Is Groupon fizzling out?

Groupon is relying more on Goods than deals. Is this the end of the daily deal craze?

Groupon shares took a hit Tuesday after the company released its second-quarter-earnings report, which missed revenue estimates by a good chunk of change.  Groupon reported $568 million in revenue when the Street was expecting $578 million.  Groupon is blaming the lower than expected income on the economic tumult in Europe, but is macroeconomic turmoil really to blame, or is it a cooling daily deals market?

Shares fell 27% on Tuesday to close at an all-time low of $5.51.  Since Groupon went public last fall, its share price has fallen almost 79% and its market cap has gone from a high of $13 billion to $3.58 billion.  That’s only a little more than half of the $6 billion Google had offered Groupon in December 2010, when daily deals were all the rage and Groupon was exploding.  I’m sure Larry and Sergey are breathing a huge sigh of relief now.

In Monday’s earnings call, CEO Andrew Mason explained that much of the problem originated overseas.  The bulk of Groupon’s revenue comes from its international business, and most of its international business is located in Western Europe, where economic conditions have taken a turn for the worst in recent months.  Their case isn’t helped by the fact that European merchants’ satisfaction score with Groupon is 25 percentage points lower than that of Northern American merchants.

Mason says that Groupon intends to fire up its European market by identifying a better balance between merchant and consumer value in Europe, as well as providing deal personalization.  But is it all Europe’s fault?  

Over the last few quarters, Groupon customers have been spending less and less.  The average Groupon customer in Q2 2012 spent $165, compared to $179 in Q1, $187 in Q4 2011, and $189 in Q3 2011. 

But it seems that the daily deals themselves—the heart of Groupon’s business—have been slowing down.  Groupon has had to rely more and more on its other businesses, particularly Groupon Goods, which J.P. Morgan analyst Doug Anmuth notes is “a less profitable and we believe less differentiated business.”  Revealing the true extent of the slow-down in Groupon’s daily deals business, Groupon Goods accounted for more than half of Groupon’s Q2 direct revenue.

“We understand that Groupon likely views Goods as a powerful means of leveraging its large base of 38 million active customers. However, we’d prefer the Goods business to be an incremental growth driver rather than the primary driver, and we believe Groupon has less competitive advantage overall in this segment,” Anmuth wrote.

Nevertheless, other analysts are staying optimistic.

“Despite the challenges in the quarter, we believe that the Groupon model can work,” says Wells Fargo Securities analyst Jason Maynard.

At this point, only six of the 23 Wall Street analysts who cover Groupon are maintaining a “buy” rating.

Mark Mahaney noted in a Citi Research note prior to Monday’s earnings call that in a survey of merchants, Groupon remains the top choice among businesses considering running a daily deal.  Groupon’s overall market share has increased and merchants’ plans to run a daily deal through Groupon remains high.  In a survey of consumers, Citi found that new product adoption and awareness has increased since last year.

But is pure brand awareness enough to carry Groupon along, or is this the beginning of the end of the daily deal craze?

Image source: artquid.fr