Groupon's 'services and shopping' future remains elusive
- Summary:
- Bargain basement coupon provider Groupon wants a higher margin, higher end future, but transitioning to a new model is proving a long term prospect.
Groupon’s struggle to find a consistently monetised business model isn’t getting any easier, despite turning an unexpected profit late last week.
While that trip into the black might have been expected to bring some cheer, the underlying reality is that it owes more to Groupon’s disposal of a controlling stake in m-commerce companyTicket Monster for $360 million.
That was enough to put the brakes on the firm's declining numbers which have been essentially on a downward slope since the firm’s IPO in 2011. The firm turned in a second quarter profit of $109.1 million, up from a year-earlier loss of $22.9 million, on revenues up 3.1% to $738.4 million.
But every bit of seemingly good news is almost immediately countered by a balancing negative one. So there was a 6% increase in the number of active customers during the second quarter, but that was down from 7% in the first quarter. Worse, it was down from 24% against the second quarter last year.
CEO Eric Lefkofsky admits that the firm faces an uphill struggle to transform from a daily email coupon business into what he calls a predominantly mobile, local commerce marketplace:
Our mission is to connect local commerce by providing better yield management tools to merchants looking to fill their open capacity, while offering consumers a seamless experience to which they can discover, book and buy locally.
There’s a problem here though - Groupon just doesn’t have the inventory to deliver on that mission statement. Lefkofsy admits:
In order for our marketplace to thrive, we need more inventory. Just search for almost any category in almost any city and you will notice that we just don’t have enough inventory to fulfil many of our customers’ demands.
But the CEO’s obligatory spin here is, of course, that this problem is also a major opportunity:
The math is pretty simple. If you take North America we offer about 240,000 deals out of a pool over 4 million merchants that we targeted. With less than 10% of merchants running deals in our platform, we still have a long way to go to get density up to the appropriate levels. But we’ve made some progress. Globally, we now have almost 510,000 active deals on the platform, including about 75,000 coupons.
We’re on track to achieve our goal of more than doubling the number of active deals in our site over the next year. This should give us enough inventory in many, but not all markets to improve conversion, allowing us to efficiently invest to drive customers to our site and drive local growth.
Less bargain basement?
Something else that Lefkofsky has in mind is shaking off, at least in part, the image of Groupon as a bargain basement discounter:
Our goal is to attract merchants that don’t want to discount their products and services so heavily, but still want to access our large community. Merchant pages and the various market rate transactional products that we now offer allow merchants to sell their services at much closer to full price. To-date, we released almost 2 million merchant pages to be indexed on Google, up from roughly 900,000 last quarter.
There’s also work to be done on making Groupon easier and more attractive for the buy-side to use. Significant effort has gone into connecting the sell side to the marketplace and making it easier for them to upload inventory. Now the same needs to be done on the buy side. Lefkofsky explains:
We’re focused on is ensuring that our customers have an amazing experience every time they use Groupon, from search to buy to book to redeem to pay. Our customers should be able to navigate local merchants, find amazing deals, hit buy, book an appointment or reserve a table, walk in and redeem their Groupon, pay the bill and handle any customer service issues they have seamlessly, right from their phone using their Groupon app. The process of using Groupon needs to be easier than not using Groupon.
According to COO Rich Williams, that last point is a major focus:
The process of using a Groupon has to be an easy or easier than not using a Groupon, and it should be dead simple for merchants to add inventory to our platform, manage with their offers, and run their businesses. For consumers, we continue to develop solutions on our app that we believe will make redemption, payment, and even tipping seamless. We’re also continuing to evolve our merchant-facing tools in the Groupon merchant app to make connecting to the Groupon ecosystem flexible and easy. These tools provide a unique set of functionality that help merchants get the most out of their deals and deliver a great experience for the customers.
Services and shopping
This has also meant rethinking what Groupon does from three categories - load, good, getaways - to two, in the firm of services and shopping, says Williams:
Services is really just the things you can do wherever you might be and the ways to get you there. Our overarching goal here is to make buying and redeeming Groupon as easy, or easier than any other online or offline experience.
We want you to come to our marketplace, because taking care of your daily life will be simpler with Groupon, and we’re building products that remove friction and annoyance people experience everyday, whether it’s on or offline in the area in which they spend a significant portion of their hard-earned money locally.
With that in mind, our top priority in our services businesses is cracking a few key high-frequency local use cases. That means building amazing products and experiences, as well as deep and broad selection in food and drink, in health, beauty, and wellness, and in things to do. These are the things that people do frequently when they’re out and about. For example, the average American eats at or from a restaurant over five times per week.
As for shopping:
We’re focused on two areas. First is continued margin improvement in our direct or first-party business. The team has made significant headway over the past few quarters in this area and remains focused on further optimizing our logistics and supply chain processes, vendor relationships and operations to speed delivery for customers while reducing costs. In addition, we continue to refine our pricing and merchandising playbook to improve cross-sell and multiple unit orders as well as scale smaller but more profitable subcategories.
Second, but equally important is connected supply. With connected supply, we expect to supplement our direct primarily flash-oriented inventory with third-party and market rate items in order to significantly accelerate the breadth and depth of our marketplace.
We now have over 50,000 products available in North America alone, and expect that number to only increase. We don’t need every iPhone case or pet bed ever made in every color, but we have the demand to support a broader selection and richer assortment than is available on Groupon today.
And we believe there’s appetite for additional services and experiences around it. Once we’ve made good progress with connected supply, the natural next step is to localize. In the long-term, we think no one is better positioned to solve that last mile of local commerce.
Lefofsky remains relentlessly upbeat in his assessment of the firm’s positioning:
As we aggregate more inventory and improve user experience, we believe conversion will rise, and we’ll be able to efficiently invest to drive traffic and transactions unlocking new pools of growth.
As such, we now turn our attention to making our product truly indispensable to consumers looking to explore the world around them and save money while they’re at it. We aspire to be the best kind of daily habit one of surprise and delight, a place you start, when you’re looking to do or buy just about anything locally.
As we seek to connect local commerce and reward every day curiosity, we’re mindful of how far we’ve come and how far we have yet to go, given the size of the opportunity before us and the fact that we’re still only six years old, despite the scale at which we operate.
He adds:
We've got to get our existing customers buy more and add more customers. And that’s what all of our energy in investments right now are focused. Marketplaces take time to build and I think people don’t realize ours is only a couple years of old.
It’s just hard to imagine, but we don’t even have the search box a couple of years ago. So we now talk about search being 30% of our business, but we didn’t even have a search box, and a few years before that e-mail was virtually 100% of our business.
My take
The real challenge for Groupon is summed up by Lefkosky when he says:
To get our existing customers buying more, they have to think of us as a daily utility.
For my part, I absolutely do not think that way. I get Groupon emails popping in to my spam box every day, but I can’t remember the last time I bothered to read one.
Lefofsky adds:
We have to have a marketplace that’s got high discount inventory and low discount inventory and high margin inventory, low margin inventory. And we have to have people and merchants that are basically on Groupon all the time.
And that’s the biggest mountain to climb. In an age of Amazon Prime and Alibaba, I’m just not seeing it.