Groupon Bottoms Out as Billings Hit Lowest Level Since IPO

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Groupon’s stock (GRPN) hit an all-time low in after-hours trading, falling over 16% to $3.29 per share Thursday after the daily deals company reported lower than expected revenues in Q3, driven largely by stagnant growth in its international business. Overall gross billings, which account for all customer purchases, slid by 6% in Q3 from the previous quarter as gross billings dropped nearly 10% internationally. It’s the second consecutive quarter that Groupon saw its total billings decline.

The company’s CEO, Andrew Mason, attributed the dismal international performance partially to a deflated European economy but admitted to investors that Groupon’s international “playbook” was overly ambitious.

“We focused on a different strategy in Europe, focusing on capturing market share at the cost of technology and innovation, and too often, the satisfaction of our customers and merchants,” the embattled Mason told investors during the company’s earnings call Thursday.

During its heyday in 2010, the then privately held Groupon snapped up competitor after international competitor, putting itself in 43 countries by the time it filed its S-1 in June of last year. It’s a stark contrast to the more measured expansion strategy taken by other local players like Yelp, which has scaled more slowly, allowing markets to develop organically.

By the time the massive land grab came to an end in the summer of 2011 and the company began to shift its acquisition strategy toward product innovation, Groupon had already lost valuable ground in developing its core, local commerce business domestically. In pushing the daily deal so intensely, the company had lost its ability to upsell existing merchants on value added services. The local marketing space was converging quickly, and Groupon had sacrificed much of its first-movers advantage to create what Mason correctly visioned as a “operating system for small businesses.” Its most valuable, and expensive asset — the merchant relationship — essentially became static.

The effects are beginning to show in the company’s balance sheet. Third-party revenue in North America, which accounts for Groupon’s local deals business, dropped 23% in Q3 from the previous quarter to $158.5 million — the least revenue generated from its local business since going public last year. It’s unclear how much revenue the company is generating per merchant, but given the decrease in revenues and the increase in selling costs year-over-year, it seems to be heading in the wrong direction.

It’s in this context that Groupon has expanded its e-commerce initiative, Groupon Goods. Think of it as a contingency plan: instead of upselling the merchant, they’re upselling the consumer, but at a fraction of the margin. According to Mason, the e-commerce business, which generated a little over 45% of Groupon’s revenues in Q3, could operate on a margin “somewhere in the high single digits” whereas the margins for local commerce segment are typically between 25-30%. It’s a quick revenue fix, which even Mason seemed hesitant to fully endorse.

The big concern here is that the e-commerce business does little to accrue leverage in Groupon’s business model. Consider this. Total cost of revenue in North America more than tripled year-over-year in Q3. However, cost of revenue for its local commerce segment nearly halved during the same period. What accounted for the spike was the introduction of Groupon Goods, which made up nearly 45% of the total cost of revenue in Q3. Groupon has essentially built an entirely different business without leveraging any of the assets developed in its first four years.

Steven Jacobs is deputy editor at Street Fight.