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  • Why GRPN Is Going Back To $20.. The Future Of Groupon & Why Google Will Buy It 3 comments
    Oct 26, 2012 3:24 PM | about stocks: GRPN, GOOG

    Let me start by saying that Groupon is not for everyone. I dislike shopping and rarely go into shops, only going into one to buy something when I need something specific. Retail shops don't like people like us (they would all go broke if everyone was like me). They need the buy-on-whim shoppers like my wife who would pop into a shop and buy a new outfit or shoes without a reason.

    Having said that, I am a GRPN addict and make a purchase a week on average if not more. Finding interesting stuff at a deal is a high. Even if a portion of the 38 million active users feel the same way, GRPN has a future. Buyers fatigue is a fair argument and at times the daily mail can clog up one's inbox. Despite that, users like me still open the email at least 4-5 times a week (I know a few besides myself).

    I give you three reasons why I like GRPN right now and a final vision of how I see GRPN after Google buys it over.

    1) Competitors are dying: Amazon's loss attributed to living space puts the nail on the coffin. While entry barriers are perceived as low in this business, unlike other internet businesses where user growth is considered more important and the networking effect of users rising above a critical mass is what is considered as the holy grail, I believe that in this business merchant growth and relationship building is more important. Entry barriers are not low to build this and one needs to spend money over time to physically build this network.

    2) Being the largest has advantages: With daily deal companies dying by the day, coupon buyers are learning the hard way that having bought a holiday package from a company that shuts shop leads to no-holiday!!! For larger ticket purchases consumers are shifting to the biggest and strongest financially. Good for GRPN.

    3) Argument against merchants not returning to GRPN: Many analysts talk about the merchant losing money on the groupon and not using GRPN again. Having signed on to longer term deals with merchants, I disagree with the argument that merchants lose money in the long run. Contrary to that, I find that GRPN offers small merchants the cheapest way to spread awareness of their existence. As a Singapore resident, I have used massages, acupuncture, A/C servicing amongst other things and signed up with longer term packages for some. If the merchant is good in what they do, they will find GRPN the cheapest way to get long term customers. If they suck, then off course they will close down eventually.

    In addition, I find that human nature being as it is, we get bored of the status quo and are a curious lot, so once the package we buy from the merchant expires we will try another out. Thus implying that the merchant will also keep looking for new customers and coming back to use GRPN for the next set of customers.

    Here is an interesting example of a large merchant using Groupon. Pizza Hut in Singapore started 6 new items on their menu. The Groupon offered any of the 6 with a drink at $9.95 verses $19.80, a 50% discount. 5000 people bought this groupon in 2 days. Assuming GRPN makes 50% of the $9.95 or approx $25k on this, and that Pizza Hut works on a 300% margin (i.e. the cost of the meal is $4.97) then, is this not a great way for pizza hut to get awareness to consumers about their new menu? If I like the new food item will I not go back to Pizza Hut (I never go to pizza hut cause find their pizza's terrible)? A win-win for Consumer-GRPN-Merchant.

    The Future of Groupon

    It's 1:30pm on a nice day in New York and you are walking down the street wondering what to eat. The Italian restaurant 2 blocks away is having a slow day with tons of tomato sauce that will go waste if enough pastas are not consumed by 3pm. The restaurant plugs in 50 arrabiata pastas available at 70% off for the next hour and a half on groupon-google. Your google android phone flashes the groupon to you and within minutes the 50 pastas are sold out to consumers within 10 blocks. Google maps shows you the way to the restaurant. Half the consumers also have a glass of wine (by then google has figured out which Groupon consumer likes Italian food and also their preference of wine).

    Groupon today mass markets stuff to their 38 million active customers and counting. Soon they will start sending targeted mails based on an individual's preference. Combine it with Google, and for a certain type of customer (the 38 million and counting like me), GRPN-Google will know exactly what I like to do and take over how I spend my wallet.

    In other words, in the future GRPN will target a deal at you based on

    - Individual: who you are,

    - Time: what time of the day it is,

    - Location: where you are at that time,

    - Habit: what you like to do typically,

    - Options: which merchants close by have spare capacity to utilize or items to sell

    - Matching: what you are most likely to buy

    Disclosure: I am long GRPN.

    Stocks: GRPN, GOOG
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Comments (4)
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  • shanjain
    , contributor
    Comment (1) | Send Message
     
    Hi Nanik,

     

    You seem to have addressed all the typical arguments against Groupon.

     

    The one major one I had that you have also written about is the unhappiness of merchants on Groupon’s ability to make customers return. It seems to me that Groupon’s customer base is an extremely opportunistic, deal seeking, hopping variety. While this is great for inducing trials, these customers inherently don’t take the merchants that come through Groupon seriously and move on to the latest kid on the block through Groupon. Is it that these customers have two wallets? One where they stick with their steady shopping and the Groupon wallet which they use to play around and get gratification of deals. Almost like an investment portfolio and a trading portfolio?

     

    Having said that, what one needs to figure out is whether Groupon can still generate enough business with your visionary scenario of a merchant using Groupon for opportunistic sales through Groupon as well! I am talking about the restaurant example. That may be the way out for Groupon- focus on perishable goods. Groupon will say to all perishable sellers- come to me last minute, I will get you sales. Or if you are a trader stuck with one-off inventory I will get it out for you. Groupon becomes the seller of last resort. And of course for inducing trials as well.

     

    I only have theory, don’t know what it means for the valuation. But Amazon’s 350 MM valuation of LivingSocial is scary!

     

    Cheers,
    Shantanu
    31 Oct 2012, 10:42 PM Reply Like
  • Bill Herbert
    , contributor
    Comments (211) | Send Message
     
    Shantanu,
    Nanik has it right - there is huge potential for GRPN and yes, I agree with him that eventually it will be acquired for a nice sum. They have had their problems for sure, but now have professional mgmt handling many of the tough jobs, like accurate financial reporting, that being a public company demands.

     

    The one key thing to remember is - Groupon is the established leader in aggregating demand for "perishable" inventory - and that's an extremely broad range of services, and to a lesser extent, products like a plate of spaghetti.

     

    The mobile wave will favor the merchants who know how to maximize their investments in their storefront, equipment, employees, training, and cost of inventory storage, if applicable. All of these costs are ticking meters that must be paid to run a business.

     

    Ergo, you can't afford to have these assets sit idle while the meter is running, even if you sell under your usual price. In the example given, the restaurant sells out perishable inventory at cost rather than throw it away; that is huge for a restaurant, and even bigger for a salon or other service that almost always can use more customers.

     

    Most smart owners understand this concept quite well. Look at the average restaurant - they give you a better deal for lunch than dinner, no? That's becuse of the tricky supply/demand balance of competing sites, or fast food alternatives, and busy customer's schedules, etc. You need to give people a better deal at lunch or you will have a nearly-empty restaurant. That's reality.

     

    It also pays dividends to get more traffic to build word-of-mouth, which is the main way people choose where to eat, as well as where to get their hair styled, etc. This pays big benefits over time if you handle it right.

     

    Mobile tech is rapidly giving the consumer a big advantage in terms of deal awareness and selection of when/where to buy and how much to pay. Merchants must work with this or they will perish.

     

    Groupon will be a leader in getting the owners to wise up and use their service for this important engagement with consumers, and the fact that AMZN basically just admitted defeat means they too may make an offer for GRPN, as Living Social is a joke compared with the GRPN machine.

     

    Get it now under $4, an unbelievable "daily deal" that won't last past next week - trust me!
    3 Nov 2012, 10:00 AM Reply Like
  • nanikr
    , contributor
    Comments (2) | Send Message
     
    Author’s reply » Bill. Its good to find another believer. Trust me people like you are hard to find... The negative mood on GRPN is so high that almost everyone believes that there is no future for the company. This is after the stock has dropped 85%+ from the peak. I read something recently where the analyst compared GRPN to Enron and saw the same fate.. As a contrary investor this kind of rubbish excites me beyond measure. At sub $4 I find very little new negative information that has not already been priced into the stock. A positive surprise at some point is very likely..

     

    Shantanu, thanks for your thoughts... I see where you are coming from. I agree that a lot of investors are opportunistic and use GRPN for their opportunistic bucket of capital (or more like fun-time-pass getting-something-at-a... capital)... having said that if you ask the same coupon buyers after a while you will find that when they only use coupons opportunistically, there is a fatigue element to being opportunistic as well.. More so if using the service involves sitting in front of the sales person for an hour and being pushed constantly to buy into a regular priced service. Remember this is not the cutting of coupons from a newspaper and magazine to get $5 off a packet of Chicken at Sainsbury. These coupons allow customers to try out a service and for a merchant to cheaply get customers knocking on the door.

     

    Over the medium term groupon buyers shift to buying services they are genuinely interested in pursuing... be it massages, language courses, salsa, gym etc etc... (I put restaurants into a different bucket which I explain later). For instance, I find very few people will try out 4 hours of Japanese classes at a discount unless they are genuinely interested in learning the language... the 4 hours allows them to assess if they can go through with it and also get a sense of the quality of the institute.

     

    Studies of human decision making have shown how people will spend $100k on a stock without much research but spend 50 hours pondering over which $500 computer to buy... We like to test stuff out before making decisions on the smallest of things... Groupon perfectly plays into our psyche...

     

    Yes, GRPN is not the perfect medium to advertise for all local merchants. I find it works best for merchants who are genuinely good at what they do, have spare capacity and are able to price their customers according to their willingness to pay. The beauty of capitalism and competition is that there will always be new vendors doing something better and the existing leaders getting complacent. Add to that the constant movement of the best staff for services and you have a ready list of new merchants as clients for GRPN.

     

    Getting into restaurants. Firstly the margins on food and liquor are crazy, especially if you think just in terms of variable costs and not the sunk costs of the establishment, rent etc... If the restaurant sells for $20 and $40 coupon and gives GRPN $10 they still make more than the variable cost on the food. On top of that its actually hard to buy exactly $40 worth of food. Lets say you eat worth $52... Then the restaurant made $10+$12 = $22 on the food sold at $52. Add a glass of wine on top of that and the GRPN is a huge winner... I used to be a bartender in NYC a long time ago and the statistic was that almost 50% of new restaurants close down in the first year of operation. This gives a sense of what coupons can be for the restaurant business and why GRPN is making strong acquisitions in that space.... To survive a restaurant needs tables filled at all times and they are better off with GRPN even if they just meet their variable cost on the food with coupons.

     

    Finally for a positive spin on the Living Social (LS) valuation. GPRN is approximately 4 times the sales of LS. With LS valued at 350m by Amazon. I would think of this as the most conservative valuation point to start from. Simple arithmetic would value GRPN at 350m x 4 = $1.4bn. Add cash to this on the balance sheet and we get to $2.6bn slightly above the current close. I argue now that because this is a completely size based business, in place of an arithmetic multiplier one should use an exponential multiplier.. or in other words a firm two times the sales should be valued at 4 times and one 4 times the sales at 16 times. Based on this my minimum valuation on GRPN based on LS valuation by Amazon would be 16 x $350 = $5.6bn or close to $8.5 a share. Add the cash and you reach $10.4 a share.

     

    I agree with Bill. Sooner than later GOOG, EBAY & AMZN will be in the fray to buy GRPN... To be honest I would not be surprised if Walmart threw their hat into the ring as well. But that's me. :o)
    4 Nov 2012, 09:05 PM Reply Like
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