Groupon Profit Tied to DealAdvisor’s Flash-Sale Software

Groupon Chief Executive Officer Andrew Mason
Groupon Chief Executive Officer Andrew Mason is relying on e-commerce to reverse the decline that erased 81 percent of the company’s value in the year after its initial public offering in 2011, making it last year’s second-worst performing IPO by that measure, data compiled by Bloomberg show. Photographer: David Paul Morris/Bloomberg

As Groupon Inc. rushes into e-commerce, it needs to line up vast numbers of products to become profitable. To secure sufficient inventory, the company is developing software that will help small retailers easily set up flash sales on its Groupon Goods site.

The tool, called DealAdvisor, will let shopowners arrange sales for a fixed period, targeting the millions of visitors to Groupon’s pages. The feature is aimed at bringing more merchandise to the year-old Groupon Goods e-commerce service, Vice President Faisal Masud said in an interview. It’s in early testing and will be available next year, he said.

“We are the party that all the major vendors are coming to if they want to move massive volume,” said Masud, comparing Groupon Goods to discount retailers such as Big Lots Inc. and TJX Cos.’ TJ Maxx. “Our goal is to deliver a high-class experience with great products directly procured from brands at good margins.”

Chief Executive Officer Andrew Mason is relying on e-commerce to reverse the decline that erased 81 percent of the company’s value in the year after its initial public offering in 2011, making it last year’s second-worst performing IPO by that measure, data compiled by Bloomberg show. Mason needs Groupon Goods, which lets retailers such as Dell Inc. and Garmin Ltd. peddle thousands of marked-down items via two-day sales, to counter dwindling demand for local daily deals, which will probably generate $2.4 billion in billings in 2014, versus $4.2 billion this year, Evercore Partners Inc. projects.

Groupon shares rose 4.8 percent to $4.80 at the close in New York. The stock has plummeted 77 percent this year.

Established Players

The Goods division has made early progress, accounting for a quarter of revenue after only a year. The company will sell $2.7 billion worth of products and travel services in 2014, up from about $1 billion this year, according to Evercore. Still, the emphasis on e-commerce pits Chicago-based Groupon against established providers Inc. and EBay Inc. in a business plagued by low margins and high storage and shipping costs.

“It’s a very competitive space, and I’m not sure how successful they can be going up against all these big entrenched competitors,” said Edward Woo, an analyst at Ascendiant Capital Markets LLC.

Given its bulk-sale approach to e-commerce, Groupon’s ability to increase revenue from the Goods division will depend on how efficient it becomes at finding large caches of discounted products.

DealAdvisor, created in partnership with e-commerce software provider ChannelAdvisor Corp., will let smaller retailers offer deals with less human intervention than the current system. Rather than rely on Groupon’s buyers to find products, the system will encourage merchants that already sell on Amazon and EBay to offer their wares to Groupon Goods.

Amazon Veteran

If Groupon decides to put the deals on its site, it will use software to help determine how much of a product it can sell, set an appropriate price, arrange to have the items sent to one of its fewer than 10 warehouses, and coordinate sales and shipping to customers.

“We’re building a framework where the best possible deals at the best possible prices and velocity get pushed to this platform,” Masud said.

To spearhead the foray into retail, Mason hired Masud, 40, a veteran e-commerce executive who spent seven years helping build Amazon’s sprawling logistics operation. After joining in May, Masud led a reorganization of Groupon Goods, removing salespeople and hiring about 40 people with experience buying for the likes of Sears Holdings Corp. and Target Corp.

Topaz Earrings

Unlike other flash-sale sites such as luxury fashion retailer Gilt Groupe Inc. and home decor purveyor One Kings Lane Inc., Groupon isn’t focused on a specific category. Instead, its buyers look for opportunities to quickly sell large quantities of products to Groupon’s tens of millions of e-mail subscribers.

“That’s the biggest thing they bring to the table: A whole lot of e-mails and the ability to move several thousand units in a day,” said Sucharita Mulpuru, an e-commerce analyst at Forrester Research Inc.

The site set records over the recent Thanksgiving weekend, selling more than 42,000 topaz earrings, 40,000 iPhone cases and 43,000 photo albums. Bigger-ticket items have included a KitchenAid Inc. stand mixer and pasta maker for $449 and a Dell laptop for $839.

Unlike Amazon, where vendors have little choice except to offer products at the lowest rates to compete with other sellers on the site, Groupon Goods gives more freedom in setting prices, said Mark Sherengo, director of digital sales at camera brand Pentax.

On Amazon’s website, “the consumer wins, but the manufacturer loses,” Sherengo said. Groupon “allows us to know what profit we’re going to make.” Amazon declined to comment on pricing for sellers on its site.

Fast Embrace

Shipping packages costs much more than selling coupons online, a reality that has already hit Groupon’s bottom line. Evercore estimates the company loses money on Groupon Goods, with a negative operating margin of 15.6 percent, compared with a positive margin of 17.3 percent for its coupons. Groupon expects margins for physical products to improve to almost 10 percent, according to Chief Financial Officer Jason Child.

“Customers have embraced” Groupon Goods “a little faster than we expected,” Child said in an interview last month. While that’s boosting sales, it’s also “leading to margin reductions.”

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