Skip to footer

The problem with Groupon

Groupon has yet to carve out a competitive niche for itself in the market, and it never should have been a multi-billion dollar company.

|
Charles Rex Arbogast/AP/File
In this Sept. 22, 2012 file photo, the Groupon logo is displayed inside the online coupon company's offices, in Chicago. Brown argues that Groupon is a bad investment, and always has been. (AP Photo/Charles Rex Arbogast, File)

Regular readers know I've been hating on Groupon ($GRPN) since before the IPO, I made it pretty clear that I was not a fan of the model or the opportunity for a daily deals stock.  I had some great intel from merchants who used the service and salespeople from competitors about why this should never have been a multi-billion dollar company.

Morningstar put out a piece of research on the stock this morning that I thought cut right to the heart of the matter - the barriers for competition are effectively zero...

Groupon's Business Can Easily be Replicated
 We believe that Groupon is primarily a local e-mail marketing company that is hoping to transform into a local advertising powerhouse. This potential opportunity is not lost on the market, as companies including LivingSocial, Travelzoo (TZOO), Amazon.com (AMZN), OpenTable (OPEN), and Google (GOOG) have launched daily deal services as well. Although Groupon has incredible brand recognition, it's not clear to us why merchants would avoid using the competition, particularly if they receive other services or better terms.

Thoughts on the Economic Moat
 In our view, Groupon has not carved out an economic moat. We cannot attribute any of our five defined sources of an economic moat to Groupon's business at this point in time:

Customers and merchants have no switching costs. Consumers typically subscribe to multiple e-mail lists, and we believe that the value of the deal and the quality of the merchant drives the transaction, not the company that e-mails the offer.

The firm also does not have a cost advantage. The company has built an e-mail subscriber list and runs a call center to call local businesses to run "Groupons." Unless the company can develop a low-cost way for "self-service" advertising by local merchants that is superior to the competition, we cannot envision any cost advantage that Groupon could construct. Furthermore, we think that competitors who sell other ad products to the same merchants may put Groupon at a competitive disadvantage.

The firm has no meaningful intangible assets, and it doesn't enjoy network effects. Groupon is essentially a sales agent and intermediary between local merchants and consumers. Consumers are free to use competitors such as LivingSocial, Amazon Local, or Travelzoo's Local Deals and gain little to no benefit from using Groupon repeatedly. Moreover, LivingSocial has shown no signs of slowing growth although it has a smaller base of merchants and customers.

The rest of the report concerns valuation and "weak economies of scale.  It's behind a paywall at Morningstar but if you want to sign up for Morningstar StockInvestor, it's $109 for the year (12 issues).

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to The problem with Groupon
Read this article in
https://www.csmonitor.com/Business/The-Reformed-Broker/2012/0310/The-problem-with-Groupon
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe