Groupon may sell itself as a local commerce company, but its core local deals business is quickly taking a supporting role in all metrics except one: profit.
The company announced solid fourth quarter earnings Thursday evening, finishing the year with gains in both revenue and gross billings during a seasonally busy holiday season. But shares of the deals company fell in after hours trading with investors responding to a dismal profit outlook as Groupon deals with international currency issues and a less profitable revenue mix.
The sagging bottom line comes as the company struggles to reconcile its “Goods” segment with its more profitable local discounting business. Ecommerce now accounts for a little over 62% of Groupon’s total revenue, representing a 21% increase from a year ago. And for the first time, the goods business generated a majority of billings for the company during the fourth quarter.
The Goods business may generate revenue, but its return on the bottom line is minimal. Each dollar in revenue which the company generates from its ecommerce business creates $0.73 less in gross profit than its local product. Domestically, where its ecommerce business is even less efficient, that number jumps to $0.85 cents for each dollar in revenue.
Meanwhile, the company has managed to turn around its core North American local deals business, which fell into disarray in 2013. In the fourth quarter, gross local billings in North America grew by 14% year over year, its largest increase in six quarters. The growth was driven in part by a decrease in the commission the company charges merchants, a tactic CEO Eric Lefkofsky defended during an earnings call Thursday.
To investors, Groupon pitches an aggressive local strategy — and its investments are equally ambitious. In the past year, it has launched a major search initiative, Pages, aimed at expand its reach organic reach and invested in a massive point-of-sale effort called Gnome. The strategy is to create an infrastructure that can support a constant flow of buyable local goods and services without with a limited number of salespeople.
During the earnings call, Lefkofsky announced its latest project: a redemption system that uses beacons to allow merchants to track and communicate with Groupon customers in their stores. Lefkofsky said the product, which he said would launch soon, aims to appeal to smaller businesses that may not want to install an entire point-of-sale tablet on their counter. He also said the company plans to rebrand Gnome, the point-of-sale initiative the company launched last year.
“We’ve had a very consistent operating system strategy which is all about putting hardware into merchant’s stores so they can connect to our platform,” said Lefkofsky. “The idea is to eventually allow merchants to upload inventory into our marketplace so we can eventually fulfill on this promise of a real-time local marketplace.”
Lefkofsky admits that the hardware projects remain in their early stages. But the company is right to invest in these initiatives. What’s challenging is that the leverage in its existing local deals business is overshadowed by low margins in its ecommerce segment. Meanwhile, more tangible initiatives like Pages, which are critical in offsetting the decline of its email business, should have been developed years ago when the company was busy building out a complex ecommerce infrastructure.
Steven Jacobs is Street Fight’s deputy editor.