A new Groupon?
Groupon Inc (NASDAQ:GRPN), the daily deals household name that is approaching the two-year anniversary of its IPO this coming November, released “Groupon Reserve” on its website in the first week of July. Touted on the site as featuring “exclusive offers, exceptional experiences, easy reservations, up to 40% off, no-pre-payment, and no vouchers required,” it looks like the next step for the company that has fallen over 66% since its IPO.
At first glance, the change looks like a plus for customers. However, Is it really a plus for Groupon Inc (NASDAQ:GRPN) overall? The company’s stock is up 82% this year , mostly due to a surprising first quarter revenue beat and speculation. Despite being up, quarterly profit margin and net income averages since the IPO has largely been in the red at -3.6% and -$20.6 million, respectively. Although revenue shot up to $2.3 billion last year from just $313 million in 2010, the company is still lost $67 million last year.
One key problem Groupon Inc (NASDAQ:GRPN) may face is possible cannibalization of its core daily deal segment. If customers can use Groupon Reserve, which on paper looks superior in every way to the company’s standard offers, then what is stopping customers from completely ignoring the regular deals? Groupon now has 41 million customers worldwide, and while North American revenues grew 42% last quarter as the international segment fell 18%, there is a small catch – 56% of company revenues still come from overseas. This means that if the trend continues, Groupon Inc (NASDAQ:GRPN) will continue to see operating income decline like it did in the first quarter of 2013 when it went from $39.6 million to $21.2 million.
There is also a possible branding issue with Groupon. Past issues like vouchers not being accepted and the lack of clarity in deals of the past may still haunt customers and prevent them from testing out Groupon Inc (NASDAQ:GRPN) Reserve. Likewise, weak endorsements from the Wall Street consensus still puts the one-year price target under the current share price by over $2.
Expanding tables
Scotland-based Eveve and now Groupon’s Reserve are two of the bigger names trying to jump into the market that OpenTable Inc (NASDAQ:OPEN) currently dominates in the US. Calling itself the world’s leading provider of online restaurant reservations and seating more than 12 million diners per month through online bookings, OpenTable Inc (NASDAQ:OPEN) is now looking to expand on its successful business model internationally.
Unlike Groupon, OpenTable’s business appears more focused on helping restaurants prosper. The company’s propriety reservation software if being used by businesses with much success and this helps keep OpenTable Inc (NASDAQ:OPEN)’s revenues very predictable on a month-to-month basis. Additionally, unlike Groupon Inc (NASDAQ:GRPN), OpenTable’s revenues are mainly from North America and the company has a very high customer retention rate.
The business model works well financially as the company’s stock is up over 122% since its IPO. Quarterly profit margins have steadily gone up over the past five years, climbing from -1.83% in 2008 to 15.69% in the company’s most recent quarter. It should be no surprise then that Groupon is trying to capitalize on the trend. Another company may see greater opportunity in adding restaurant reservations to its own business, however.
GRPN Total Return Price data by YCharts
Facebook or OpenBook?
Facebook Inc (NASDAQ:FB) has a lot new products and ideas which include Facebook Home, Instagram Video, and new partnerships. However, the scrutiny on the company has also grown since its IPO over how to better monetize its 1.1 billion active monthly users. Despite showing significant mobile growth in a year’s time, going from 0% in 2012 to now a full 30% of revenues coming through mobile systems, people are still waiting for Facebook Inc (NASDAQ:FB)’s next big idea.
Restaurant reservations could be the perfect fit for Facebook. While Facebook Inc (NASDAQ:FB) did see total sales increase by 38% in its most recent quarter to $1.46 billion with $1.25 billion of that being advertising revenue, its average revenue per user dropped from $3.30 to $2.85 within the US and Canada segment. Unlike hardware or other high cost-of-entry innovations, restaurant reservations could be easily added through the company’s current business model. Food is something its users already discuss through posts and food pictures on Instagram, and adding something similar to an OpenTable would compliment real consumer needs.
OpenTable did a survey in 2011 where the average check per diner was $42.50. If Facebook can attract just a small percentage of its massive user base to just a few restaurants a year, this could skyrocket current revenues.
Final thoughts
Groupon Inc (NASDAQ:GRPN) Reserve might be a great idea but it may be too late for Groupon due to its branding problems and the fact that it is very similar to OpenTable’s business. Even worse, bigger Internet companies like Facebook could potentially use their money and userbase to move into the business and take a huge chunk of the pie. This is because as more and more people create multiple Facebook accounts, revenues and net income – not user growth – will soon be the only data that matters. To make that data more appealing, restaurant reservations might be something for Facebook to consider adding to its menu.
The article Will “Groupon Reserve” Save Groupon or Open Doors for Others? originally appeared on Fool.com and is written by Michael Carter.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Facebook and OpenTable. The Motley Fool owns shares of Facebook. Michael 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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