Deal a Day
Groupon was created around the idea of selling a single product or service, normally from a local merchant, to its network of potential buyers. The deals were heavily discounted, which the buyers liked. And they usually sold out, which Groupon Inc (NASDAQ:GRPN) and its retailers and service providers liked.
When first introduced, this was a completely new idea. Stores found themselves flooded with customers after a Groupon campaign. Which led to more campaigns and more people looking to get in on the deals. At one point, it looked like Groupon would change the face of local marketing, which allowed it to expanded aggressively.
Problems
The biggest problem the company faced was that the deal-a-day model is easily replicated. With no way to protect its market, competition flooded in. While part of Groupon’s success was in creating a large following of potential buyers, the social networks make that increasingly easy to accomplish. Moreover, the company’s list of sellers, another key to its business, isn’t exclusive. So competitors can easily step in and siphon off business.
Some sellers, meanwhile, have found the service less beneficial to their long-term results than hoped. For example, a restaurant owner I know personally experiences an influx of customers after a Groupon offer but found that very few become repeat customers. Privately held Restaurants.com, a restaurant focused competitor to Groupon, works much better, with coupons generating repeat business. Since a Groupon Inc (NASDAQ:GRPN) is little more than a loss leader to get potential new customers in the door, these types of complaints are a big issue.
Buyer fatigue is another problem that Groupon has faced. When just starting out, the company’s service was cool and new. Now, deal sites are commonplace. Moreover, customers started to realize that the deals may be good, but that doesn’t mean they are worth buying. A few expired Groupons would be enough for most people to question the whole concept.
Changing Model
While sales took off at first, the mix of competition and fickle customer tastes quickly led to an obvious need for a strategy shift. To that end, the company has delved into direct product sales, acting as a liquidator. Not a bad business idea, but no more unique than its Groupon Inc (NASDAQ:GRPN) business.
In fact, Overstock.com, Inc. (NASDAQ:OSTK), among others, has been successfully functioning as a liquidator for years. While Overstock.com, Inc. (NASDAQ:OSTK)’s top line has been heading up fairly consistently, earnings have been far more volatile. While the inherent benefits of using the distribution power of the Internet are strong, that hasn’t yet translated into a stable business model. As such, Overstock.com, Inc. (NASDAQ:OSTK) isn’t a good choice for most investors.
Bigger Players
Deal-a-day competition is also important to keep in mind. While Living Social is Groupon’s main competitor, there are bigger fish in these waters. For example, Amazon.com, Inc. (NASDAQ:AMZN), which has a stake in Living Social, has its own branded offering, Amazon Local. Google Inc (NASDAQ:GOOG) also has a deal site that includes liquidation sales.
While Groupon quickly built buzz around its name, Amazon and Google clearly have more impressive pedigrees. Google may just be testing the waters, something it does quite often with new ideas, but Amazon is a retail powerhouse that isn’t going anywhere. Indeed, Groupon is financially strong, but probably not strong enough to take on these two industry giants.
To give scope to the size differential, Groupon had revenue of about $640 million in the just ended quarter, Amazon had revenue of $21 billion in the same quarter. Groupon is small fry. Amazon can afford to keep the pressure up to make life difficult for a competitor and slowly build yet another business as it goes. Although a recent sell off is notable, it is just a blip in the long-term advance the shares have seen. More aggressive investors would be better off in Amazon than Groupon Inc (NASDAQ:GRPN).
Avoid the Buzz
Not every good idea is a long-term winner for the company that came up with it. The deal-a-day concept is great, but too easy for others to exploit. A shift into an already crowded retail market isn’t likely to be any better of a direction. The removal of a controversial CEO doesn’t change the bigger problems the company faces. Most investors should simply avoid Groupon.
The article The Problem Isn’t The CEO originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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