Groupon Is Executing Terribly

Apr.29.14 | About: Groupon, Inc. (GRPN)

Summary

Groupon continues to spend less on marketing and more on everything else.

Groupon Goods is missing some key features.

Groupon's Coupon section is completely featureless.

Groupon (NASDAQ:GRPN) is an internet retailer that sells discounted goods and services. It trades for a big discount to its $20 2011 IPO price. This article will not dive into Groupon's financial performance, but will give some perspective to some of the many execution mistakes Groupon is making.

Big Decrease in Marketing Expenses

Groupon defines marketing expenses as:

Marketing expense consists primarily of targeted online marketing costs, such as sponsored search, advertising on social networking sites, email marketing campaigns, affiliate programs and, to a lesser extent, offline marketing costs such as television, radio and print advertising.

Here is the 2009-2013 chart of selling and marketing expenses:

Operating expenses: 2013 2012 2011 2010 2009
Marketing 214,824 336,854 768,472 290,569 5,053
Selling, general and administrative 1,210,966 1,179,080 821,002 196,637 5,848
Click to enlarge

Groupon decreased spend about to almost 1/4 of 2011 levels while increasing other expenses nearly 50% from 2011 levels. Any company that has to show growth and profit with these kinds of changes has big headwinds to overcome. To further highlight this headwind, compare North America, where marketing spend increased 7% in 2013 to EMEA and Rest of World, where marketing spend decreased by more than 50%. North America showed growth in all businesses and 7% growth in the Local Voucher business, while EMEA and Rest of World both saw a decline in the Local Voucher business, which is Groupon's most important and highest margin business. In addition, Groupon's North American take rate went up from 2012 to 2013.

Groupon Goods Mistakes

Groupon Goods is a newer low-margin business where Groupon sells physical goods directly to the consumer. If I do a search for "yoga" on Groupon, Groupon Goods listings for yoga mats and pants appear alongside those for discount yoga classes. The only differentiator from Amazon (NASDAQ:AMZN) or Overstock (NASDAQ:OSTK) is that Groupon only sells its discounted products for a limited time, and it tells you how popular each deal is.

Groupon Goods is missing some key features. There is no way to sort the products for sale. Typically you can sort by price, popularity, average review, etc. In Groupon's case, you might want to sort by newest or soon-to-expire deals as well. Groupon lacks reviews, and when I observed my wife was shopping on Groupon, she constantly was checking Amazon for reviews. The only reason to purchase from Groupon is the price. Finally, Groupon lists X-rated products in sections where they don't belong.

Groupon's Minimalist Coupon Feature

You would expect Groupon to do something innovative when it comes to coupons. RetailMeNot (NASDAQ:SALE) consistently ranks well in the search engines and is the company to beat when it comes to coupons. RetailMeNot collects user data to determine which coupons work and are popular. If the coupon/promo code is not on RetailMeNot, there likely is not a discount available. Groupon calls its coupon section "Freebies," as Groupon typically sells vouchers/coupons. Each company's page is a simple list of coupons. For example, I clicked on American Eagle (NYSE:AEO). The first coupon on Groupon is "Free Shipping on Men's and Women's Shoes." When I look at RetailMeNot, the top deal is "Additional 40% Clearance + Free Shipping." Groupon has 10 Deals, RetailMeNot has 27. I don't see any reason why people would use Groupon over RetailMeNot, besides Groupon's much more powerful brand.

Looking Forward

These mistakes have stifled growth and hurt Groupon's stock price, but looking long term, they are all mostly fixable. Any company that reduces marketing expense to around 25% of prior levels and maintains/grows revenue is growing. Groupon will continue to grow top line revenue, and if they streamline operations, they will start to show profit, which justifies the stock price. This is stark contrast to competitors like Zulilly (NASDAQ:ZU) which have a long way to go to justify its stock price. I am long Groupon and am looking to sell more covered puts.

Disclosure: I am long GRPN. 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.