Financial Analysis: Groupon

Alex Debayo-Doherty
Sep 10, 2020 · 10 min read

Authors: Alex Debayo-Doherty and Matthew Garcia

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Photo by Artem Beliaikin on Unsplash

Our Findings:

  • User Experience: Groupon’s mobile and web platform resemble a digital coupon book that requires sifting through unwanted deals near you. It would benefit from a personalized feed or search category with the location. Even with card-linked (Groupon+) purchases, the customer needs to be proactive about finding vouchers and discounts, which is hard to reconcile with Groupon’s push for spontaneous mobile shopping.
  • Quantitative Analysis: Groupon is struggling to produce and maintain positive net income and overall earnings. Sales growth has been negative since 2015. Groupon has a healthy amount of cash on hand, current and quick ratio, and has worked to decrease its liabilities over the past few years. As a result, while Groupon’s overall financial metrics are not great, we believe that Groupon is well-positioned to meet any financial obligations.
  • Management: Company has had a bad history of mismanagement. Rich Williams, the current CEO, has done well to improve operational efficiency and vision, but poor communication and mismanagement of cash, signals that management trouble still plagues the company. Integral CFO, Michael Randolfi, left, which is a big hit for the company.
  • Merger Potential: A merger with Yelp could be mutually beneficial with Groupon’s transaction and ability to monetize customers and Yelp’s loyal user base, content, and independence from Google.
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Photo by Scott Graham on Unsplash

The Business Model:

The Local category uses Groupon’s network of merchant partners to offer its consumers discounts on goods and services near them, and they generate revenue from a cut from a purchase of a voucher and an advertisement fee from the merchant. Given the declining popularity of vouchers, one pays for ahead of time. The company has released a service, Groupon+ that allows consumers to link any credit card to a specific voucher and pay a discounted rate at the time of purchase unlimited times as long as the promotion is still active. Groupon’s objective in the local space is to expand the marketplace, increase brand awareness, customer acquisition, and revenue.

The Goods category is an e-commerce platform in which the company earns product and advertising revenue from purchases of goods directly from Groupon. This platform leverages Groupon’s merchant connections to offer discounted goods to consumers. It is composed of the subcategories: Events and Activities, Beauty and Spa, Health and Fitness, Food and Drink, Home and Garden, and Automotive.

Groupon offers travel discounts on hotels, vacations, package deals, and airfare. They recently partnered with Viator, a travel booking service with a low price guarantee and good customer support to bolster this aspect of its business model. Moreover, Groupon has partnered with GrubHub and Live Nation to better penetrate the food and event discount spaces in an effort to make its open marketplace as expansive as possible.

The company’s main distributions are on mobile and web. This is the place where consumers would like their card to a discount or purchase voucher outright. Groupon reports that 75% of its transactions are on mobile. On its mobile app, they use location to filter by distance to offer nearby deals to consumers through a map interface.

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Photo by UX Indonesia on Unsplash

The User Experience

Another observation we had was that the voucher system resembled a hardcopy coupon book that was common before the rise of the internet. It seems that the business model is a digital adaptation of that hardcopy advertising platform. Groupon+, a pay-at-the-point-of-sale system that is addressing the antiquated nature of the voucher system, will surely help Groupon customer satisfaction and retention. In spite of this, a core pillar of the Groupon business model is the need for the consumer to be proactive. For Groupon and Groupon+ the consumer needs to know ahead of time which deals they are interested in and engage with discounts before they shop. In our view, this was difficult to reconcile with the company’s current 75% mobile market and emphasize local discount offers. It seems the platforms are trying to appeal to spontaneous consumer spending but, simultaneously, requires planning and forethought on the part of the consumer. Additionally, Groupon’s committed to being an open marketplace where consumers can find anything they want at any time.

Groupon’s difficulty is that its competitors also offer similar services and discounts but have specialized in specific industries. Snackpass (discussed further below), for example, is focusing on food discounts on college campuses. SnackPass has achieved high penetration on its campuses and can better serve the needs of people looking for food. In addition to being hurt for being a generalist marketing platform, much of Groupon’s revenue comes from merchant sales directly to consumers. This model directly competes with Amazon’s delivery services and will likely be suffocated as Amazon expands. Bearing this in mind, Groupon is under attack from multiple angles, and its commitment to continue to grow its marketplace for consumers does not address the threats posed by companies with different business models and overlapping marketplaces.

Another glaring weakness of the business model is the threat from direct merchant social media penetration. Companies that might have partnered with Groupon in the past are now empowered by social media and an increased ability to reach their customers directly. Groupon the past three years has made 30% or more of its annual revenue in Q4 with the holiday season. Consumers have a sense of the discount market, so, as companies are able to reach consumers more directly, its need for an advertising platform diminishes. Groupon is making attempts to modernize with Groupon+, a subscription model, and enhancing its mobile experience, but customer retention and acquisition and year-over-year growth have continued to decline, signaling a more critical issue with the brand and its appeal to consumers.

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Photo by Markus Spiske on Unsplash

The Numbers:

There are some positive signs for Groupon’s financials. In the past year, Groupon has improved its quick and current ratios so that they are greater than 1, which positions them to better respond to financial obligations. Additionally, Groupon has decreased its total liabilities over the past three years, making the company less leveraged.

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Photo by Markus Spiske on Unsplash

Leadership and Management:

Rich Williams, the current CEO who came from Amazon, was integral in transitioning the company to its leaner and more efficient operation. He consolidated the company’s active operations in 36 countries down to the most profitable markets in just 15 countries. Williams has created a much more capable management team that has worked on “right-sizing the cost structure, harmonizing product platforms, reducing Groupon’s global footprint, opening up the customer acquisition funnel, and pushing product enhancements that drive increased customer engagement.” MIG Capital, who assessed Groupon, believed in 2017 that Williams and his disciplined CFO, Mike Randolfi, have put Groupon on a redemptive path, where they could improve its EBITDA and FCF.

MIG released a memo in August of 2019 updating its shareholders on the status of Groupon’s progress. They expressed concerns about the company’s management and the ability to communicate with investors. Michael Randolfi, who was at the helm of the company’s transition with Rich William and praised for his discipline in capital allocation, left the company which left a lot of people worried about future financial management and communication. Moreover, MIG shared its frustrations with the company’s decision to not use its net cash position to buy back equity in the company at its record low valuation. MIG felt this was the best use of the cash on hand but no action was taken, which does not inspire confidence in the management team.

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Photo by Uriel Soberanes on Unsplash

Competition Analysis:

Increasingly, rewards companies are restructuring programs and focusing on specific industries. For example, Snackpass, a company founded in 2017, offers college students a mobile app that allows them to order food online and receive rewards and bonuses for using the app. Snackpass reported almost 90% penetration of the student body at Brown and Yale, and reported very high user frequency: the average customer used Snackpass 2.5 times a week.

Additionally, manually finding coupons is becoming an increasingly antiquated practice. Honey, a company that was recently acquired by PayPal for $4 billion, is a mobile app and browser plug-in that automatically searches the web for coupons and applies them to items at checkout. Apps like Honey remove the friction involved in the process of finding and applying coupons, which makes these companies more attractive than time and labor-intensive companies like Groupon.

One other way that the competitive landscape is changing is that social media platforms like Facebook, Instagram, and Snapchat are addressing local ad dollars and local e-Commerce markets to a greater degree.

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Photo by Micheile Henderson on Unsplash

Merger Potential:

Disclaimer: All of our research and thoughts are based upon publicly available information. We can not verify anything that was published online aside from the reputability of the sources. We are an unbiased source and have no connection with Groupon.

Cogent Market Insights

Cogent Market Insights offers fresh market perspectives generated by students from Brown and Harvard

Alex Debayo-Doherty

Written by

Harvard Undergrad | VC, Tech, Futurist, Music Lover

Cogent Market Insights

Coming from a place of intense curiosity and determination to understand financial operations, The Cogent Market Insights Team aims to produce clear and digestible learning materials and market analysis to demystify and clarify the world of finance and investment.

Alex Debayo-Doherty

Written by

Harvard Undergrad | VC, Tech, Futurist, Music Lover

Cogent Market Insights

Coming from a place of intense curiosity and determination to understand financial operations, The Cogent Market Insights Team aims to produce clear and digestible learning materials and market analysis to demystify and clarify the world of finance and investment.

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