Groupon Tries to Move Beyond Reputation for Discounts

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At six years old, Groupon is younger than its earnings report would suggest. The company posted mixed earnings Tuesday with stronger-than-expected profits but slimmer revenue, due in large part to currency fluctuations impacting its international business. The quarter, which saw the sale of a cornerstone asset in Asia and a continued reboot at home, captures the clutter of a surprisingly large business in transition.

If you’re not an investor, it’s almost best to ignore Groupon’s international operations. Last month, the company agreed to sell off a majority stake in Ticket Monster, the Korean ecommerce site which Groupon purchased from LivingSocial two years ago, to a private equity consortium led by KKR for $360 million — netting a roughly $200 million profit for the company. During an investors call Tuesday, CEO Eric Lefkofsky said that the company would continue to evaluate its other international operations, “doubling down on some areas and finding partners for others.”

Elsewhere abroad, the company continues to push through an effort to rewind one of the most aggressive and premature periods of growth in corporate history. Revenue and billings were down on year-over-year in basis in both its EMEA and rest of world segments but other metrics show signs that the losses may be stabilizing. Plus, a stronger dollar and weaker euro complicated earnings, shading revenues downward in year-over-year comparisons.

A shift away from just discounts
At home, its earnings tell a clearer story about the structural challenges, and opportunities, facing the company. The firm’s far more profitable local business has stabilized in North America, returning to double digit year-over-year growth after a handful of flat quarters early last year. But the ecommerce business continues to keep total margins at about half of where they would be if local stood on its own.

The stabilization comes as the company looks to alter one of the foundations of its business: discounting. As the buying and selling of services online becomes more and more generalized, the opportunity for the firm is less as a marketing engine and more as a sales channel for local businesses. And in the call Tuesday, Lefkofsky hinted at just that, admitting that discounting is a tactic — not a product —and indicating that it will begin to sell “market-priced” services.

“We’ve had a one-size fits all approach when it comes to merchants,” he told investors. “In order to double our inventory, we need to attract merchants who do not necessarily want to discount their services. We need better deals, as well as market rate inventory that we can leverage to create thriving real-time local commerce marketplace.”

The company is positioning its pages product, which it launched last year, at the center of the effort. In the 18 months since the product was announced, it has created over 900,000 pages for merchants in the U.S.,  which includes basic directory information as well as reviews and any current deals. “Pages are the entry point of our new inventory assembly line as they create a transactional relationship between us and those merchants,” said Lefkofsky.

However, Groupon faces headwinds, amplified by multiple factors. Its relatively late arrival to search puts it well behind others in search optimization, making it harder and more expensive to compete in competitive categories. Now, with larger firms such as Amazon and a host of other smaller upstarts vying over demand for local services, the competition across categories will accelerate at an unprecedented rate.

The company also faces a deep branding challenge with both consumers and merchants. Today, the company has a user base known for frugality and a merchant base known for discounting. In order to offset the small margins in selling market price goods, it needs to dramatically accelerate the amount of transactions that occur each day. That shift from a marketing service to a retailer will force the company expand well beyond its current set of shoppers and sellers.

Steven Jacobs is Street Fight’s deputy editor.

See Groupon’s global GM & VP Sean Smyth at Street Fight Summit West in San Francisco on June 2nd. More info and buy tickets here.