Why Groupon's Take Rate In North America Is Going Up

Apr. 4.14 | About: Groupon, Inc. (GRPN)

One of the reasons why Groupon’s (NASDAQ:GRPN) North American operations are most valuable is its high take rate in the region. This metric refers to the percentage share of Groupon in customer purchases and is calculated by dividing the company’s revenues by gross billings. Groupon’s take rate in North America has increased from 40.7% in 2011 to 53.4% in 2013, and stands much higher than the figure for EMEA (Europe, the Middle East and Africa) and the rest of the world. This can be attributed to an increase in negotiating leverage in the region, as well as higher proportion of direct sales. We expect this trend to continue, and to help Groupon build a relatively stable business with greater control over the sales outcome.

Our current price estimate for Groupon stands at $8.45, implying a premium of about 5%-10% over the market price.

Why Groupon’s Take Rate Will Continue To Go Up

Groupon has the clear intention to expand in the physical goods space, considering the success that online retailer Amazon (NASDAQ:AMZN) has witnessed in this area. Online spending has grown significantly over the past decade, as lower operating costs have enabled merchants to offer deep discounts to their end customers, thereby spurring demand. Global e-commerce sales have jumped from $482 billion in 2009 to an estimated $963 billion in 2013. In North America alone, online retail sales have gone up from $132 billion in 2008 to $263 billion in 2013, accounting for roughly 5.8% of total retail sales. The trend is not only encouraging, but also shows tremendous growth potential. Groupon’s decision to push for physical goods sales is intended to leverage this growing market.

The company is investing in building a warehouse network that will allow it to ship physical goods to its customers directly, instead of relying on its merchants. It needs to maintain a high level of customer service and delivery standards if it has to compete against incumbents. Groupon has mentioned that it intends to sell some specific items at the best possible prices, and isn’t interested in selling everything just yet. Although Groupon’s deals business has crumbled in international markets, the silver lining is that the brand is recognized in the U.S. The company can leverage its large user base to successfully expand its physical goods retailing business domestically. Most of the physical goods sales is likely to come through the direct sales channel wherein Groupon is the owner merchant, and is responsible for storage and delivery of goods and merchandise. This implies that gross billings and net revenue are same and the take rate is 100%. As the proportion of direct sales increases, Groupon’s overall take rate will go up.

Additionally, Groupon is the biggest social discounted buying service in the world. Its sheer scale and presence make it attractive for companies that want to promote themselves on a nationwide or worldwide scale. This means Groupon, with its growing customer base, will always remain attractive for businesses. This should help the company maintain or possibly improve its take rate on most deals, especially with its efforts at retaining customers and making the deals more relevant.

Disclosure: No positions