38% of Groupon’s revenues now come from selling low-margin, discounted junk

Is Groupon Goods a Daily-Deal Savior or a Low-Margin Distraction?

Published on August 7, 2013
by Jason Del Rey

When Groupon recognized in 2011 that daily deals alone wouldn’t lead it to long-term success, the company started selling discounted products under the Groupon Goods banner. That business has continued to grow strongly since then, accounting for $151 million in revenue in North America in the first quarter, and $229 million globally. As the Chicago-based daily-deal company prepares to report second-quarter earnings on Wednesday, it’s clear that analysts will be paying close attention to this business segment. That’s because the Goods unit now represents 38 percent of Groupon’s sales, via discount sales of consumer electronics, jewelry, clothing and other such items from national companies. The rest of the company’s business, of course, focuses on selling discounted services from local merchants.And while Goods sounds like a good adjunct business, the effort also is fraught with challenges. That includes low margins and expensive incentives, such as free shipping, that is needed to spur adoption. It also puts Groupon smack into indirect competition with Amazon, the behemoth that dominates online retail. On a more operational level, the division also lost its general manager in May, when Faisal Masud left for an e-commerce leadership role at Staples.

In a research note, J.P. Morgan’s Doug Anmuth outlines some concerns: “Groupon Goods growth is strong as the company leverages its large subscriber base, but we believe this is a less differentiated business and we think there are better ways to invest in ecommerce.”

Beyond Goods, here are some other topics to look out for later today when Groupon reports after the markets close:

First: What progress, if any, the company is making on its search for a permanent CEO. Day-to-day operations are currently being overseen by co-founder Eric Lefkofsky, while co-CEO Ted Leonsis leads the CEO search.

Second: Wall Street will be looking to see what percentage of transactions occur on Groupon’s mobile apps, a bright spot in Q1 when it accounted for 45 percent of sales. If that number continues to grow, the company has a clear data point that proves it is becoming increasingly less dependent on its original email-based “push” model.

And third: There’s one financial nugget that often goes unnoticed — Groupon has more than $1 billion in cash. It would be surprising if the temporary leadership team talks about what they might do with it, but it is an important number to watch.

For the whole company, on average, analysts are expecting earnings of two cents per share in the second quarter, on revenue of $606 million.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: