Groupon’s Local Business Bounces Back — But Is It Too Little Too Late?

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groupon_pic1Groupon beat market expectations in the third quarter, stabilizing a troubled international segment and accelerating — albeit, slightly — the company’s core North American local business after two quarters of decline. However, the company’s quickly growing (and far less profitable) ecommerce business continues to overshadow the small gains of the local segment, dragging on its profitability and overall operating leverage.

The deals company reported revenue of $757.1 with gross billings of over $1.8 billion, representing a 27% increase from a year earlier. The growth in revenue largely came from its ecommerce business, which continues to see strong growth — posting a 61% jump from a year earlier.

Meanwhile, the company managed to re-accelerate local billings after two consecutive quarters of decline. But a decrease in take rates — the commissions which the company charges merchants — sent local revenues down on a year-over-year basis. During an earnings call Thursday evening, Eric Lefkofsky, chief executive at Groupon, stressed to investors that the difficulties the company has been facing have begun to subside.

“Over the last several quarters, [our local business] has been overshadowed by headwinds related to email declines consumer declines, and a shift in consumer behavior as we transform to a mobile marketplace,” said Lefkofsky. “But redemption have stabilized as it appears we have burned through a good deal of our consumers backlogs of unused Groupons… and email business has stabilized after falling for the past couple of years,”

Lefkofsky’s vision to turn around the stagnant local business focuses on moving the company from an email distributer to a destination for consumers. Over the past few quarters, the company has worked to source longer lasting, recurring deals and shift consumer behavior away from the inbox to its mobile app and desktop site.

The effort has largely proven unsuccessful. During the call, Lefkofsky said that the percentage of deals sold to users who searched the site still represented around 10% of all transactions — roughly the same as last quarter.

What’s interesting is that the company’s recent release of a listings product pages appears to come lock-step with the marketplace initiative. Lefkofsky admitted that the pages product, which includes basic contact information as well as reviews content for merchants, is effectively an SEO play as the company looks to create a way for the deals in its marketplace to index in Google.

The vast majority of search occurs outside of Groupon so we need to make sure we’re in front of customers wherever they’re searching,” Lefkosfsky said.” To expand our SEO efforts, we’re dramatically expanding the amount of content we put in front of users.”

Lefkofsky said that the SEO represents about 7% of the company’s business in North America. That’s well below Yelp and other listings sites who often generate more than half of their traffic through search. But developing a search presence from scratch will require a massive effort, both in creating content and driving traffic to those pages.

The search engine effort is a smart idea — but it’s something the company should have done years ago. The decision to enter an appealing but largely unrelated ecommerce business a few years ago kept the leadership from focusing on the real challenges in building a local business. The question for Groupon is whether it is too little too late.

Steven Jacobs is Street Fight’s deputy editor.