The challenges facing Groupon are mounting as the daily deals pioneer struggles to create a viable business model. As Reuters notes, interest by consumers and merchants in its daily-deal local offerings continues to wane, and it is far from clear that the Chicago-based startup can offset the decline in the bulwark of its original business model with other services that will generate enough business to keep it afloat.
Accordingly, Groupon's market capitalization has dropped to just $1.8 billion, down 90% from nearly $13 billion when its stock went public at $20 a share a year ago in the second-biggest US IPO since Google. Key executives and salespeople continue to jump ship, while it's also coping with controversy over its accounting methods.
Even though Groupon had more than 4.3 million customers last month, and "an annual run rate of nearly $1.5 billion in global billings and nearly $500 million in revenues shortly after its one-year anniversary in September," according to a company spokesperson, the now-apparent weakness in its business model means that imitators, such as the Amazon-backed LivingSocial, are having unprecedented problems.
As the 800-pound gorilla in the space it invented, Groupon by far is suffering most of the slings and arrows. The basic problem is that small merchants it has recruited nationwide for daily deals have found themselves on the short end of the deep-discount promotions, which seem to benefit consumers — and Groupon — a lot more than the businesses who sign up for promotions.
It turns out that daily deals aren't much more effective than other, more traditional means of advertising a local business, and that merchants often lose money providing discounts at the cash register to eager customers who turn out to be one-time patrons only. In fact, a recent survey by the Raymond James securities firm polling about 115 merchants using Groupon found that 39 percent were unlikely to repeat the experience, according to Reuters.
Groupon has been trying to counter by diversifying into new services and features such as Groupon Goods, a more traditional discount online retail operation that now accounts for much of the company's revenue growth. Services to help local merchants with payments and point-of-sale operations also are growing. Heck, it's even launching a holiday wish book and pitching hot holiday toys, a tried-and-true tactic of retailers such as Walmart and Toys R Us, this year.
In its transformation, the first-mover advantage, market momentum, sizeable sales force and relationships with merchants may yet end up giving Groupon a telling edge over competitors even though the playing field is moving to services other than daily deals.
"There may be some market-share shift" during this transition, Arvind Bhatia, analyst with Sterne Agee & Leach, told Reuters, "to the benefit of Groupon." It can only hope.