Groupon ‘Goods’ Shows Ecommerce Isn’t an Answer to Deals Fatigue | Street Fight

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Groupon ‘Goods’ Shows Ecommerce Isn’t an Answer to Deals Fatigue

1 Comment 19 November 2012 by

Just last week, Groupon was touting its Groupon Goods unit as a potential panacea to the narrowing of the daily deals market. But the move might not be such a positive one: Groupon Goods may be about to choke Groupon to death. As investors evaluate whether the company has hit rock bottom, it’s the company’s e-commerce business, Groupon Goods, that may be its biggest liability.

Part of the concern investors should have about the goods business is just how vital Groupon Goods is to the company’s top line. The division accounted for 45% of total revenue in Q3 2012 and that’s only set to increase. Meanwhile, income from the company’s daily deals business declined for the second straight quarter. But dig into the Q3 financials a bit more, and it’s possible to see for the first time how little the goods business leverages the existing assets — which Groupon has spent hundreds of millions of dollars developing.

Goods Erases the Leverage in Groupon’s Local Business
As a company scales, and its assets mature, the cost of making a dollar should decrease. That was Groupon’s bet, and — to a certain extent — the bet played out. If you look at the local business (what the company refers to as  its “third-party” revenue), the cost of revenue as a percentage of revenue (a rough indicator of leverage) within the North American segment has dropped from 28.6% in Q4 2011 to 9.8% today. That’s a 300% drop in three quarters, and a sign that the company is paying less for every dollar that comes in.

So why has the same metric for the company’s total earnings nearly doubled in the same period? Since Groupon rolled out its e-commerce business in Q4 2011, the cost of “direct revenue” (the term Groupon uses to disclose its Goods business) as a percentage of direct revenues has stayed north of 85%. It accounts for 70% of total cost of revenue, and contributes less than half of the total revenue.

The numbers show a company split between two businesses: a slowing-yet-increasingly-profitable local marketing service, and a costly e-commerce business that will eat up increasingly more investment while producing smaller and smaller profits. The problem for Groupon is how little the two business have in common. An investment in one — say, the rollout of a new point-of-sale system — does little to improve the other. Pushing one (like increasing the amount of goods included in the daily email blasts) means less opportunity to sell the other.

With Goods, Groupon Became a “Reseller”
Part of what makes the margin for Groupon’s local commerce business so high is that the marketplace already exists. The supply networks, fulfillment methods, and customer base needed to keep a market running are already in place. Groupon was merely an accelerant — a facilitator of commerce within a given structure. Goods pushed the company into the reseller business, and the variable risks and liabilities associated with the upkeep of a market.

In trying to bill out the networks need to function as a reseller, Groupon missed an enormous opportunity to continue to rethink how the local marketplace functions. Like it or not, the daily deal provided a brand new way for consumers to purchase goods and services in the local marketplace. The innovation was the transaction, not the discount. There’s a lot of money to be made in continuing to disrupt the traditional structures that govern the local marketplace. Since Groupon IPO’d a year ago, we’ve seen companies rethink everything from how we pay (Square) to how purchases are fulfilled (same-day delivery). Groupon made the wrong decision when it was ahead. Now its a question of whether the embattled company can catch up.

Steven Jacobs is deputy editor of Street Fight.

  • http://twitter.com/BryanZuniga Bryan Z

    That’s an interesting article and I’m curious what are your predictions for Groupon Goods for 2013?

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