Groupon is concentrating on its 86.5% gross margin local deals
This strategy combined with the hiring of the new local deal GM is the right way to go.
They are ceding the merchandise market to Amazon, and concentrating on where they are the best and biggest.
The last line mentions this strategy also positions them for a take-over. That would be interesting and a nice exit strategy for me.
September 29, 2017
Why Groupon is re-embracing its local daily-deals business
JOE CAHILL ON BUSINESS
Groupon's biggest business is shrinking, and that's OK with CEO Rich Williams. Revenue from direct sales of merchandise, representing more than half the onetime e-commerce wunderkind's top line, fell 19 percent in the second quarter. The drop reflects Williams' plan to expand profit margins and look for growth in the company's original business of offering deals at restaurants, beauty parlors, health clubs and other local merchants.
"Direct-goods declines in the quarter reflected an intentional shift of business mix from 'goods' to 'local' commensurate with our focus on optimizing for gross profit rather than, say, billings or revenue," says company spokesman Bill Roberts.
Groupon apparently has tired of banging heads with Amazon, Walmart and other giant retailers in a high-cost, low-margin business where scale separates winners from losers. Direct sales in its Groupon Goods business generated a gross margin of 15.3 percent on $217.9 million in North American revenue during the second quarter. Local deals, meanwhile, produced a gross margin of 86.5 percent on $207.5 million in North American revenue.
That's why Williams is betting on "local." A big boost in marketing spending helped drive local gross billings up 13.5 percent in North America in the second quarter, the biggest quarterly rise in more than a year. On a conference call with analysts, Williams credited the growth to strength in Groupon's health, beauty and "things to do" categories.
Williams is playing to Groupon's strengths as a marketing hub for local commerce. The company has built a competitive advantage in its relationships with local merchants and its list of 32 million North American customers looking for discounts at nearby restaurants and neighborhood service providers. Groupon dominates the local deals market, having acquired its last real competitor—Living Social—last year.
Groupon's expertise and relationships in local commerce create no such advantage in goods, a business launched by former CEO Andrew Mason six years ago. Merchandise retailing is a global business, with consumer products manufactured in far-off Asian factories and sold through Amazon and national chains. Groupon lacks the scale to compete on price or selection.
Asked by an analyst in August if Groupon might exit goods altogether, Williams hedged, saying, "We're at this point focused on continuing to drive more health in that business, improve its gross profit profile, and have it be a great contributor to engagement on our platform and lifetime value of our customers." CFO Mike Randolfi said the company is shifting to a "marketplace model" in which Groupon collects commissions from third-party vendors who offer products on its website, an approach that would yield less revenue but higher profit margins and lower costs.
The shift will cause short-term pain. Declines in direct goods sales pushed companywide revenue down 8.4 percent to $662.6 million during the second quarter, offsetting 7.2 percent growth in third-party sales.
Longer-term, the move makes sense. Customers have come to expect merchandise from Groupon. A third-party marketplace approach would allow Groupon to meet that expectation without the burdens of carrying inventory, operating warehouses or dealing with logistics.
Many questions remain for Groupon, which has struggled to find a viable business model since going public in 2011 in one of the most hyped IPOs of its time. Profits have been elusive, even as Williams slashed headcount and pulled back from several overseas markets. Lower overhead and restructuring costs trimmed second-quarter operating losses to $7.4 million from $39.8 million a year earlier.
Signs of progress have lifted Groupon shares 29 percent, to $5.00 yesterday, since second-quarter results came out on Aug. 2, well below a post-IPO high of $26.19, but up sharply from a 52-week low of $2.90 in June.
"The company has proven they're not only viable, but have positioned themselves to start growing again," says analyst Tom Forte of D.A. Davidson.
They also may have positioned themselves as a buyout target. The run-up in Groupon shares partly reflects renewed takeover chatter, with Yelp and IAC mentioned as potential bidders. Deal or no deal, Groupon will do better with less goods.
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