Deal with it: Groupon ponders its future

The discount coupon leader now faces competitors big and small, angry consumers and merchants, and a fickle stock market

Every day comes a new horror story. One day it is a fracas between swearing parents, weeping children, furious elves and overwhelmed Santas at a Christmas market in Newcastle. The next day it is a Reading bakery brought to the brink of collapse after being forced to bake 200,000 cut-price cupcakes. Such are the claims of disappointed customers and disaster-stricken merchants that now the UK's Advertising Standards Authority is investigating Groupon.

When the Chicago-based company, which emails 143 million subscribers around the world with a "daily deal" on local goods and services, promised to "reshape local commerce", it didn't have this sort of chaos has in mind.

The trail of bad news is proving hard for Groupon and its founder Andrew Mason to laugh off, because the company is still in its infancy and has to prove its value to the merchants who use it to tout for customers.

And just as each new day brings forth a new disgruntled customer or merchant, each day seems to bring a new competitor, too. Start-up entrepreneurs have created scores of copycats, internet behemoths such as Google have tried to get in on the act, and there are particularly piquant threats from media companies that already have tight relationships with local advertisers, such as newspaper groups and – just yesterday – the giants of radio broadcasting in the US.

No wonder investors at Groupon's much-hyped flotation on the Nasdaq stock exchange last month are having second thoughts. After soaring in the first few days, driven higher by speculators desperate for a piece of the internet's next big thing, Groupon shares have slumped by almost 40 per cent from their peak. Worse, at $18.824 in lunchtime trading in New York yesterday, as the rising tide of the market failed to lift Groupon's boat, they were 6 per cent below their float price – not an outcome the company's bankers had hoped for.

It is barely three years since Groupon sold its first deal – a coupon for two-for-one pizzas at the restaurant below its Chicago offices – but it barely needs an introduction. More than 30 million people have now bought one of its coupons, 16 million more than once. What they get for their money is a steep discount at a local merchant, anything from a coffee to a pedicure to bungee jumping to almost anything else you can think of. What the merchant gets is a new way of persuading customers through its doors, hopefully to come back again and again.

For now, Groupon is much more coy about the number of merchants who use the service for a second time than it is about the number of email subscribers who buy the coupons, but this is the number that will ultimately prove Groupon's worth. What we do know is that the company's growth is slowing, but from stellar start-up rates that could not possibly be maintained.

Groupon recently expanded into travel deals, dramatically increasing the amount of money pouring through the company. Yipit, a website that aggregates the daily deals of Groupon and many of its many competitors, estimated that gross billings (that is, the amount of money spent on coupons) were $176m for Groupon in North America in October, up 22 per cent from the month before. North America is the company's most mature market, where it has so many subscribers now that it felt comfortable pulling back on marketing spending. It broke even in North America in the third quarter, and analysts will be looking at its next results early in the new year for the first clues as to whether Groupon can be as profitable as its $12bn stock market valuation suggests.

It won't just be gross billings that will be important to that profitability, but the cut of the gross billings that Groupon keeps, currently around the 45 per cent park. In other words, Groupon passes on barely half of the money its customers spend to the merchants.

According to an investment note yesterday from Frederick Moran, an analyst at Benchmark, that mid-40s figure is currently holding steady, even though travel deals are less lucrative for Groupon. Competitors' attempts to steal share by offering a lower take or a faster payout had not worked, Mr Moran told clients.

But will that hold true for much longer? Gross billings are expected to be flat in the first quarter of 2012 compared with the final three months of this year, on Benchmark's conservative estimates.

Already, Groupon has a constellation of competitors. Its nearest, LivingSocial, is about one-third the size, taking in gross billings of $55m in North America in October, according to Yipit. But Amazon Local, a daily deal offering from the giant e-commerce company, is the fastest-growing new rival and has already leapt into third place. Not all big companies will succeed, of course, and Facebook has discontinued its local deals offering for the time being, but Google is still in the race.

And now there is big news for SweetJack, a service created by Cumulus Media, the No 2 radio broadcaster in the US, for its local advertisers. SweetJack's daily deals are advertised not just through its email subscriber list – one million and growing – but also on the 570 Cumulus radio stations in 120 US cities. Yesterday, Cumulus allied with Clear Channel, its bigger rival, which has 850 stations in 150 cities, to roll the service out nationwide.

Lew Dickey, the Cumulus chief executive, said SweetJack was "a breakthrough brand in a sea of sameness that's fuelled by the power of radio to connect local merchants with consumers".

Jeff Grau, at eMarketer, says the daily deals space was ripe for consolidation, but that there was still room for new competitors, focusing on very local markets, especially if they can reach mobile subscribers. "There is pressure at both ends of the business model: it is about getting quality merchants to sign up as well as quality subscribers," he said.

Mr Mason was at a Credit Suisse investment conference last week addressing the question of competition. He told the audience that Groupon had "hit an inflection point" relative to its rivals. "There's no question the barriers to entry to this business are low," he said. "But the data shows with equal certainty that the barriers to success are quite high."

The giant banner displayed by Legia Warsaw supporters last night
i100(and it's got nothing to do with the Great British Bake Off)
footballPremiership preview: All the talking points ahead of this weekend's matches
Angelina Jolie with her father Jon Voight
Arts and Entertainment
Tulisa as a judge on the X Factor in 2012
tvLouis Walsh confirms star's return
Life and Style
fashionClothes shop opens on Bill Clinton Boulevard in Pristina
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Life and Style
Melissa and Joan Rivers together at an NBC event in May 2014
peopleDaughter Melissa thanks fans for 'outpouring of support'
Life and Style
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

Test Manager - Banking - Yorkshire - £450 per day

£400 - £500 per day: Orgtel: Test Manager - Banking - West Yorkshire - £400-£5...

SAS Developer - DI Studio - Banking

£450 - £500 per day: Orgtel: SAS Developer, Chester, Banking, DI Studio, £450-...

Recruitment Consultants - Banking & Finance

£20000 - £30000 per annum + OTE £40 - £50K first year: SThree: SThree Group an...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone