Groupon Cannot Compete In The Industry It Created

| About: Groupon, Inc. (GRPN)

Groupon (NASDAQ:GRPN) was founded less than five years ago, in November, 2008, and has managed to gain the attention of many on Wall Street. Due to being the first company in the "daily deals" space and its once steadily growing sales, Google (GOOG) offered Groupon $6 billion for the company in 2010. Of course the board of Groupon turned the offer down, and as of Friday February 28th, 2013 the market cap of GRPN sits at $3.36 billion.

Not long after Google's offer was rejected, they started their own daily deals division, Google Offers. This highlights the first problem with the Internet coupon industry: very low barriers to entry. All you really need are salesmen and businesses willing to participate. That is why so many of these online coupon companies have popped up over the last few years including Yelp Deals (NYSE:YELP) and Living Social.

This influx of companies operating in the space is another problem. The laws of supply and demand would dictate the more companies offering this kind of service to business owners the lower the price of the service (since the number of potential customers hasn't increased at the same pace as entrants into the industry). That is one reason the margins have dropped, and why Groupon can't turn a profit.

So why are some people touting Groupon as a potential turnaround candidate? Many believe the recent firing of co-founder and ex-CEO Andrew Mason will be a good catalyst for change at the company. Others saw the rise in revenue last quarter as positive, even though profits slipped further into the red. A 5-year old company that had a huge IPO (the second biggest tech IPO after Google) being called a turnaround candidate should raise some alarms that maybe the excitement over Groupon was misplaced.

Let's assume that the new leadership at Groupon manages to turn a profit, or at least lose less money, and they can outlive some of the smaller players like Living Social. They will still have to compete with Yelp and Google's coupon offerings, whom I believe will end up eating Groupon's lunch.

Yelp and Google both have other business lines that complement a daily coupon offer. When people use Yelp to find reviews on that new sushi place down the street, it makes a lot of sense to offer a coupon for either that restaurant or a nearby sushi place. Since the coupon is relevant to something they are actively searching for, I would think that increases the chances of the consumer buying a coupon.

And more or less the same goes for Google Offers. People use Google to actively search for something. The information that Google can collect through your searches, theoretically, should help them be able to find deals that are more pertinent to the consumer. My experience with Google Offers doesn't necessarily jive with this theory, but obviously Google has much more information on us than Groupon, so if they can't figure out what you want to buy, how would Groupon?

The bottom line is that both Yelp and Google have much more information than Groupon, that they can use to their advantage when presenting coupons to customers. This allows them to target consumers that are actively searching for something, rather than passively sending out coupons that match an area of interest, or as is common that just matches where you live.

On top of the information gap, there's the challenge that most businesses which would participate in an Internet coupon already have relationships with Yelp and Google on some level or another. This familiarity should lead to more success in convincing businesses to participate in a coupon offer.

Groupon made the Internet coupon industry, so give them credit for that. But can they ever make money in the space they created? It's possible Groupon could turn around, but with low barriers to entry and larger, more relevant rivals, it's more likely that Groupon won't exist in 10 years (and that's being generous). I only wish I could have shorted shares in the first month of trading, when GRPN was closer to $30 a share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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