Groupon: Betting On Flash Sales And Online Travel Bookings

| About: Groupon, Inc. (GRPN)

Groupon (GRPN) has been looking to expand its offerings to online travel and restaurant reservation service and after venturing into online coupons last month, Groupon diversified into flash sales with the acquisition of flash sale website Ideeli for $43 million. Ideeli offers men's and women's clothing, accessories and home decors in a flash sales format. This format allows people to buy products at a discount price but only for a limited time. Groupon will gain access to Ideeli's 6 million customers through this acquisition. Although the company was operating into losses of $30 million in 2013 with $115 million in gross revenue, analysts backed Groupon for buying Ideeli at a good price.

Fashion flash sales rose to popularity post 2008 when major brands had a lot of unsold inventory, but as inventory fell, companies faced trouble offering such deals. Thus, this format lost momentum in the past few years, but it is unlikely that the online flash market for fashion garments will disappear completely as fashion garments are still one of the top growing categories of e-commerce. The combined offline and online flash sales market is $40 billion today. The major companies operating in the online fashion flash market include, Ideeli, Gilt Groupe and Zulily (ZU). Zulily recently completed a successful IPO on November 15, 2013, where the share price increased by 87.5% on the first day. Unlike Ideeli, Zulily has been a profitable business, though the net income stood at just $0.42 million over revenue of $438.7 million for the first nine months of 2013. The company has a strong reputation in mobile commerce with 45% of the orders coming through mobile in the third quarter of 2013. Ideeli isn't far behind in mobile, and it achieved triple digit growth in revenue from mobile devices between 2012 and 2013. Groupon has focused on mobile segment with several initiatives last year and could possibly use Ideeli's strong mobile presence to build expertise.

The acquisition will be particularly useful in Groupon's new initiative to help small mom-and-pop retail stores that are unable to sell their merchandise at full prices. Groupon would inform customers about any sale/discount at a nearby local store. With the help of Ideeli, Groupon could aid these stores in selling their apparel at a discount to customers. Through this new initiative, customers could purchase a product from a local store at a discount through either Ideeli or Groupon's website and pick it up later from the local store. The main challenge for the company would be partnering with local stores in different U.S. markets. It is testing the initial phase in Chicago, and if proved successful, it could open up a new set of small retailers to work with. This would eliminate the need of storing and shipping costs. The company incurs significant shipping costs since it offers free shipping for orders above $20 and includes free returns as well. Thus, through this business, Groupon will not only improve its profit margin, but also build up a strong network of retailers across the country.

Expanding its hotel offerings

Groupon strengthened its Getaways marketplace and has added more than 20,000 new hotels around the world. With the addition of new hotels, Groupon travelers could discover new hotels in popular destinations and save money on discount deals. In order to attract travelers, Groupon offered a 5% rebate for reservations made at the newly added hotels. The addition of new hotels came from its association with Expedia (EXPE), and Groupon is offering the discount to encourage more users to book through its site.

The company is planning to integrate it with its last minute booking app Blink, which it acquired last year. Blink has partnerships with 2,000 hotels, and with the help of this massive addition, Groupon could become the preferred choice for travel booking. Groupon wants to take advantage of the fact that travelers are increasingly using mobile and tablets to book hotels, and usually last-minute booking happens through these mobile devices. Around 7% of all travel bookings in 2013 were made through mobile devices, and they are expected to go up by another 20% in 2014. Groupon integrated Blink into a mobile app, which is available on the Google Play Store and iOS Store to attract more travelers and ramp up hotel bookings.

Bottom line

The past year had been a dream run for Groupon as the share price grew 137% owing to change in leadership the and shift from a push to pull strategy.

(Source: YCharts)

Last year, the company was rebuilding itself with the change in its strategy and diversifying away from daily deals. This year Groupon is building on its strategy of diversification and strengthening with the acquisitions it completed last year. Though daily deals continue to be its main source of revenue, it is leveraging its vast user base to get into different segments of e-commerce (Flash sales). This year will be an important for Groupon, as it will show whether the company will be able to overcome the declining gross billings and revenue. I remain optimistic about Groupon's fundamentals and recommend buying this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article