This post is written by Unaiz Kabani of Yipit, a daily deals aggregator and data firm. Yipit produces excellent research on the daily deals industry and has written several analyses of Groupon.
Groupon’s Product Expansion Masks Decline in Core Local Deals Business
Groupon is now in the second week of its IPO roadshow, where it is pitching prospective investors on the growth of its business.
Groupon’s new products are major components of its growth story. In the third quarter of 2011, Groupon expanded from offering just deals for local services to those for travel, event tickets, and consumer products with the launch of Groupon Getaways, Groupon Live, and Groupon Goods.
Slide from Groupon online roadshow via www.retailroadshow.com
New Products Driving Growth
Although the performance of Groupon Now! has been disappointing, Groupon’s other key products that launched in Q3 have done very well.
- Groupon Getaways: Getaways generated $25 million in gross billings during the quarter, and surpassed LivingSocial Escapes, formerly the leading travel deals product, in just its first full month of operation.
- Groupon Live: Groupon’s partnership with LiveNation to sell event tickets collected $9 million during the quarter.
- Groupon Goods: Groupon quietly launched Goods, offering consumer products, after the success of Groupon Products in several international markets. Goods accumulated over $2 million in gross billings in only one week of operation during the quarter, putting it on pace to be a $100 million business.
In Q3, these products collectively contributed $36 million in gross billings – that is already 9% of Groupon’s total North American gross billings after the products contributed nothing in Q2.
Slide from Groupon online roadshow via www.retailroadshow.com
Groupon highlights the importance of these products in its roadshow presentation. It indicates that while Getaways, Live, and Goods will continue to grow, so will the core local deals product.
Masking Decline in Core Local Deals
However, Groupon’s core local deals business declined in the most recent quarter. Groupon grew 8% in North American from Q2 to Q3 because of these new products, but its core local deals business actually dropped 3%.
If Groupon’s growing subscriber base is taken into account, the recent decline of its local deals business is even more troubling. Gross billings per subscriber for the overall business declined 14% during the quarter, while gross billings per subscriber for the core local deals business declined 22%.
Why is Groupon’s Core Local Deal Business Declining?
There are a few reasons.
- Cannibalization: The new products are often being featured in the same emails and Groupon pages that previously only displayed local deals. There is likely an impact from the new products simply cannibalising sales from the core local deals product.
- Seasonality: Q3 coincides with the slow summer months, when many potential customers are on vacation and less likely to be checking their email each morning. Groupon’s drop in North American gross billings in July from June was primarily the result of the July 4th holiday weekend.
- Competition: Google and Amazon recently introduced their local deals offerings and rapidly expanded in Q3. By September, Amazon had already become the fourth-largest daily deal provider, only trailing Groupon, LivingSocial, and Travelzoo.
Can “Smart Deals” Reverse this Trend?
While Groupon initially experimented with personalisation of deals late in 2010, it only recently began implementation of its new “smart deals” initiative, which attempts to better match specific deals to specific subscribers. In recent weeks, Groupon updated its user profile interface to better identify the types and locations of deals that most appeal to each specific customer.
Groupon believes that its recent efforts to better match specific subscribers with the deals they are most likely to buy will increase conversion rates and reverse the trend of declining revenue per subscriber.
The launch of Groupon Reserve, which targets higher-end subscribers by offering premium experiences, will further help Groupon segment its customer base and increase its revenue per user.
Successfully implementing such “Smart Deals” should increase Groupon’s overall share of customer wallet and help reverse the recent decline in its core local deals business.
Implications of Product Expansion
CEO Andrew Mason often points to Groupon’s huge local salesforce as one of the company’s greatest competitive advantages over potential rivals, such as Google and Amazon. As Groupon moves into product categories that do not require such an expansive local salesforce, Groupon may have fewer competitive advantages.
- Fewer competitive advantages: While Groupon dominates the local deals market and is able to use its leading position to extract higher margins, it does not yet dominate travel, tickets or general e-commerce. Groupon faces competition in these segments from successful existing companies, such as Amazon and Priceline. Going forward, it appears that Groupon will be generating an increasing percentage of its revenue from products where it faces more established competition.
- Lower commission rates: By partnering with the likes of Expedia, LiveNation, and a host of e-commerce partners, Groupon receives lower commission rates from these new products than it does from local deals. Essentially, lower-commission sales from these new products are replacing higher-commission local sales, which is why Groupon’s average commission rates are falling.
- Better operating margins: Deals from the new products are generally higher priced and, in the case of Getaways and Goods, can be distributed nationally. Groupon’s average gross billings from a Getaways deal is $95k compared to $11k for its average local deal. Therefore, sales costs as a percentage of gross billings per deal are substantially lower for these deals than for core local deals, potentially counteracting the adverse effect of lower commissions on the bottom line.
Given Groupon’s huge existing subscriber base, product and category expansion represent a great opportunity to better monetise each subscriber and increase share-of-wallet.
While Groupon will likely see continued growth from the addition of new products, prospective investors will be looking to see if increased personalisation can reverse the decline in Groupon’s core local deals product.
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