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."

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
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

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific