Does Groupon Have a Better Deal for Investors?

by Carol Kopp, Minyanville staff writer

When Groupon GRPN reports its quarterly earnings on May 8, it will have been less than five years since the daily deals site was founded in Chicago, and hoo-boy, what a trip it has been.

Oddly, Groupon might now be right back where it started. That is, great business idea; now let’s see whether it can be profitable.

From the first, Groupon’s astonishingly fast international expansion impressed investors and spawned dozens of imitators, all scrambling to offer discount coupons for local goods and services.

Soon, consumers were deluged with daily deal emails of dubious interest. Merchants complained that the deals cost them money, but didn’t bring in repeat business. By the time the Groupon IPO launched in November 2011, questions about the company's long-term profitability were mounting.

The stock debuted at $28, and then it sank like a stone. Its stock price fell about 75% last year, to as low as $2.60. At the end of 2012, Groupon reported a net loss for the year of $67.4 million, on revenues of $2.33 billion.

We haven’t heard a lot about Groupon since, or about the hot new category of daily deals. When last heard of, in late February, the company had just ousted founder and CEO Andrew Mason, who announced his firing on Twitter and then departed cheerfully.

The hype is over, but in fact quite a lot is happening at Groupon. It remains to be seen whether it can actually start making money, but the company clearly has a few more deals up its sleeve.

That may be why its stock is doing a lot better, up nearly 40% this year to date. It closed Monday at $6.26.

Among the company’s new strategies are the following:

Groupon.com has broadened its product mix, adding national online retailers’ sales to its core content, and local deals by zip code. It also is expanding in key special interest areas without muddying the local mission. Its Getaways travel section is topped with day trips, but also offers vacation packages at a discount from national providers.

The wider range of offers could make the site more attractive to consumers, who must have burned out on the endless offers of neighborhood pizza specials and nail salon packages.
In any case, Groupon clearly needed to reduce its reliance on door-to-door sales to small merchants. The local deals concept was (and is) a great idea for a business, but scaling it to worldwide proportions is an awesomely lofty challenge.

The company is actively buying up patents for enhanced e-commerce technologies—to improve its own competitive position, or to protect itself from competitors’ suits, or both.

According to Crain’s Chicago Business, Groupon now owns 15 patents, including six purchased last year from Walker Digital Management LLC, the intellectual-property firm owned by Priceline PCLN founder Jay Walker.

The report suggests that Smart Deals, a function Groupon now uses to target potential buyers based on their past purchases or browsing activity, may be based on one of those patents.

Meanwhile, the company is expanding its merchant services for small business with products like Breadcrumbs, an app for the Apple AAPL iPad which is designed to help restaurant owners with tasks from menu planning to staff management.

That kind of offering could dovetail nicely with another, and potentially bigger, project: Groupon Payments. Of course, its electronic payments service puts it once again smack in the middle of the most competitive Internet space. Still, if its merchant services get it a following among small business people, Groupon Payments might get a boost as a natural add-on service.

As if to illustrate just how much has changed since Groupon got its start, the company says that 40% of its transactions now are completed on a mobile device. That gives it a shot at another potentially lucrative new business—location-based offers.

The company just introduced an update to its mobile apps for both Apple iPhone and Google GOOG Android devices that allows for location-based deals searches for consumers on the go. TechCrunch reports that the functionality is currently available in the US only, but is expected to be added internationally later this year.

Still, Groupon’s biggest asset may be the subscribers’ email list it has built up over the past five years. It contains 200 million names, a Gartner Research analyst noted in an interview with Fortune. That’s 200 million people who have indicated they are willing and eager to buy a bargain—a fabulous thing to have if you can figure out how to market the right goods and services to the right names on that list.

Meanwhile, the world of bargains is not standing still.

The newer sites are highly tailored to specific niches. Like Mamapedia.com, which mixes child care tips with daily deals for parents. Or PlumDistrict.com, which markets deals from merchants who are moms to customers who are moms. And Roozt.com, the site for socially-conscious shoppers with a cause.

So, five years later, Groupon may be the old-line deals site.

Now all it has to do is prove it can turn a profit.

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