Groupon Inc. (GRPN)’s shares, which have fallen below the company’s initial public offering price, show that both merchants and investors are having second thoughts about the nascent daily-deal industry.
About half the businesses that have offered an online deal- of-the-day in the past aren’t planning to do so again in the next six months, according to a survey published on Jan. 2. The study, by Susquehanna Financial Group and daily-deal aggregator Yipit, showed that merchants were concerned about a low rate of repeat business from new customers gained through such offers.
“The risk factors are enormous” for daily-deal companies, said Sucharita Mulpuru, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. “Their cost of merchant acquisition is going to get higher over time.”
To keep growing, the industry, which researcher BIA/Kelsey estimates may more than double to $4.17 billion by 2015, will probably agree to charge businesses less. Groupon, in fact, said in a June IPO filing that offering merchants more favorable terms may cut into its profits.
Margins are already shrinking. The amount of billings Groupon booked as revenue narrowed to 37 percent in the third quarter from 42 percent in the prior period and 44 percent in the first quarter. Chicago-based Groupon attributes the decline to getting into new products, such as travel and event tickets.
The company’s shares slipped 2.6 percent to $18.77 at 1:01 p.m. New York time. Yesterday, Groupon dropped 6.6 percent after the release of the Susquehanna and Yipit survey, which collected data from more than 100 merchants. This week marks the second time that Groupon stock has fallen below the $20 IPO (GRPN) price since its Nov. 3 debut.
Groupon is the biggest Internet-deal provider, delivering discounts on restaurants, hotels, spa treatments, and other goods and services. Rivals include Washington-based LivingSocial and Seattle-based Amazon.com Inc., and Groupon also lists Google Inc. and Microsoft Corp. as competitors in its prospectus.
While 80 percent of the survey’s respondents were satisfied with daily-deal companies, about 52 percent of merchants said they’re not planning to offer a discount through such sites in the next six months.
“People are scrutinizing it a little more because of all the merchant feedback,” said Herman Leung, a Susquehanna analyst based in San Francisco. He has a “neutral” rating on Groupon’s stock. “About 76 percent of the merchants plan to do zero or one deal over the next six months. They’re seeing sufficient demand on their own as the economy is getting better.”
Julie Mossler, a spokeswoman for Groupon, declined to comment.
Small Business Market
Groupon created the online daily-deal market in 2008 and in the first three quarters of 2011 featured deals from more than 190,000 merchants worldwide, according to its prospectus. That leaves plenty of room for growth, as there were 5.9 million businesses with employees in the U.S. alone in 2009, according to the U.S. Small Business Administration.
Brendan Lewis, a spokesman for LivingSocial, said that even within the Susquehanna and Yipit survey, the numbers are encouraging.
“It shows the vast majority of merchants who have run deals are happy with their experience, and nearly half plan to run another deal in the immediate future,” Lewis said in an e- mail. “You’d be hard-pressed to find an 80 percent satisfaction rate among merchants for any other marketing channel in use today.”
Still, LivingSocial put off its IPO plans last year as Groupon and other Internet companies faced turbulent debuts in the public markets. The company instead lined up $400 million in private funding at a valuation of about $6 billion, a person with knowledge of the matter said in December.
Staying private has allowed LivingSocial to shore up its finances without the scrutiny of the public markets. Groupon, meanwhile, has been criticized for its ballooning marketing expenses (GRPN), which have led to rising losses.
The company has more than 10,000 employees, up from 37 in June 2009. It spent $613.2 million on marketing in the first nine months of last year, resulting in a net loss of $238.1 million. Marketing costs will increase in the coming months as stores become less inclined to offer Groupons because they aren’t seeing users return, Mulpuru said.
“It’s been like a marketing blitzkrieg that’s grown the business to the size that it is,” Mulpuru said. “They were using investor money to subsidize these offers for so long. Then what merchants start recognizing is, ‘We’re just not getting new customers.’”
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