Groupon on a Slippery Slope

Analysts believe that consumers are beginning to feel the effects daily deals fatigue in the email in-boxes after being barraged by discount deals offered by multiple vendors multiple times a day. Benchmark Capital analyst Clayton Moran believes that “the daily deal business has run into a wall.” According to Yipit, daily deals market revenues have fallen to $134 million in July in the top 30 North American markets, down from $144 million in June. This is obviously unwelcome news for the market leader, Groupon, (Nasdaq:GRPN) which has seen its market capitalization tumble since it listed in November 2011.

Groupon’s Financials
Groupon’s Q2 performance and outlook were a big disappointment to the market. Gross billings for the quarter fell from $1.35 billion a quarter ago to $1.29 billion. Net revenues rose 45% over the year to $568.3 million but fell short of the Street’s target of $575.3 million. International revenues grew 31% over the year but fell 4% sequentially to $308.2 million as the company was severely hurt by exchange rate conditions. Groupon’s international business now accounts for 54% of revenues. Net income of $0.04 cents a share, improved from a loss of $0.35 reported a year ago and managed to surpass market expectations of $0.03 a share.

Groupon attributes its disappointing growth to the troubled European market. The continent’s economic crisis has curtailed discretionary spending by consumers. In addition, currency headwinds are hurting revenues from the region. But Europe isn’t the only market with a worrisome profile. During the quarter, Groupon’s market share in North America fell from 56% a quarter ago to 53%. Competitor LivingSocial is eating into its market share as that company’s presence in the market grew from 20% to 22%.

In other metrics, Groupon saw a mere 3% sequential growth in new subscriber additions. The average revenue per customer also slid from $179 a quarter ago to $165 in the previous quarter.

For the current quarter, Groupon expects revenues of $580 million-$620 million, compared with market estimates of $605 million.

A New Strategy for Cash-Strapped Europeans
Despite the poor economic conditions in much of Europe, Groupon continues to invest in the region. It is changing the mix of deals it features in Europe from an emphasis on higher-priced ones such as luxury hotel stays to offering more inexpensive deals that do not rely on discretionary spending.

The company is also investing in the technology and support it deploys in Europe so it can personalize deals. Last quarter it began testing personalization tools in major European markets and is hopeful that by the end of the current quarter, it will enable personalization in its top European markets.

Groupon is also investing in sales team in Europe so that it will become a household name in Europe just as it has become in North America.

Groupon Acquires Pospitality
Groupon recently acquired Pospitality, the creator of Breadcrumb, an iPad-based point-of-sale (POS) system for restaurants. The acquisition is expected to have cost them between $10 million and $15 million. Through Breadcrumb, restaurateurs can take orders table side and update menus through wireless technology built for iOS. Analysts expect that the acquisition will help Groupon become the end-to-end solution provider for local merchants by helping them with marketing, integrating with POS systems and offer tools for analytical insights into their consumer data.

But the market hasn’t reacted positively to these moves. The stock is trading at $4.75, with a market capitalization of $3.1 billion. It has fallen more than 80% since its high of $31.14, reached soon after the company listed in November 2011. Groupon may well be wondering if it should have accepted the $6 billion price tag that Google had put on it a few years ago.