011

North America vs International Revenue($000's)

International North America

62.2%

37.3%

37.8%

26.4%

% share

% of revenue

Marketing Spend ShareNorth America vs International

3 mths end March 2011

North America

International


Page 12

Case Studies: Chicago, Boston, Berlin and London Although only limited data is available in the S-1 filing for each of the 4 cities, it is interesting to make a comparative performance study of the key metrics provided. Each city is showing consistent subscriber growth over time. London has grown quickly in subscriber acquisitions but is falling short on converting subscribers into paying customers. Although Berlin has the lowest subscription base of the 4 reviewed, it has still gained more subs than either Chicago or Boston did after 1 year of activity.

Despite impressive acquisitions of subscribers, it is important to see how many become paying customers. Despite London achieving 1.6 million subscribers, to date only 145,000 have purchased a Groupon (a conversion of just 9% - compared to 37%, 35% and 18% for Chicago, Boston and Berlin respectively).


Boston 17,069 56,904 122,375 194,615 285,615 412,467 561,064 778,936

Chicago 36,891 62,038 147,882 268,056 492,826 750,118 1,102,146 1,504,978

Berlin 92,500 152,800 261,200 396,000

London 159,156 423,660 993,662 1,602,968

4 City ComparisonSubscriber trend


Boston 8,545 20,953 36,634 62,610 94,617 142,930 197,961 272,548

Chicago 19,003 43,023 74,237 125,403 184,074 285,987 409,746 552,712

Berlin 9,072 23,007 40,992 69,412

London 10,284 34,182 75,897 144,933

4 City ComparisonCumulative Customer trend


Page 13

While growing subscriptions is important, Groupon need to address the falling ratio of Groupons purchased per subscriber. Both Chicago and Boston has seen a dramatic fall from 1.5 Groupons per subscriber to around 2 subscribers per Groupon sold. London has not yet managed to grow purchase rates above 1 Groupon per 3 subscribers.

Both Boston and Chicago has seen the average price per Groupon fall over time and even Berlin saw a drop in the last quarter. London however continues to see average Groupon ticket price climb and has been consistently higher than the other cities analyzed. This is likely due to the higher cost of living in London, but may also be a result of the category of deals being offered (eg greater share of high price activities than lower ticket items like fast food, manicure deals).


Boston 50% 37% 30% 32% 33% 35% 35% 35%

Chicago 52% 69% 50% 47% 37% 38% 37% 37%

Berlin 10% 15% 16% 18%

London 6% 8% 8% 9%

4 City ComparisonCustomer share of Subscribers


Boston 1.5 0.7 0.5 0.5 0.5 0.5 0.5 0.5

Chicago 1.3 1.4 1.0 1.0 0.7 0.7 0.6 0.6

Berlin 0.5 0.6 0.5 0.6

London 0.3 0.3 0.2 0.3

4 City ComparisonGroupons purchased per subscriber


Page 14

Although the quantity sold and revenue generated for each featured merchant is dependent on numerous factors, both North American cities have seen average Groupon sales per merchant fall. Berlin and London are still witnessing growth however.

Both Chicago and Boston saw average revenue per merchant rise in the first 15 months of activity, but each has since seen average deal revenue fall back to December 2010 levels.


Boston $26.89 $35.00 $31.88 $30.29 $30.13 $26.40 $24.99 $23.96

Chicago $34.11 $35.56 $26.11 $23.93 $26.50 $24.21 $24.89 $22.62

Berlin $21.25 $26.87 $36.12 $26.61

London $34.30 $42.55 $45.42 $49.99

4 City ComparisonAverage Price per Groupon


Boston 394 533 649 871 1,316 1,541 994 851

Chicago 700 917 1,140 1,829 2,235 2,322 1,445 1,253

Berlin 436 333 411 551

London 486 547 809 931

4 City ComparisonGroupons Sold per Merchant


Page 15

London is currently outpacing the other 3 (generating $46,500), but still lags behind Chicago at its peak mid-2010 with an average deal value of $60,000.


Boston $10,606 $18,667 $20,690 $26,364 $39,655 $40,690 $24,825 $20,395

Chicago $23,881 $32,609 $29,771 $43,750 $59,236 $56,223 $35,957 $28,327

Berlin $9,259 $8,955 $14,851 $14,663

London $16,667 $23,276 $36,735 $46,528

4 City ComparisonAverage Revenue per Featured Merchant


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Page 17

Some outstanding questions

Email Subscription churn/open rates? With a low conversion rate, it would be beneficial to know how many people are actually opening the emails Groupon send out each day. Also of importance is to get a fix on the churn (unsubscribes) that is occurring over time.

What is the trend in fraud/refund rates? Groupon currently hold 4% of revenue to cover fraud and refund. The question is: how does this match up with actual fraud/refund rates and how is it trending over time.

Revenue by deal type? Given the wide value and volume splits that occur between different daily deal categories, plus the growth in niche vertical deal sites, an understanding of

model.

Voucher redemption rates and timeline of redemption? Siupon coupon redemption, any change in either the breakage or time between customers purchasing and redeeming Groupons will affect cash flow. Additionally, should legislation extend legal redemption terms on coupons.

Repeat customer trends

Is Groupon generally appealing to discount hunters. If so, merchants may be less interested in running daily deals and Groupon customers will likely be less loyal to a single Daily Deal site.

Proportion and trend toward national deals?

Groupon has stated that it uses national deals to help build subscriber base and these deals are likely to be less profitable given the lower margin charged to merchants.

What is the share of mentions on Facebook, Twitter etc per subscriber? Part of the daily deal concept is having consumers share deals with friends, family and work colleagues hence the term social group buying. Question is, are people still sharing deals at the same rate?

CONTACT

mailto:[email protected]

http://www.linkedin.com/in/martinnewmtl

http://twitter.com/

Groupons1analysis 110719203435-phpapp01

Business

subscriber

gross profit

deal type

average price

north america

customer acquisition

held steady

national deals