Groupon: What happened?
It's no mystery that Groupon (NASDAQ: GRPN) is the biggest name in daily deal websites. In the late 2000s, it helped popularize a special kind of daily discount wherein a set number of people agree to participate in order for a company to “unlock” its discounted merchandise or special sale.
Through Groupon, retailers could be guaranteed a certain number of customers at a certain price. Groupon makes its money by keeping a share of the revenue generated by the deal.
Even though it enjoyed its biggest, most record-breaking holiday sales season this year, the company announced it is laying off about 10% of its workforce and shuttering operations in six countries.
This announcement follows a series of international closures already announced this year. Last April, Groupon sold its controlling stake in Korean ticket company Ticket Monster to private equity firm KKR, which I talked about earlier this week.
Essentially, Groupon is simultaneously at the top of its game and furiously downsizing. What gives?
In the company’s blog on Tuesday, Groupon CEO Rich Williams wrote:
We saw that the investment required to bring our technology, tools and marketplace to every one of our 40+ countries isn’t commensurate with the return at this point. We believe that in order for our geographic footprint to be an even bigger advantage, we need to focus our energy and dollars on fewer countries. So, we decided to exit a number of countries where the required investment and market potential don’t align. You likely saw that we recently exited Greece and Turkey. We are also ceasing operations in Morocco, Panama, The Philippines, Puerto Rico, Taiwan, Thailand and Uruguay.
Part of the difficulty is, of course, a strong U.S. dollar. When approximately 43% of the company’s revenue comes from overseas markets, a strong dollar is a major hindrance to the bottom line.
Another problem is that the business model is not favorable to most types of businesses. In fact, a 2010 report revealed that Groupon actually turns down 88% of deals pitched to it by businesses.
This is partially because its profits are based on revenue sharing, similar to advertising... so huge revenue does not necessarily mean it’s making tons of money.
For the company to make money, it needs individual deals that take in lots of money AND that have contracted Groupon with a healthy share of the revenue...
And ever since Groupon went public, it’s reported big revenue growth every year with a consistent operating loss. Last year, it lost $73 million.
In short, the business model is not at all strong.
Five years ago, daily deal sites were on an amazing upward trend, and everyone wanted a piece. With more than 500 start-ups attempting similar deal-making, Groupon turned down a $6 billion buyout from Google and opted instead to go public.
Groupon’s was the biggest U.S. tech IPO since Google’s in 2004.
Since that time, the cracks in the foundation have become obvious.
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The weakness of the daily deal business model could clearly be seen in Groupon’s biggest competitor, Washington, D.C.-based LivingSocial.
The site runs in a fashion similar to Groupon but attempts to connect consumers with local businesses they can support.
In 2013, LivingSocial received an emergency $110 million bailout from investors such as Amazon to keep the company out of “imminent financial ruin.”
The company, which received a $5.7 billion valuation in 2011, looked to be worth less than a quarter of that when it accepted the emergency capital.
LivingSocial is still a private company, but because Amazon owns nearly a third of it, the financials can be seen in part.
After a couple years of losses, LivingSocial underwent significant downsizing. According to Amazon’s ledgers, the layoffs and restructuring turned the company profitable. In 2014, it netted approximately $100 million in profit.
Unfortunately, that profit came entirely from the sale of the company’s Asia business. The company’s operating losses were actually $73 million, an increase over the previous year’s.
This is after scaling staff back from its peak of 5,000 employees to just 1,350.
Ultimately, these daily deal sites fail because they do not turn deal-buying customers into regular customers. Merchants using Groupon and LivingSocial might attract a huge flash of customers, but it comes at a share of their revenue, and there’s no customer stickiness.
As we approach the midpoint of the decade, it looks like “Groupon” could end up being a terribly dated early-2010s buzzword.
For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.
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