Groupon’s Not Trying to Become Amazon, but Andrew Mason Says Products Are Key

Do you need a new wireless router? Or maybe you want a silk duvet or a faux leather jacket. Well, if you act fast enough, there’s a chance you can buy them for 50 percent off on Groupon.

The Chicago daily deals company, which once focused solely on selling coupons for restaurants and spas, has quickly morphed into an online retailer, selling physical goods that are shipped to your front door. In about a year’s time, the side business has grown to account for 11.4 percent of the company’s North American revenue, totaling $193.7 million in the first nine months of the year.

Yesterday, on Groupon’s quarterly conference call, CEO Andrew Mason defended the decision to expand into products, even though it means lower margins and going up against some mighty competitors, like Amazon.

“We built something that fits squarely into our core customer value proposition of the discovery of curated offers and carves out a unique space in the retail e-commerce sandbox,” said Mason, according to a Seeking Alpha transcript of the call. “We neither need to nor do we want to try to out-Amazon Amazon. We’ll never be about comprehensive product selection, but our skills at curating unbeatable offers are clearly resonating with our customers.”

The public markets did not respond favorably to the company’s enthusiasm.

In after-hours trading yesterday, Groupon’s stock plunged 15 percent, or 59 cents a share, and in the morning the news was still bothering investors. Shares fell nearly 30 percent today, or $1.16, to trade at $2.77 a share, way below the company’s last 52-week low of $3.68 a share.

The company’s market value now totals $1.82 billion, regrettably far below Google’s $6 billion buyout offer.

Groupon Goods offers a handful of products daily, making it similar to Amazon-owned Woot, which offers discounted merchandise for a limited time. Some of the electronics are priced in the hundreds of dollars, but most products fall between $10 and $40, filling a deal-seeker’s sweet spot. For instance, as of today, only 190 refurbished Motorola Xoom tablets had been sold for $229, but more than 1,000 Netgear wireless routers had been sold for $32; and more than 1,000 packs of men’s underwear had sold for $12. In particular, Mason illustrated Groupon’s reach by saying it was able to help Garmin sell nearly 30,000 GPS units in 24 hours.

Add to that free shipping and free returns on any purchases over $15 and the offer appears even better. Groupon will also be opening special “stores” for the holidays, including Thanksgiving- and Christmas-themed events. This will expand consumer interest in Groupon this year, compared to last year, when the company’s holiday focus was on resolution-type offers, like weight loss or gym memberships.

So, will Goods be less profitable than its original deals business, and what can investors expect to happen to the company’s original business?

On the call yesterday, Groupon’s CFO Jason Child addressed the topic of profitability.

He said the two businesses are reported differently, according to standard accounting practices. But if they were to be compared on an apples-to-apples basis, a local deal’s operating margin is roughly 10 percent to 12 percent vs. the Goods business, where he hopes margins will end up in the high-single digit percentages. “It should be actually quite similar,” he reasoned.

Mason addressed how the two businesses will work together. Going forward, he said less of the real estate in the emails Groupon sends out will be dedicated to local offers, which will mean coming up with new ways for customers to find them. Two possibilities, he said, are to focus more on Google and Bing search and discoverability on the mobile phone.

“Goods has been the primary driver of our growth over the last two quarters and is now at an annual billings run rate of nearly $1.5 billion,” Mason said. “This begs the question, what does this mean for our local business? Has it reached the limit? To be clear, we continue to believe in the size of the local e-commerce opportunity in front of us.”

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