Later this week, daily deal juggernaut, Groupon (Proposed Ticker: GRPN), is scheduled to go public. The company plans to price shares between $16 and $18 and raise $510 million.
But I wouldn’t invest in the deal at any price!
Sure, it has a novel business model and benefits from being a first mover in its space. But the same could be said about Webvan, the dot-com era company that delivered groceries to your doorstep. And we know how poorly that ended!
In 1999, Webvan’s stock doubled in price on its first day of trading. Yet two years later, the company went bankrupt, rendering shares worthless.
Whether or not Groupon’s IPO proves to be a similarly historic flameout remains to be seen. But that’s not a bet I’d even consider making. And here’s why…
~ Too Much Competition, Too Soon: In Groupon’s IPO prospectus, the company readily admits, “Our business is highly competitive. Competition presents an ongoing threat…”
I’ll say! In 2008, the company pioneered the daily deals space. Yet in three short years, there are at least 300 competitors.
The impact of so much competition is clear. As the company’s latest results reveal, it’s cutting into Groupon’s growth.
Third-quarter sales only increased 9.5% quarter-over-quarter, compared to growth rates of 33% and 72% in the two previous quarters.
~ No Barriers to Entry: What’s worse, there’s nothing stopping more and more competitors from entering the market.
Heck, all a competitor needs is a deal with a local merchant and an email list of potential customers. And management knows it’s that simple. The company’s IPO prospectus flat out says that “no significant barriers to entry exist” for competitors.
As Iain MacDonald, CEO of SkillPages, said, “Their market is not as defensible as Facebook’s or Google’s.”
“Not as defensible” is being polite, Iain. In my opinion, Groupon has nothing more than strong brand recognition. And that’s not a competitive advantage that can sustain an upstart business for years and years to come.
~ Shrinking Revenue Share: Longtime readers are well aware of our closely held belief that share prices ultimately follow earnings. Groupon’s not profitable yet, so what’s that say about the future for the stock?
Even if we cut the company a break and consider its earnings potential – specifically, its revenue share on the average deal – the picture is less than inspiring. The cut Groupon takes on each deal is already declining.
In the last year, Groupon’s share of each deal dropped five full percentage points to 37%.
Again, that’s not a sign indicative of a robust, enduring business model. As competition heats up, look for Groupon’s revenue share to continue to get squeezed.
~ To-Be-Determined Benefits: To date, local merchants haven’t been raving en masse about how Groupon’s service has energized their business. And that’s never going to happen.
When merchants partner with Groupon, they’re offering discounts of up to 50%. No business has margins that robust.
In essence, Groupon is a loss leader for the local merchants it partners with. And the problem with that is it’s debatable whether or not losing money on the front end to attract customers actually results in generating repeat business.
I’m sorry. But when the benefit to your partners isn’t readily apparent, identifiable and sustainable, you’re going to struggle to keep their business.
Over time, Groupon’s likely to struggle with attracting merchants that treat the company’s service as a long-term marketing tool, as opposed to a one-off experiment.
~ Consumer Overload: Forget about the merchants that Groupon tries to help and think about the consumers. They’re inundated with deals from Groupon and countless other daily deal sites.
At some point, fatigue is bound to set in. Nobody can shop until they drop. The novelty wears off. Or worse, it never gains traction.
Consider: Although Groupon boasts 142 million subscribers, about 80% never buy a deal.
To Groupon’s credit, it’s doing what it can to try to “activate” more subscribers by offering new types of deals – like Now Deals and Getaways. But again, competitors can quickly knock-off any successful initiatives, sending Groupon searching for yet another new growth opportunity. And that’s a vicious cycle that’s hard to maintain over the long haul.
Bottom Line: After only three years, the daily deal is becoming a commodity. Not to mention, as Groupon CEO, Andrew Mason, says, “We have yet to reach sustained profitability, and we have no shortage of competition.” Add it up and that’s not a business I want to even consider investing in over the long term. Because I don’t think it can survive over the long term.
Ahead of the tape,