Groupon, Inc. (GRPN) Presents at Morgan Stanley Technology, Media and Telecom Broker Conference Call - (Transcript)

Groupon, Inc. (NASDAQ:GRPN) Morgan Stanley Technology, Media and Telecom Conference March 1, 2021 3:30 PM ET

Company Participants

Aaron Cooper - Interim CEO

Conference Call Participants

Matthew Bombassei - Morgan Stanley

Matthew Bombassei

All right. Good afternoon, everyone, and welcome to the Morgan Stanley TMT Conference. My name is Matt Bombassei, and I work on Brian Nowak Internet team here at Morgan Stanley.

Today, we are pleased to be joined by Aaron Cooper, CEO of Groupon. Prior to becoming CEO of Groupon, Aaron served as President of Groupon's North America business. Aaron, thanks for being with us today.

Aaron Cooper

Thanks so much for having me.

Matthew Bombassei

Absolutely. Before we jump in, I just have to run through the requisite disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Some of the statements that Groupon will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Groupon makes are based on assumptions as of today, and Groupon undertakes no obligation to update them. Please refer to Groupon's Form 10-K for a discussion of the risk factors that may affect its actual results. All right, let's dive in.

Question-and-Answer Session

Q - Matthew Bombassei

So Aaron, starting off at a high level, you transition to the CEO role in the midst of a pandemic and really quite a transformational period for Groupon. What do you think are some of the biggest takeaways and learnings over the past 11 months as you've navigated through this pandemic?

Aaron Cooper

Thanks, and thanks for leading off with a question. Listen, when we look back at the last 11 months, the #1 thing that pops to mind for me is resilience. Resilience of our marketplace, community, so that's both the customer side and the merchant side, as well as our employees. And let me give you a few examples as to how that's played out with each of those different groups, and also just what I see coming here.

We moved very quickly when COVID hit, and we took out a ton of costs. We actually took out about and removed about 1/3 of the workforce, taking out about $250 million in cost. And then as a team, there was a job as a team to very much rally, rally on behalf of our merchants and rally on behalf of our customers into really challenging times.

And so when I look at all the work that we're able to accomplish, I am so proud of this team as to how far we've come from Q2 of last year. We're moving faster. It shows up in a number of ways. It shows in our product innovation, in our sales and just broad communication across the company. So I feel great about the moves that we've made on the employee side.

From a recovery standpoint, we quickly used our diverse set of assets. So we are -- obviously, are strong in the local business, and there's a lot of different business lines within local. Our Goods business is well, our Travel business, our Live business. This broad spectrum of assortment showed up in different ways and over different periods of first COVID hitting and then different periods of the ebbs and flows of waves in the recovery. And the way that our team has adapted to get the most demand for our merchants, get the most for our customers has been really impressive, and it showed up in solid results over this period.

And while we were managing down our costs, while we're working on recovery, the team showed up with a strong strategic execution on our growth, our growth plans so that we're not just talking about recovery, which is a very strong business case on its own with our leaner cost model, but we're talking about our plans for growth, which is really to open up this marketplace, open up both sides, the customer side and merchant side, into recovery so that we see growth back -- beyond. I don't know. So overanswered your question, but I'll come back to resilience really being something that showed up, and I've been so impressed by.

Matthew Bombassei

No, that's incredibly helpful. Those examples are very, very helpful. You talked a little bit about recovery there, and COVID has obviously negatively impacted the local business as people have been sheltered in place. But as we head into 2021 and we're starting to get hopefully an early step to our return to normalcy and me and you were just talking about this, progress continues to be made on the vaccine. We've seen in places like New York, I'm able to go to restaurants again. And so what does Groupon need to do to successfully position the local business so that it can benefit from a reopening?

Aaron Cooper

So as we look across our segments and across our geographies, you have this first horizon of this organic recovery. And what we need to do is a lot of what we have been doing in some areas. So if you think about our Beauty & Wellness business, which has substantially been in business at a lower level throughout COVID, and again, adjusted for different geographies. There's a lot more we can do to increase wallet share with our customers and to show up for our merchants within Beauty & Wellness. That would be natural to a recovery.

Now if you look at like Things To Do, and you and I were just talking about live events that we're looking forward to getting back to, the ways that indoor activities, outdoor activities and then national kind of travel destinations all shows up in live events on the spectrum of this recovery is going to be different. And so the way that we show up for those merchants to tell the world like they're open, they're doing business differently, they have new products, they're safe, will be, I think, helped by our inspiration product, our Deals product. And that's what I've seen when I've talked to merchants that operate across those exact categories.

So I think in recovery, everything that we do will show up, and which will show up differently by merchants and by consumers. Now I think key for us in recovery is that we -- is that recovery shows up in the way I expect it to, which will be a catalyst for growth. The work that we've done over the -- over this entire last year has been to really improve our merchant value proposition, so we have more merchants to improve our customer value proposition. And we've been super methodical there, and this will show up into recovery as well. The way that we're now able to offer merchants a lower cost way on to Groupon via Offers, an easier way on to Groupon with self-service and the ability for merchants that want more to do more with Sponsored Listings. It's a real trifecta of a merchant offering that a year ago, we didn't have much of that at all.

And when you think about the consumer offering that benefits from that merchant offering, the commitments that we've made and the plans we have to open up our CX, to open up more of the commerce for our customers to do more commerce with those merchants is going to be important as well.

So for us, there's a lot more kind of blocking and tackling in the recovery that needs to occur. And -- but what we're most energized about is that recovery we think is going to be almost a marketing event for this company, whereas all that pent-up demand shows up in transactions, customers and merchants will be reintroduced to everything that we've just done so that we drive the growth beyond recovery.

Matthew Bombassei

Absolutely. And you talked about the trifecta factor there. And it's been a comment being, one of the initiatives to transform the local business is around providing high-quality inventory as one of your #1 priorities, the Deals, Offers, Market Rate inventory. In the test markets where you have rolled this out, what has been the consumer reaction to the introduction of the product so far? And what are we seeing on the test frequency side, spend side? Any detail there would be great.

Aaron Cooper

Yes. So when we look at our test markets and just so everyone has the perspective, in July of last year, we announced a strategy that would focus on inventory and modernizing the marketplace. We're specifically asking about in this question is, how do we perform in these 4 test markets where we wanted to push hard in the inventory portion of that strategy?

In July, we set out a scorecard, it was a public scorecard, where we looked at inventory growth. And then in the second phase, we wanted to look at customers' billings and units and how they would increase. So within the first 3 months, we're able to drive 65%, 70% improvement in inventory, where the lion's share of that came from a new product called Offers, which was a much lower margin offering for our customers.

And so we're energized because sometimes you launch new products, you're looking for a 1% improvement. For us to get a 70% lift or a 65% lift in inventory, where 2/3 of it was done by this new product, and that helped us to understand, yes, we are 100% hunting in the right spot to put on a lower cost item, something that some of the merchants can be always on, so they can handle a lot more repeat commerce than they could with just our Deals product, which can have too high of a take rate and too high of an overall cost for customers to be able to repeat and for all of the merchants' items. So we saw great progress there.

And then the second part has to do with the customer interaction. On the customer interaction, and this is into the second wave of COVID, but we're able to clearly see units increase and overall billings increase to low double digits and high single digits versus our control cities and our test versus control. So again, these aren't small changes. This is -- these are pretty significant changes. And so we're energized by what we saw.

So we are moving forward with rolling out key components of this strategy that we believe we can handle in a high-leveraged way. We're removing restrictions, so customers can buy and buy again. We're rolling out offers in Beauty & Wellness, which we got really good signal on merchants being able to add their full catalog and are very interested in customers being able to come again. And then we're finally going to make a change that's been long overdue, but we're going to make changes to our CX to open up our inventory and modernize the marketplace, and we have targeted -- those targeted for Q2.

Matthew Bombassei

Yes. You talked a little bit about merchants there, too, which leads me into my next question. But just thinking about the merchant reception to these products, merchants have been under pressure, especially when you think about your local segment as people have sheltered in place. So what has been the merchant reception to these products? And who are the merchants you're seeing come on to the platform? Is it new merchants who are using the product for the first time? Is it merchants that maybe you've engaged in the past, but then they didn't stick with the platform? Any detail there would be great.

Aaron Cooper

So we're seeing receptivity across the board. And I kind of think about it in 3 different buckets. You have new merchants that have never worked with Groupon before. And for them, when they're coming on to our platform, being introduced to more than one way of working with us is certainly very natural. They don't know any differently. So never have a repurchase restriction. So that's never an issue, isn't a thing.

Being able to have a low-cost offer that they can put other components of inventory on is also very natural. And using our self-service tools is always natural. These are all things that are different than the merchants that have worked with us for years, where they've had for years, one rather high cost way of working with us, which is just Deals and the time that takes to actually work with their sales rep because we didn't have the automation in place.

And so now we talk about new merchants is they -- it is coming on to a completely different Groupon. So that's exciting. For existing merchants, obviously, like, in order to hit these total numbers, we had to see huge receptivity from new merchants as well, which we did see, where new merchants are -- I'm sorry, existing merchants are adding multiple items and really filling out their store and adopting our self-service products as well, both with the combination of adding offers and removing restrictions on Deals. So we saw adoption across the board from all of our merchant cohorts.

Matthew Bombassei

That's very helpful. And sticking on this for a second, when you think about the end state for Groupon, do you have a target mix of inventory when it comes to Deals, Offers, Market Rate inventory? And how do you think about the unit economics with the different offers? And how that impacts Groupon's margin structure?

Aaron Cooper

Sure. So as you think about the marketplace, the answer always starts with, we want all of the inventory. And so of course, we want merchants to be able to do more and more with us. And we want them to be able to take advantage of Offers to fill out the store, Deals to promote and to really connect with and energize their commerce on Groupon and then Sponsored Listings as well because while you and I may run similar businesses, you may run a better business, and you deserve to have a way to pay more. And for years, merchants have asked for that, and we've told them no, and now we're able to tell them, yes. So we're really excited about this trifecta of the offering for the merchants.

As far as like the exact mix of Deals and Offers, that's going to be informed by the customer. Right now, we're building out a lot of supply. We'll build out the supply. We're going to improve our CX to really open up access to the supply. There's a number of things that we're going to do there that we think will be very clear wins. They've shown up in research. They've shown up by way of just our ability to modernize this marketplace for the additional supply that we're putting on and take advantage of the additional supply our merchants are putting on, specifically, Offers made up 70% of the supply that we added. It made up in HBW about under 10% -- 9% of total sales.

And so within that, you can see the receptivity on both sides. As far as the exact rate mix, that will be up for us to tune as we roll out our CX and as we build more inventory and as we watch the way our customers interact with it at scale. But what I'm really energized about here is we're not talking about 0.25 point here and 0.25 point there. We're talking about a really big change in a portion of local, where when these customers or merchants are thinking about commerce, they're thinking about Groupon. So that feels good.

Matthew Bombassei

Absolutely. That's helpful. And when we think about growing this inventory, are there any particular verticals you're focused on in the near term? Or any verticals in particular that have been particularly receptive to the increase in offerings and types of inventory?

Aaron Cooper

So for us, winning is winning in local across the board. I think we're most differentiated in Beauty & Wellness, which is very fragmented as well as our Things To Do, which includes our leisure business, which is also very fragmented. The way that Offers and Market Rate and Deals and access to self-service and connectivity and using our self-services tools has showed up has been different in each of those categories, but strong across the board.

So as we look into recovery, we see natural tailwinds for purchase frequency in Beauty & Wellness. As people get out more, our research says they're going to be doing a lot more beauty treatments to get ready to go out more. And I don't know if you need research for that because everyone just kind of knows it that as you're ready to go out more, do more things, see more people, you're going to take care of yourself from a beauty standpoint. So we think there's a natural tailwind there.

And then from a Things To Do standpoint, it's all about working with these merchants to get more. I told you about like the national destination Things To Do, where they're looking to how are they going to get demand? Are they going to get demand from overseas? Are they going to get demand locally? Groupon can help them open up locally, which is where the demand is going to come from for the coming months and quarters. And we think about Things To Do merchants in the indoor space.

Again, these folks will be taking advantage of the way that they can introduce Groupon or reintroduce -- I'm sorry, reintroduce their business to customers as it opens geo by geo. So the -- each merchant that's going to take advantage of our offering a little bit differently. But across the board, we saw engagement in our test markets, and we think that the rollout of removal of restrictions, rollout of Offers, and broadly speaking, the changes we're making to our CX will allow our merchants to do a lot more.

Matthew Bombassei

And now when you think about the learnings that you've acquired from say beauty and Things To Do maybe a bit slower to come back just because of the nature of the offerings there, how can you apply some of the learnings you've taken from beauty and apply that to the Things To Do category. Are there learnings that apply across categories? Or is this kind of a new space where you have to figure out a new way to appeal to Things To Do merchants and Things To Do consumers?

Aaron Cooper

Yes. So I mean, when you're working with local as we do, the nuances here are so important and something that we're very -- we're always obsessed on those types of details. So we saw a really strong signal in the test in beauty, with -- obviously COVID hit beauty less hard than it hit Things To Do. And we saw real engagement across all of our merchants with interest in removing restrictions so that they can continue to get customers back.

And so we've seen, over time, millions of customers clicking to want to buy, and our platform has told them, no. Merchants have told them no. Now our merchants are saying yes on our platform, we can say yes. And so we're removing restrictions and rolling out offers in Beauty & Wellness. Removing restrictions across all verticals and rolling out offers in Beauty & Wellness are very clear action steps here.

Then the CX is going to be really important. And so from a CX standpoint, the way that we're able to invite our customers to engage more deeply in our site will also hit all of our verticals. Right now, if you go to our site, our app, it hasn't been updated in about 5 years from a material update standpoint. What we're looking to do now in the coming months is to make a number of changes to our homepage and category pages, opening those up with clear call to actions, to engage with categories, to search more, adding repeat purchase flows, which is something we didn't need to have when we weren't having the ability for customers and merchants to do repeat commerce. But now that's something that we want to have happen more, and we've developed the value proposition on both sides for that to happen.

So we're really excited to open that up. So yes, we saw some really good engagement in Beauty & Wellness with offers. We saw engagement across local with a number of the things that we've been focused on. And we see the ability into recovery just to learn more about how to help different segments of local grow as we seek to scale. And so that's what I expect to happen.

Again, I think that some of the verticals that will be later to recover will take advantage more of our inspiration offering sooner as they move into more of our destination offering, which is, of course, where we see growth happening after they get their own businesses back to a level of sustained recovery.

Matthew Bombassei

And bigger picture, how should we think about the time line for the rollout of these different initiatives? Maybe talk about the different inventory types, talk about the new CX. We know about the 4 test markets, and you mentioned rolling out to North America in beauty on the 4Q call, but how should we think about the time line for the broader rollout of all of these products?

Aaron Cooper

So we're acting with a ton of urgency. I'll mention this again, but we see recovery and all that pent-up demand as a potential for almost like a marketing and branding event. Using a lot more people out doing things and engaging in the way that Groupon shows up for them during that period of time will help shape our reputation. That's like the same as like brand marketing and reputation development.

So the changes that we're making to roll out Offers, our team is doing that now actively. That is happening. The changes we're making to remove restrictions, we've committed to getting 80% of our inventory without repeat purchase restrictions by the end of the year. We're moving quickly on that. The changes to the CX will be some major changes that we make by the end of Q2 that we've talked about and as I mentioned here.

Ramping self-service for our merchants so they can do more on their own and the whole interaction with Groupon is less costly from a time perspective, that's something we're actively ramping right now, and we just introduced the ability for us to give merchants' recommendations via our self-service tool. And so you see us steadily progressing from, I can change an image, so I'm going to give your recommendations. I can do Deals and Offers to the point where you can do multiple services, not just Deals and Offers but also Sponsored Listings, which is something we're looking to ramp as well.

So we're pushing on all elements of the merchant value proposition and all elements of the customer value proposition with urgencies so that we can use the tailwind of recovery to really amplify the way we want our customers and merchants to think about us, and so that shows up in our growth story going forward.

Matthew Bombassei

That's very helpful. And you talked about this being sort of a rebranding event for Groupon as we progress throughout the recovery. Prior to the start of the pandemic, the goal was to roll out marketing spend to accompany the changes in products to rebrand Groupon in the eyes of the consumer. How should we think about marketing spend going forward and the need to spend in order to reeducate the consumer about what the value proposition of Groupon is?

Aaron Cooper

So this is a great question. And so I think all marketers will agree that you have to change the core value proposition before you market on top. And so that's what we're talking about doing. That's what we've spent this year working on this, and we're continuing to obsess on these key levers of the value proposition that, for the most part, are all incremental to what Groupon has done in the past. And we've got really good momentum, and we're just building the energy against those. And of course, I just mentioned all the different time lines associated with those rollouts.

Into recovery, we'll plan to spend more marketing as well. But I want to make sure to call out that there's a very special component about Groupon, which is our e-mail and push notifications. And so yes, I'm interested in building this destination commerce model to complement our inspiration, but that inspiration allows us to drive a lot of our own traffic and use that traffic to educate customers. So there can be an evolution as the way that our customers think about our brand just within our own media and within our own app and overall experience.

In addition to that, yes, into recovery, we'll look to spend more. We've been at historic lows. And as we spend more into recovery, it will also look to spend more mid-funnel and upper funnel as we think about the longer arc of inviting customers in to engage with Groupon and the reputation that we want to have with these customers.

Matthew Bombassei

Perfect. That's very helpful. And you talked about giving merchants more tools. And one of the things you mentioned was Sponsored Listings. This is something we see in a lot of the e-comm players. You've recently launched Sponsored Listings. Just curious, what has been the merchant adoption of this product? When we think about the e-commerce players, we think, generally 2% to 4% of gross billings is a place that they can get to. When we think long term for Groupon, how do you think about the overall adoption of that product?

Aaron Cooper

That's a great question. Because we're energized about this product. And what I like is I like our ability to simultaneously go out with offers, which is a lower expensive way on the platform and have Sponsored Listings to cater to people that already know that they want more, and they can spend additional on the platform in order to get more. And so the Sponsored Listings, we had our NVP launched. And we got solid positive reaction from merchants and got the signal that we're looking for.

So we'll be moving forward on scaling Sponsored Listings. We've got some tech work to finish out, but then we'll be scaling this more throughout the year. And it's our expectation that merchants engage and because this is something that they understand intuitively because to your point, it's on many other marketplaces and advertising platforms. And we think it's got important implications to both the customer and merchant experience. First, customer and merchant experience elements that we need to work out, but we definitely see this as being accretive to the overall marketplace, just like it is to other marketplaces and advertising platforms.

So going forward, I think, for us, we see this as a large and important opportunity. Again, there's just an order to the operation here. But as far as this being an accelerant to the business model as we start to scale it later in the year, I agree with you, this is exciting.

Matthew Bombassei

Absolutely. And you talked about order to the operation and the thing that comes before Sponsored Listings is getting those merchants on the platform, and that leads us to your self-serve tool, which is something that you mentioned a bit earlier. But just talk to us a little bit about the adoption of the self-serve tool. What percentage of merchants join the platform using the self-serve tool? And how do you think about the self-serve tool as a way to drive increased margin expansion going forward?

Aaron Cooper

Yes. So a couple of dynamics there. One, just to set the context, we've done very little self-service since Groupon was founded. And so this is just the way that merchants work with companies like ours and advertising platforms and marketplaces. And so we're rolling out something that's just long overdue. We're really energized by the uptick that we've seen from existing merchants and from new merchants. And not just with the ability to get on the platform, but when you're on the platform, to do more. So there's multiple dimensions. It's not just -- we've got x number of new merchants via self-service with x number of new merchants via self-service then -- are now doing more with us, and whether satisfaction is higher because it didn't have to interact with a sales rep to do something that they have done by themselves in 30 seconds.

And so we see engagement from new and existing, and it's increasing in its materiality. We see leverage from the sales team, where now the sales team can work on higher order things, which is great leverage. We see leverage from self-service being able to help us get merchants engaged with multiple services and the merchants being happier.

So there's just so many different benefits from where we're coming from to ramping our merchants on the self-service. First, new merchants come on, but even existing merchants, getting them on, and they can do more and more over time, it becomes so natural as the way that they engage with us. So we see good leverage out of all of those different components.

Matthew Bombassei

And switching off of local for a second and thinking about Goods. It was initially announced that Groupon will be exiting the Goods business entirely. And then the strategy shifted to more of a third-party model. So when you think about the evolution of the Goods business, and potentially, its trajectory going forward, how do you think about the importance of the Goods business to the overall model? And what do you think about as the end state of that business?

Aaron Cooper

So every time I talk about Goods, I always make sure to lead off with winning is on the other side of winning in local for us. This is where we're most differentiated. This is where our margins are strongest. This is the way that customers and merchants, basically, they think about us. And so that's our focus.

With Goods, Goods has a role on our platform as one of our categories. And we're really proud of the work that we've done to significantly reduce our cost structure for Goods. We can now run this business a lot more efficiently.

In North America, we've moved it completely over to third party. We're going to be doing that work in International. And so we'll accomplish that. And so while Goods has shown up across our assortment in different ways during the pandemic, we sold a lot of PPE in Q2 of last year.

Local is where our strategy is. Local is where all of our investment is. And I see Goods continuing to play a role, but the growth and the excitement in this business is going to be all about local.

Matthew Bombassei

Absolutely. Absolutely. I want to be cognizant of time. I know we're running out, but I'll ask my last question. When you think about international market, how do they fit into the broader growth strategy for Groupon? Whether that be applying the learnings that you've taken from the local business and applying that to international local? Or even the transition that you saw in the Goods business in North America? How can you apply those earnings to the international business? Any context there would be great.

Aaron Cooper

Yes. We have some named fast-forward countries outside of North America. And our plan with those countries is when they're ready, there's still restrictions that are significant and the recovery has -- is behind in those countries. But when they're ready, we'll be rolling numerous components of the value prop improvements that I mentioned out to those countries as well.

Matthew Bombassei

Got you. Well, I could do this all day, but unfortunately, we're constraint to 30 minutes. So Aaron, just want to thank you for the time. We really appreciate it, and thank you, everyone, for joining us today. We hope you enjoy the rest of the conference, and have a great rest of your day.

Aaron Cooper

Thank you so much.

Matthew Bombassei

Absolutely.