A bad deal for merchants
For many merchants, Groupon is considered as a raw deal. Although Groupon claims that it is a free way to promote services and goods, merchants are required to offer a steep discount of 50% or more. The revenue is then split in half with Groupon Inc (NASDAQ:GRPN), which leaves the merchant with only 25%, meaning that it just sold a product at a 75% discount.
What’s worse, Groupon doesn’t pay merchants right away despite collecting their share of the revenue instantly. Merchants have repeatedly complained about a “payment lag” of up to 60 days, which have led to questions regarding the company’s financial health.
Meanwhile, an alternative for merchants would be to sell their products at lower discounts through Amazon, and receive their payments on time. For Amazon, crushing Groupon Inc (NASDAQ:GRPN) would be easy – it simply has to treat merchants better.
Google Inc (NASDAQ:GOOG), through its own site, Google Offers, has already addressed Groupon’s primary weaknesses by paying out 80% of the merchant’s share of the voucher revenue within four days of the sale, and the remaining 20% within 90 days. It also pays merchants for sold vouchers that are not redeemed, while Groupon does not.
For merchants, the choice of dealing with Amazon, eBay Inc (NASDAQ:EBAY), Google Inc (NASDAQ:GOOG) or Groupon comes down to whichever company offers the better deal. Amazon, eBay and Google Inc (NASDAQ:GOOG) can afford to offer more attractive packages, which Groupon will find increasingly tough to match.
A bad deal for investors
Although Piper Jaffray expects weak revenue guidance for the March quarter, it expects in-line top and bottom line results. However, Piper maintains an ‘overweight’ rating on the stock, stating that international and “take rate” (percentage of revenue kept by Groupon for sold products and services) stabilization could offset some of the negative guidance.
However, I believe that investors shouldn’t have too much faith in Groupon. The company has been mired with accounting problems, such as its embarrassing earnings revision last March when a higher-than-expected number of customers requested refunds.
With so many high-profile departures over the past year, it also appears that the company does not have much faith in itself. Co-founder Eric Lefkofsky and board member Ted Leonsis are currently the interim-CEOs until the company can find a suitable replacement for Andrew Mason.
The Foolish Bottom Line
With a negative profit margin of -2.35% and a bleak -7.07% return on equity over the past 12 months, you should only invest in Groupon if you have faith that its business model of daily deals can actually grow.
When an e-commerce company has lost credibility with its merchants, investors, and own executives, it’s time to move on. Bigger players such as Amazon.com, Inc. (NASDAQ:AMZN), eBay Inc (NASDAQ:EBAY) and Google Inc (NASDAQ:GOOG) will inevitably gobble up Groupon’s daily deals market by offering merchants more attractive terms, and customers will follow. In other words, Groupon is toast.
The article Groupon: Going, Going, Gone… originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
