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Daily deal emails are used to remind Groupon consumers to save money while shopping.

What's the deal with Groupon?

by Carolina Herrera
Feb 12, 2013

Groupon Inc.’s climb to the top was fast. Unfortunately for its investors, the Chicago company’s decline has been just as rapid. Increasingly, consumers who were earlier enchanted with the company’s once-novel daily-deal offerings are deciding they just don’t care.

“I jumped on board as soon as the site got popular, but lately I just find myself deleting unopened emails from them,” said Emily Homen as she grabbed coffee at a downtown Starbucks. “I haven’t gone as far as unsubscribing though.”

When its little known co-founders launched the website in late 2008, Groupon’s deals of the day widely appealed to recession-battered consumers anxious to save more and spend less.

After a fabulous, high-profile rise, Groupon has been hampered by a growing list of setbacks. After having lost much of its early luster, these days Groupon is scrambling to recapture the bright future that was once anticipated for the company. And while it launches new market efforts, there are rumors that it has become takeover bait.

When Groupon burst on to an untapped market, the daily deal website developed at an accelerated rate. Experts predicted the company would make $1 billion in sales faster than any other company had before, and Groupon’s name became almost as prominent as key Internet players such as Facebook Inc. and Google Inc.

But despite high hopes for Groupon at the beginning of 2012, the year ended on a disappointing note.

“For a supposed profitable Internet company, they just aren’t very profitable,” said analyst Craig Sterling at EVA Dimensions.

After making a big splash, the company's star has been fading. Less than three years after Groupon was created, Google proposed purchasing the closely held company for $6 billion in late 2010. Under CEO Andrew Mason, Groupon spurned the offer, and opted to go public through a $20-a-share IPO.

The decision seemed positive as the company’s shares closed above $26 on its first day on the market. But the value didn’t hold, and early investors have lost much of their investment. On Monday, Feb. 11 the stock closed at $5.36 per share, down about 80 percent from IPO price in November 2011.

As the company’s troubles mount, the stock has continued to drop, and its current market valuation is about $3.5 billion – well short of the more than $15 billion it reached shortly after the offering.

Because of Groupon's losses, the company does not have a price-to-earnings ratio. In comparison, the S&P 500’s P/E ratio currently stand at 17.29.

Unsubstantiated rumors have circulated this year about the possibility of a tech giant such as Inc. acquiring the company. A Groupon representative declined to comment.

But speculation remains. “Their costs are way too high,” said analyst Sterling. “Being bought out would help with the increased cost.”

Things used to be simpler. The collective buying model that is at the center of Groupon’s business connects vendors with interested users on the site. The ability to partner with any national or local business willing to work with the company allowed Groupon to expand the business into 48 countries.

Contracted merchants are expected to lower their prices to a sale value that will appeal to deal-seeking users. For example, a $30 manicure would be advertised at a discount of $20. Groupon then receives 50 percent of the sale money once the deal is purchased, or in this case $10. The remaining money is then given to the manicure business. Based off the example, the merchant incurs a loss of $20 at the end of the purchase.

The overall idea is to attain multiple new customers. But many vendors complain that a majority of consumers show no loyalty for future services. The discount deal draws them in, but they don’t stick around to form a long-term relationship.

Could making changes lead Groupon towards a brighter future in 2013? Possibly.

Recently, Groupon took merchants’ complaints about the potential risk of doing business together into account and launched a program in January to help participating businesses gauge how a deal will do.

“We're providing local businesses with a free tool they can use to work out the profitability of their Groupon campaigns,” said Nick Halliwell, Groupon’s public relations representative. “It’s something that's generally not available through other marketing, advertising mediums.”

The information in the free Merchant Impact Report was originally only available to large businesses and not all Groupon merchants. It includes how many people received the deal, who is purchasing it and a profit calculator that will estimate cost-effectiveness.

“As a small business owner, I appreciate the depth of information provided and how convenient and easy it is to review the success of my Groupon deal,” said Jake Parks of Jake’s Coffee, Tea & Sandwiches in California in a press release. “Seeing the extra dollars spent over the deal value and the amount of repeat customers provides tangible proof that Groupon works.”

The company’s changes could help turn things around, says advisor Aaron Kessler at Raymond James. Groupon began to expand into other markets in 2011. “The growth has slowed with the core service so they do need to look into expanding,” he said.

In 2011, the parent launched Groupon Goods, which offers online daily deal discounts on products, not services. That put Groupon into direct competition with well-known sites like eBay Inc. and Amazon. To better compete in that tough marketplace, Groupon two months ago bought CommerceInterface, a provider of web management for e-commerce sites used by some of the industry’s biggest players, including Amazon.

That wasn’t the only deal Groupon has struck as it moves to better position itself in the market. Prior to acquiring the web management system, the company began offering payment-processing services to offer merchants a lower-cost alternative to the bigger processors they were using. Again, this is a market already tapped into by large companies such as PayPal Inc.

“A lot of the new areas might not be as high growth,” said advisor Kessler. “But maybe at this point it is important for them to redirect.”

Despite the company’s effort to offer more and better services, , experts believe Groupon still faces future challenges There are questions about the company’s top management, and its early financial accounting practices have drawn criticism.

Rumors that Mason might be replaced as CEO have been circulating for a few months now. Some say the company’s embarrassing accounting miscues underscore Mason’s lack of experience in managing a public company.

Investors may get a better understanding of where Groupon is headed when the company releases its fourth quarter earnings at the end of this month. The company is expected to show a small loss, but Wall Street will be more interested in the amount of active customers, and the impact of holiday shopping on the company.

With copycat competitor Living Social having recently incurred losses the question remains: Has the day of the daily deals come and gone?

“I mean, I still find myself occasionally buying things from them,” Homen said. “You know, sometimes you just can’t argue with a bargain.”