Maybe we should start calling them yesterdaily deals. The group-discount model that Groupon pioneered and cultivated into a mass phenomenon has become a fading fad. Worse than that, it’s a deteriorating business. LivingSocial’s recent financials suggested as much. If there were any doubts left over, Groupon’s latest earnings should lay them to rest.
Groupon’s stock is down 30 percent Friday after it said revenue grew 32 percent a year. Many companies would love to have that kind of revenue growth, but it’s bad news for Groupon for two reasons. First, because investors were expecting something closer to 38 percent growth. Second, because that is a tiny fraction of the kind of growth Groupon was enjoying even a year ago. This is a company that has gone from red-hot to lukewarm in the space of a year.
Before Groupon filed to go public in June 2011, it lay claim to being the fastest-growing company ever. Its prospectus showed its revenue growing at a 1000-percent annual rate, in line with the growth of its gross billings, or the revenue Groupon collects before paying a share to merchants. But over the past five quarters, both figures have declined dramatically.
In the most recent quarter ended Sept. 30, gross billings grew only 5 percent from the year-ago period. And they declined 5 percent form the previous quarter. The reason for this slowdown has mostly to do with the money coming from Groupon’s daily-deals business. Its North American revenue fell 2 percent to $159 million from a year ago, while international revenue grew 1 percent to $265 million.
In a conference call discussing the earnings, CEO Andrew Mason cited the sovereign debt crisis in Europe as a key reason for the sluggish international growth. Groupon thrived during the US recession a few years back, as consumers took to its discounted deals. But the company focused on higher-priced deals in Europe, even though its economy has been stuck in its own economic morass.
In North America, where the daily-deals business is now shrinking, the reasons have to do with a longer-term trend Groupon is unlikely to stop. The group-buying fad has passed. A core market of bargain hunters will keep going for Groupon deals, but Groupon is likely to face the kind of slow bleed that eBay saw in its online-auction business.
A decade ago, eBay auctions were a cultural phenomenon, with many consumers drawn by the thrill of winning an auction. In time, the allure of that challenge passed, prompting eBay to adopt a fixed-price model. Some eBay users still love auctions, but that business has become more of a niche for eBay. Just as the group-discount business will become for Groupon, LivingSocial, and others, as online consumers move onto the next buying fad.
Groupon, of course, has seen this coming. It’s expanded into new areas such as Groupon Payments, which offers new services to local merchants, and Groupon Goods, an ecommerce division in which Groupon is the merchant offering deals. Mason said that newer areas like Payments are “nascent businesses” that are not “near-term growth drivers.”
Groupon Goods, however, is another matter. Introduced in mid-2011, Goods is generating the bulk of Groupon’s 32 percent revenue growth. In the most recent quarter, revenue from the ecommerce business surged to $145 million from $7 million, accounting for a quarter of total revenue.
This is the kind of hypergrowth Groupon is accustomed to, but there’s only one problem. Goods is a low-margin business. The gross profit for the ecommerce business is only 12 percent of revenue. By contrast, the older group-discount business has an 87 percent gross margin. So most of the new growth Groupon is enjoying isn’t translating to the bottom line. As a result, Groupon broke even in the quarter, down from the 4-cents-a-share net profit it saw in June.
But even with the impressive growth in Groupon Goods’ revenue, the company still came up short of investor expectations. And so Groupon’s stock is plunging again. It’s now 91 percent cheaper than it was at its peak on its first day of trading a little more than a year ago. Groupon’s market value ($1.79 billion) is well below its revenue for the past 12 months ($2.19 billion) and only 50 percent above its cash on hand $1.2 billion. It’s also about 30 percent of what Google was willing to pay for Groupon nearly two years ago. (Since then, Google’s stock has risen 11 percent).
In the end, the hypergrowth that once made Groupon the fastest-growing company is the very thing causing its problems today. Internationally, as Mason admitted on the conference call, it led to “execution issues.” In North America, it led to heavy spending on hiring and marketing to support a consumer fad that has diminishing potential for the future.
That leaves Groupon cutting jobs — it let go of 80 on Thursday — and slashing its marketing spend, which has fallen to 12 percent of revenue from 40 percent a year ago. But that cost-cutting can only go on so far without cutting into the proverbial bone. And it overlooks a bigger issue for the company: Groupon is quickly maturing from a pioneer of the high-margin daily deal business model to a just another low-margin purveyor of retail goods. That’s not a terrible fate, but neither is it the disruptive company investors believed they were getting in the IPO.