Groupon’s Stock Dives as Deal Margins Shrink

grouponGroupon lost more than a quarter of its market value in after hours trading on Wednesday after the company reported diminishing margins and continued international stagnancy in Q4. The once-resurgent daily deals company saw gross billings increase 24% year-over-year in the fourth quarter, but declining margins in both its local and ecommerce business forced its gross profit down 10% from a year earlier.

During an earnings call Wednesday, the company attributed its dwindling profits to larger-than-normal volume in it’s lower-margin goods business and, more importantly, a conscious decision to take a smaller cut of local deals in an effort to lure higher-quality merchants.

“In addition to continued growth in our lower-margins direct business, our margins were impacted by a conscious decision to invest in growing our merchant base and test supply elasticity by flexing deal margins,” Jason Childs, the company’s CFO, told investors.

The company’s decision to reduce the cut it takes from merchants from 40% to 35% appears to be part of a larger strategy to move away from time-sensitive “daily deals” toward evergreen offers that can support a searchable deal “marketplace.” More than 50% of local commerce transactions in its North American segment now come from non-daily deals, and CEO Andrew Mason stressed that offers delivered through pull (e.g., search), not push (e.g. email), is the future of the company.

“The reason people buy a Groupon isn’t some game mechanic,” Mason said about daily deals. “The potential of a local marketplace business — where you can fulfill demand instead of shocking people into buying something they didn’t want before — is a much bigger opportunity.”

It’s unclear whether the move to a marketplace model reflects a new opportunity or the adjustment of its existing business to an evolving consumer base. As mobility effectively collapses the purchase funnel, and consumers increasingly make purchase decisions on the fly, the idea that consumers will buy a voucher one day in anticipation of redeeming it later in the week is harder to digest.

The move also allows the company to pare down its sales force. Longer-term offers lower the churn rate for merchants, which means that fewer salespeople can manage more clients. The company reduced its North American salesforce by 12% in Q4, and, if the marketplace strategy succeeds, get ready for a big round of layoffs in 2013. So ideally, the reduced cut it would take from merchants would be offset by lower costs as the company shrunk its salesforce.

However, that’s still very much in the distance. Groupon remains bogged down by an international segment, which has seen revenue decline for the last three quarters, and a e-commerce segment that generated just $6 million in gross profit on $225 million in revenue. Both quagmires reflect the company’s almost pathological obsession with top line and geographic growth over the past two years, and it remains to be seen whether the company can adapt before these massive liabilities devour its shrinking assets.

Steven Jacobs is Street Fight’s deputy editor.

  • Eric R Cohen

    Is it too early to say “I told you so?”