The company’s merchant group is mainly comprised of entities that are new to the market and comparatively smaller in size. In order to sell their products through Groupon, they have to offer discounts in the range of 50-70%, which eats considerably into their margins. On top of that, they need to pay a hefty commission out of the remaining profit, to the company. Being small players, they cannot afford to lose out a major share of their profit for creating brand awareness. Such low value proposition has compelled merchants to shift to other avenues for brand promotion including social media.
Focusing a lot on geographic expansion
Additionally, I believe that Groupon has focused solely on geographic expansion in the last few years rather than creating value for stakeholders and enforcing further partnerships. It has failed miserably to replicate a similar model as in North America, which has taken a toll on its revenue. In its efforts to become the biggest global player, Groupon failed to take cognizance of the fact that needs and structure vary from country to country. Instead of working on reach in a particular country, it went with the similar proposal to different places leading to a thin presence.
Even Living Social is failing
The claim that a business model similar to Groupon’s is not sustainable is testified by Living Social, a website similar to Groupon, primarily funded by Amazon.com, Inc. (NASDAQ:AMZN). Living Social has also been facing serious challenges in the industry, trying to find its way back to profitability. In the first quarter, it posted a net loss of $50 million, as compared to net income of $156 million. In 2012, Amazon.com, Inc. (NASDAQ:AMZN) wrote down the value of its investment in Living Social as it realized that such high valuation was not justified for the falling company.
The shares of eBay Inc (NASDAQ:EBAY), Amazon.com, Inc. (NASDAQ:AMZN)’s big rival, recently dropped on its CEO’s warning about economic ‘headwinds’ in Europe & Korea. This could be hazardous for Amazon.com, Inc. (NASDAQ:AMZN)’s earnings, which have been in bad shape the last few quarters. In spite of being a highly overvalued stock, Amazon.com, Inc. (NASDAQ:AMZN) has mystically rallied for a substantial part of the year. It will be interesting to see the market’s reaction to its earnings (due shortly) amid challenging macroeconomic conditions and stiff competition.
Trying out something new
Reportedly, Groupon will be now be providing an online restaurant table booking service called Groupon Reserve, in order to supplement overall revenue. This initiative will mark its entry into a domain led by OpenTable Inc (NASDAQ:OPEN) that follows a really simple and sustainable business model. The reason behind its success comes from the fact that it has focused solely on a single line of service, cutting out the clutter created by many products & services. However, such a model is not a completely desirable one because it restricts scope of further activity leading to limited growth.
Analysts have downgraded OpenTable Inc (NASDAQ:OPEN) because of limited growth prospects. More than anything else, the company now needs to focus on structured international expansion, which will ensure further revenue channels. At a trailing P/E of around 59.3, the company is quite overvalued and could face a massive correction if it fails to meet earnings expectations.
Final words
While Groupon’s business model is not complicated, it is definitely unstable and unsustainable. It is now focusing on expanding horizontally by introducing new categories of business like the Groupon Reserve. However, I am not sure as to how much is this strategy going to compensate for the inherent drawbacks in its core business. In my opinion, the company should be targeting local commerce segment and making a move with particular markets to achieve sustainability.
Presently, the markets are witnessing higher volatility due to the Fed’s stance on the QE program, rally in the housing markets and other reasons. As such, it is prudent to invest in equities with a long term view and Groupon is not an ideal long-term investment because of various associated risks. Hence, I would not suggest making a new position in this stock.
The article This Is Not the Company You Should Invest In! originally appeared on Fool.com.
Mihir Mehta has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and OpenTable. The Motley Fool owns shares of Amazon.com. Mihir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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