Groupon Background Information and Financial Analysis

Introduction 

Groupon was founded by Andrew Mason in 2008 and is currently a market leader in the daily deals industry. Since 2009, the company has shown exponential growth, posting figures of 1.6 billion in revenues and over 150 million subscribers by the end of the fiscal year 2011. Nevertheless, the industry is relatively new and investors are looking to find Groupon’s profitability. This report has identified issues within Groupon’s industry as well as within the company itself that show the company’s financial analysis and overall ability for investment. Some of the challenges within the industry is the extreme ease of entry, massively intense competition and non-differentiation among market players. On the other hand, Groupon challenges revolve around the company’s ability to make profits and their dependence on acquisitions for growth. As a result, this report equally puts forward a sustainable growth strategy for the organization.

Background Information 

Groupon is a website, which features daily deals with the objective to provide a better platform for merchants to reach their clients, as well as clients reaching their merchants. This service ensures that a customer on the website could get deals that they desire for commonly bought products as well as try out new products. Discounts are normally between 40 percent and 60 percent of the retail price and over a wide range of products, including foods, cosmetics, events and services.

The company grew out of a web campaign dubbed The Point and their first project was offering a 50% discount off pizza in Chicago, where the company has its headquarters. The company soon expanded to forty-seven countries worldwide and over 170 American markets in North America. In their bid to expand internationally, the company acquired similar deal of the day websites across the countries they expanded in. at the end of 2011, the international investment for the company accounted for over 60% of its revenue, compared to 36% in the previous year. As of 2012, the company acquired Hyperpublic & Kima Labs, which will allow the company to build technology incorporating location information into their services. It is assumed that these acquisitions will help the company expand to the mobile user market, especially through the use of a mobile application. In 2011, the company offered an IPO. Although controversy surrounded the IPO as the company was accused of masking losses, changes were made to the 2010 financial reports to report a $420 million operating loss compared to the $60 million operating income reported.

Financial Analysis 

The financial success of the company is dependent on revenues earned from daily sales of Groupon deals. The company defines revenue as the net amount retained from Groupon deals after paying the agreed purchase percentage to the merchant. Therefore, the more Groupon deals are bought, the more revenues the company obtains. Despite the rapid growth of the company, there are also several market players in the industry that have entered the market since the Groupon. Although competitors are largely regional, there are other larger competitors including Amazon Local.

Due to the company’s short available history, it is not possible to find a fairly stable conclusion from the financial information. Furthermore, the IPO announcements in 2011 did not have sufficient financial information for adequate assessment to determine whether the company was worth investment. Furthermore, little comparison can be done, as Groupon is the only daily deals company that is publicly listed. With the limited information, this paper will attempt to analyze potential financial issues for the company.

Performance Drivers 

Different performance drivers have been identified for this company. These are the drivers that have influenced the success of the company. These include:

Subscriber acquisition – the company has managed to establish a large initial subscriber base by acquiring new customers, especially on the international market, thereby boosting Groupon’s growth. Decreasing the costs of marketing would be profitable to Groupon’s growth.

Customer activity – with excessive competition in the market and minimal switching costs for customers. As a result, the company has offered services that are more attractive so as to maintain customers. Therefore, encouraging customer activity should be the primary goal of the company.

Incentives for merchants – benefits to merchants engaging in the daily deals programs is yet to be fully understand. Although customers can be attracted to the deals, it is not a guarantee that those customers will return later.

Revenue and Profits 

	(Thousands)	2009	2010	2011
Revenue		$14,540	$312,941	$1,610,430
Costs and Expenses
	Cost of revenue	4716	42,896	258,859
	Marketing
	% as of revenues
	Administrative
	Acquisitions
	Operating expense
Loss from operation
Net loss

Since the inception of the company, tremendous growth has been experienced, especially in revenues. The annual revenue rose from $312 million in 2010 to over 1.6 billion in 2011, representing an increase of over 414%. The rapid expansion in the US market and international markets was the cause of the sudden increases, especially through the acquisition of existing daily deal websites. Furthermore, the change was significant as the international markets only catered for one thirds of the revenues in 2010, but two thirds in 2011. Despite this, the increasing growth led to a major increase in operating income – 420 million in 2010 and a further 233 million in 2011. Due to increased marketing costs, this operating income continually increased over the two years. This is due to the marketing strategy, which was incorporated, which what as an aggressive acquisition of subscribers, which doubled operating income figures.

Although this drive engaged 150 million subscribers in the 2011 fiscal year, only 33.7 million subscribers remained active, representing only 22% success of the subscribers drive. The 22% are defined as those who obtained Groupon services over the last twelve months. With this definition, it is not possible to determine whether the operating loss is to be taken as gospel truth. It is not possible to determine, based on the data, whether the operating loss continues. From the trends, it appears that active clients who purchase once or twice and their activity subsides. Therefore, it is critical to ensure that customer activity remains to engage profitable business for the company.

Cash Flow 

Although the company has experienced negative operating income and net income, the company has experienced a positive cash flow from initially. This is from its daily business model. As the revenue is the amount remaining as the merchant’s percentage and the company receives full payment for a service, the company has positive cash flow sine the merchant receives money only after the coupon is redeemed.

Quarterly Performance

In the last quarter of the fiscal year in 2011, the company was expected to post $475 million in revenues and a share increase of 3 cents for profits. Nonetheless, the company posted $506 million. This brought about investor confidence for the company in its upcoming IPO. Nevertheless, there was a net loss of 442 million and profit per share went down 8 cents. Despite this, cash equivalents were higher than accounts payable for the first time since the inception of the company, quelling negative publicity that the company was a Ponzi scheme, and that the company was achieving bottom-line profitability.

Because of the relatively disappointing outcomes in the 2011 year, the share price dropped to $22.16 and never went above $26. After February of 2012, the price kept dropping below the IPO price of $20 to $16-18. As of the latest reports in 2012, it is expected that increased share price can only be achieved if the company improves outcomes in 2012. This may not be a straight path for the company, however, with controversy arising due to unscrupulous accounting practices. Groupon failed to report the accurate operating loss. The subsequent announcement to ratify this decreased the quarterly revenue by 14 million dollars and increased income losses by 22 million, or rather, 4 cents per share. This was as a result of non-reporting of refunds issues to unsatisfied clients. As of that period, share price further dropped to $13.89 as of April 2012. Investor confidence was a failing phenomenon in the company. However, the announcement further damaged the failing company reputation resulting from perceived financial reporting. Should investors file a class action against the company due to its announcement, further financial pressure may be put on the company.

SWOT Analysis 

Strength	Weaknesses
Huge customer base International access Innovation resources Human resource through employee manpower	Reliance on a singular marketing technique – rapid subscriber acquisition A lack of differentiation with competition Difficulty in experiencing growth
Opportunities	Threats
Mobile platform transition Targeted marketing, which specializes products and services Enhanced merchant experience	Well-funded competition offering similar services and products Niche competitors Decreasing customer activity

In the case of strengths, the company’s expansion has opened up the company to a large customer base, enabling it to have an advantage over competitors. First mover advantage was therefore taken by Groupon to establish this market stance. Furthermore, this has given the company international access which has accounted for its massive growth and exponential growth in revenue.

Nevertheless, the company has been overly reliant on rapid subscriber acquisition at the expense of maintaining active subscribers. As a result, the company has many members, yet has maintained only 22% of these subscribers within the last twelve months. As a result, it is necessary to increase customer activity to experience positive growth. More so, it is expected that the transition to the mobile platform through the recent acquisition of mobile applications company and targeted marketing for mobile users, it is expected that this will be strategic in moving along the company towards the right direction.

Lastly, the company should watch for its major threats, which is dwindling customer activity, which is a critical factor for success in this industry. With dwindling activity, heavy investment in subscriber acquisition would be in vain. Moreover, profitability would go down. Additionally, increasing competition in the industry and the ability for the competition to offer satisfactory services compared to Groupon. As a result, this jeopardizes the business of the company.

In conclusion then, recommendations can be offered. Increased profitability in the face of dwindling customers should be enhanced. Improving customer satisfaction and service should therefore be engaged within the organization, thereby enabling comeback customers for the company and stabilizing its revenues. Again, active differentiation should be undertaken by the company for adequate attraction to the client. Where the company chooses a niche and lead in that area, the wide customer base will be sufficient to reach expected targets and stabilize business for Groupon. Therefore, Groupon must eliminate competition by separating itself from the crowd for effective growth.

References

Slade, T., Hawkins, O., & Teng, H. (2012). Groupon Inc . Retrieved from Griffin Consulting Group: http://economics-files.pomona.edu/jlikens/SeniorSeminars/Likens2012/reports/Groupon.pdf