Mobile was supposed to be local’s white knight. But, the fairy tale is not turning out as expected for Groupon.
For the first time last quarter the majority of the company’s transactions came from a mobile device. And yet, the company also hit another, less celebrated, milestone: its local business accounted for less than half of its total billings.
On Tuesday, Groupon posted record growth during the first quarter, with a stronger-than-expected jump in revenue. But shares of the deals giant sagged in after hours trading due to concerns about taking profits, stagnant growth in its local business, and weak guidance for the remainer of the year.
The top-line growth was impressive. Groupon’s revenue grew by nearly 26% from a year earlier, rising to a record $758 million for the first quarter of 2014. The increase was due in large part to an explosion in its ecommerce business in Asia and South America, which saw billings nearly triple thanks in large part to the introduction of Korean deals site T-mon, which the company acquired from LivingSocial late last year.
However, there’s strong evidence that the driver of growth may be at odds with the company’s long-term profitability. The company’s profits declined last quarter as its more-profitable local business failed to offset tanking profits in its ecommerce segment. In North America, for instance, gross billings in the local segment remained flat while the margins on goods business tanked, declining from a 14% high in the second quarter of 2013 to less than 4% this year.
During an earnings call, Eric Lefkofsky, Groupon’s CEO, attributed the slowed growth in local to the company’s continued pivot away from its core daily deal smodel.
“Although our (North American) local billings growth has been flat, we expect this to change as our marketplace gains traction,” said Lefkofsky, referring to the company’s new searchable offers product. “We began to see a decline due to a shift in consumer behavior, which has as created short term pressure on the business.”
Over the past few quarters, the search marketplace has struggled to gain steam. The company said that deals purchased through the search tool accounted for around 9% of total purchase volume, far less than the leadership had hoped it would. Lefkofsky also attributed the stagnant growth to slower redemption times and a subsequent increase in unused vouchers, which he believes dampens demand for new deals.
However, Lefkofsky remains optimistic. He told investors that the company still expected local gross billings in North America to see “double digit growth” by the end of the year.
To accelerate that growth, the company plans to integrate the point-of-sale and payments initiatives, which Groupon has developed over the past two years, into its core deals business. While its not clear exactly how large the initiatives are today, Lefkofsky says the back-office tools will open a number of new opportunities for the company to increase the supply of deals through yield management programs and make the redemption experience more seamless for consumers by allowing booking and other commerce capabilities.
Steven Jacobs is Street Fight’s deputy editor.